Definition

product as a service

Contributor(s): David Essex

Product as a service is the concept of selling the services and outcomes a product can provide rather than the product itself. The term is a variant of the "as-a-service" phrasing that has grown along with the popularity of cloud computing -- in, for example, software as a service (SaaS) -- and employs similar subscription-based pricing. With the advent of the internet of things (IoT), product as a service has garnered increased interest from manufacturers as a way to boost the profitability of their products, improve customer engagement and launch new lines of business.

In its purest form, the manufacturer continues to own and maintain the product, and the customer leases it for use or subscribes to a menu of services. In other scenarios, the customer owns the product but is not responsible for maintenance, or such responsibilities are divided according to the license agreement or warranty.

In all cases, the manufacturer uses the product as a platform for delivering additional services to the customer.

How product as a service works

Broader adoption of product as a service has been enabled by IoT, sensor technology, data analytics, personal mobile devices and cloud computing. Cheap and widely available wireless and internet connectivity make it feasible for manufacturers to outfit their products with sensors that indicate how a product is being used, as well as environmental factors that affect its reliability, such as temperature and humidity, or the failure of a specific part.

The manufacturer can monitor the product remotely and apply predictive analytics to the captured data to identify and address mechanical problems or find opportunities to offer new products and services to the customer. It can also foster the customer relationship through smartphone apps that allow the user to monitor and control certain aspects of the product, provide feedback to the manufacturer and order new products and services.

Enterprise software, especially ERP, customer relationship management (CRM) and product lifecycle management (PLM), are usually necessary for managing the products, services and customer relationships, and some vendors are explicitly marketing their software as product-as-a-service platforms. Related tools, such as field service management (FSM), asset performance management and enterprise asset management (EAM) software come into play for managing and servicing products.

Advantages

The product as a service business model allows for wide variations on the type of value being delivered to the customer. For example, a subscription might guarantee certain outcomes, such as hours of uptime or units outputted. It might specify the maintenance and repair services the manufacturer will provide. Other services have less to do with the product itself and more with how the data it collects can help the customer in their business or personal life.

The customer might also be relieved of the responsibilities of owning the product, such as the burden of maintenance or the risk of losing the financial investment. But these benefits usually come at a premium.

Proponents of product as a service say it can improve customer satisfaction while boosting a manufacturer's revenue streams with monthly recurring revenue, making cash flow more steady and predictable.

The ongoing internet connection and service agreement can also help manufacturers with CRM by establishing a more "intimate" relationship that often lasts longer than if the product is purchased outright.

Product as a service has also been touted as a potential revenue boon because the need for aftermarket service extends throughout a product's lifecycle, with revenue that can surpass the earnings from selling the product. Advocates also claim the profit margin of service is several times that of product sales, an assertion backed by studies by the Wharton School and consulting firm Accenture. IT researcher IDC, which has covered the trend extensively, predicted that manufacturer service revenue will be double that of product revenue by 2020.

Product as a service examples

GE, Rolls-Royce and Pratt & Whitney were among the early implementers of product as a service, charging on an hourly basis for power from their jet engines. Rolls-Royce began offering it in the 1960s and has since trademarked the term "Power-by-the-Hour," though the phrase is also used generically in the aerospace industry.

Printers have long been leased instead of owned, with customers paying for a service contract. Manufacturers such as HP, Lexmark and Xerox have more recently augmented their service offerings -- even on some of their WiFi internet-connected consumer printers --- by, for example, sensing when ink cartridges are low and automatically ordering and shipping replacements. 

John Deere equips its agricultural equipment with remote sensors to collect data on weather and soil conditions and use analytics to help farmers improve crop yields. However, some equipment owners have bristled at the manufacturer's tight control of aftermarket service and advocated for right to repair legislation that would let them do the work themselves.

This was last updated in September 2018

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