Effective product-service systems: A value-based framework

Abstract

Manufacturers increasingly engage in servitization and as a result offer services in combination with their products (i.e., product-service systems, PSS). However, while servitization in theory seems to be a promising strategy, in practice, the bundling of services with product offerings does not always result in the expected performance outcomes. In this paper, we propose a framework that helps manufacturers to overcome this servitization paradox. The underlying premise of our framework is the need to give primacy to the value customers derive from PSS. The framework builds on the idea that products and services differ with regard to the value that is created by the tangible elements and the interaction moments between manufacturers and customers; this is presented in a 2 × 2 matrix. Subsequently, this paper provides guidelines for identifying PSS that are effective in terms of value creation. First, the product and service elements of the PSS should have sufficient autonomous value to be sold separately on the market. Secondly, they should come from different quadrants of the 2 × 2 matrix. Lastly, the combination of product and service elements should create synergy. Through a survey among product and service developers and an experimental auction among customers we validate our ideas.

Introduction

Increasingly, companies develop and market product-service systems (PSS) to gain a competitive advantage (e.g. Antioco et al., 2008, Manzini and Vezzoli, 2003). PSS involve offerings that include one or more product functionality and one or more associated service functionality. While a company can decide to offer PSS from the start, the usual path towards such an offering is that a company that already offers either products or services adds the missing component to its offerings. Service providers can choose to offer PSS by adding products to existing services (‘productization’). For them, this bundling of products and services can be beneficial because it can result in, among other things, more efficiency (reduction of costs). For example, direct, personal contact with customers is (partly) replaced by (intelligent) products, such as robots to assist care providers (Sharkey & Sharkey, 2012). Another benefit of productization is that by integrating a product and service into a PSS, it is possible to make a service more tangible and easier to understand and evaluate before a purchase (Jaakkola, 2011).

In this paper, we focus on “servitization”, which is a more common strategy than productization. Servitization relates to manufacturing companies shifting their business focus from designing and selling physical products only, to designing and selling a system of products and services (e.g. Manzini and Vezzoli, 2003, Neely, 2008, Santamaría et al., 2012, Ulaga and Reinartz, 2011, Vandermerwe and Rada, 1988). As Neely (2008) notes, servitization concerns manufacturers who add services to products that would otherwise be offered at other positions in the value system, usually further downstream. For example, to profit from the rapid growth of the 3D printing market, some manufacturers of printing machines are exploring ways to offer 3D printing ‘on demand’ services to, for example, designers and artists. Servitization thus allows manufacturers located at different stages of the value system to create and appropriate a larger share of the eventual value to the final customers (cf. Mol, Wijnberg, & Carroll, 2005).

As a notable outcome of the servitization strategy, manufacturers may offer PSS (Chang, Miles, & Hung, 2014). These PSS can bring products closer to the customer and enable customization and tailor made solutions to a larger extent than traditional products. PSS can thus create a more personalized experience and increase the (perceived) added value of these offerings (Gebauer and Friedli, 2005, Penttinen and Palmer, 2007). Bundling of products and services is advantageous because services tend to lock the customer into a long-term relationship (Cohen et al., 2006, Tukker, 2004, Vandermerwe and Rada, 1988). PSS may also provide a means to lower costs, for either the PSS providers or their customers (Ulaga & Reinartz, 2011). Furthermore, next to strategic and economic benefits, some PSS have the potential to bring about changes in consumption patterns that may accelerate the shift towards more sustainable practices and societies (e.g.Goedkoop et al., 1999, Manzini and Vezzoli, 2003, Mont, 2002, Sundin et al., 2009, Tukker, 2004, Tukker, 2015).

Although in theory there are many benefits of a PSS, in practice manufacturers often struggle to enhance their performance by developing and marketing a PSS (e.g. Baveja et al., 2004, Benedettini et al., 2015, Gebauer et al., 2005, Matthyssens and Vandenbempt, 2010, Neely, 2008, Spring and Araujo, 2013, Stanley and Wojcik, 2005, Ulaga and Loveland, 2014, Ulaga and Reinartz, 2011). In part, this seems to be due to the fact that knowledge on how to effectively develop, manage, and market PSS is still emerging (Benedettini et al., 2015, Reim et al., 2015, Spring and Araujo, 2009). For example, many manufacturers lack the knowledge to adapt their manufacturing capabilities to effectively develop services or PSS (Spring and Araujo, 2013, Tukker, 2015). In addition, as manufacturers use product performance indicators, they might lack the knowledge to effectively apply service performance indicators in order to improve their services or PSS (Kastalli, Van Looy, & Neely, 2013). Even if a manufacturer is able to develop a PSS, they might struggle with successfully selling it on the market due to the “manufacturer's traditional goods-centric sales core” (Ulaga & Loveland, 2014, p. 122).

The primary purpose of this paper is to propose a new framework that analyses PSS from the perspective of how these offerings create value for the customer, and to show how this framework can contribute to developing competitively effective PSS for manufacturers that consider the servitization route. With this, we contribute to solving the ‘servitization’ paradox, which relates to phenomenon that servitization in theory seems to be a promising strategy, yet in practice, “the bundling of services with product offerings does not always produce the returns that companies expect” (Benedettini et al., 2015, p. 947). Using a customer value-creating perspective, we identify important principles that characterize effective PSS. In doing so we provide guidelines to managers for the successful development and marketing of PSS. Furthermore, by examining PSS from a customer value-creating perspective, we contribute to existing PSS literature which tends to analyze PSS and its effectiveness from a business (internal) perspective or a macro (ecological/environmental) perspective, rather than a customer perspective.

The sections below discuss the previous literature on PSS, to propose a framework that enables the offering of effective PSS. Subsequently, the results of two empirical studies are presented. One of these studies is a survey-based study of product and service developers; this study established that the way these professionals think and make decisions about the characteristics of products versus services corresponds well to the framework proposed here. The second study is an experiment to demonstrate the importance of determining upfront the added value that a PSS will deliver to customers. We do this by measuring the difference in consumers' willingness to pay when emphasizing the PSS character of the PSS compared to emphasizing either the product or the service elements of the PSS. In the last section a discussion and suggestions for future research are provided.