Servitization is a business model that involves companies selling products and providing additional services to customers. The move towards servitization will enable companies to enhance customer interactions through extensive value-added services. Through service offerings, companies can move beyond price competition and compete on value and service quality, thereby deepening competitive moats. Service offerings through a subscription have the added benefit of being a predictable recurring revenue stream, thereby reducing fluctuations from one-off purchases.
For the appliances industry, the potential returns are immense.
The potential market size is worth USD50 billion, assuming service revenues are just 10% of hardware sales, and with comparatively higher margins
Source: Euromonitor International
The importance of servitization to hardware-focused companies
Hardware companies have traditionally operated with small profit margins, typically below 20%. Competition is tough, and differentiation difficult, making it challenging for these companies to raise prices.
Through servitization, hardware companies can offer a complete solution that enhances customer relationships and gives the company an advantage in the marketplace, thereby increasing brand loyalty and customer stickiness through the increase in switching costs.
Ultimately, servitization can help manufacturers create new revenue streams and stand out in the market through a stronger competitive moat.
In today’s market, with replacement rates becoming shorter, ongoing services build trust, retain customers, and foster brand advocacy, ensuring long-term success and predictable revenues
Source: Euromonitor International
A significant percentage of respondents expect to replace their appliances before five years.
Servitization has been a success for Rolls-Royce since the 1960s
Rolls-Royce, renowned for its luxury automobiles, is a pioneer in the aerospace industry. One of its most groundbreaking innovations is the Power-by-the-Hour (PBH) model. This unique business model fundamentally changed the way aircraft engines were sold and maintained.
Introduced in 1962, PBH shifted the focus from selling engines as a one-time purchase to providing a comprehensive service package. Under this model, customers pay a fixed rate per flying hour, regardless of the actual maintenance costs incurred. This means that if an engine requires extensive repairs, Rolls-Royce bears the financial burden, ensuring that customers are not hit with unexpected expenses.
The success of the PBH model has led Rolls-Royce to expand its services beyond engines. The company now offers similar packages for other components, such as propellers and electrical systems.
More significantly, this business model aligns the vendor-customer incentive structure. Rolls-Royce focuses on engines; the airlines focus on passenger service. This diversification has further strengthened Rolls-Royce's position in the aerospace industry and solidified its reputation as a trusted partner to airlines worldwide.
This case study in business model innovation has many learnings for appliances companies.
LG Electronics’ transformation through its “Home as a Service” platform
In 2022, LG Electronics (LG) announced that it was in the process of transforming its business model. Through its "home as a service" platform, it aims to evolve into a "smart life solution company" focused on customer engagement. The goal of the platform-based service model is to continuously generate revenue through content, services, subscriptions, and solutions across its product portfolio. Ultimately, LG hopes these services will boost its revenue from USD51 billion in 2022 to USD79 billion by 2030.
For appliances, among the many other services launched, a major driver of growth is LG’s subscription business, The rental business has been around for a while, mainly focused on water purifiers and massage chairs. However, LG started including major appliances in 2022, leading to a growth surge of 30% in 2023.
In 2023, LG generated over USD840 million from its subscription business, which is expected to grow by 60% in 2024
Source: Euromonitor International
Of this revenue, around USD720 million came from appliance subscriptions, while USD120 million was from LG's Careship services—a routine maintenance subscription that ensures optimal performance of LG appliances.
Subscription sales accounted for 20% of LG's home appliance revenue in 2023. Customers who subscribe to appliances also gain access to various value-added services, including appliance care and online-to-offline (O2O) services, enhancing the overall customer experience.
With this success, LG has expanded its subscription service to Malaysia, Taiwan, and Thailand, with plans for India before the year ends.
Servitization has immense potential for brands with weak brand recognition. If done right, it has the potential to be an entry-point for consumers into a brand ecosystem, and to be a competitive differentiator beyond pricing.
Focusing on generating recurring revenues rather than relying on one-off hardware sales is crucial for the long-term success of the appliances industry.
As businesses continue to integrate AI in their products, it is imperative that servitization is used to monetise opportunities created and create customised experiences for consumers.
Learn more about servitization in our report, Beyond the Product: How Servitization is Shaping the Future of Consumer Appliances, to understand how servitization can transform your business and enhance customer engagement.