Is Servicization a Win-Win Strategy? Profitability and Environmental Implications of Servicization

Abstract

Servicization, a business strategy to sell the functionality of a product rather than the product itself, has been touted as a profitable and an environmentally friendly business practice. Profitability can increase because a firm can tailor the service to the needs of a customer. Environmental impact may be reduced because, under servicization, the firm retains the ownership and is responsible for the maintenance of the product. As a result, the firm has stronger incentives to invest in product durability. Motivated by these dynamics, we analytically characterize when servicization can simultaneously increase a firm's profits and decrease its environmental impact compared to selling products. We endogenize the firm's product durability and pricing decisions, as well as the consumers' use level of a product. We allow for heterogeneous consumer segments with different product use valuations, and capture the difference in product operating cost incurred by the firm and by the consumers.We find that whether servicization is greener and more profitable depends on the firm's relative operating efficiency, the relative environmental impact of the product in its use phase as compared to the production and disposal phases, and the valuation gap between the consumer segments. For products that have low use impact relative to their production and disposal impacts, servicization can be more environmentally friendly and profitable if the firm has higher operating efficiency relative to consumers. In contrast, for products that have high use impact relative to their production and disposal impacts, servicization can be more environmentally friendly and profitable only if the firm has a lower relative operating efficiency {\em and} the valuation gap between the consumer segments is low. Furthermore, we show that servicization does not necessarily increase product durability. It may decrease product durability when servicization leads to market expansion. We also show that servicization can be more profitable for the firm even when its relative operating efficiency is low. However, we show that servicization may lead to lower social surplus even when a firm's relative operating efficiency is high. Thus, while servicization as a business strategy holds promise, it should be implemented with care.