Servitization as An Alternative Business Model and Its Implications on Product Durability, Profitability & Environmental Impact

Abstract

Servitization is the activity of selling the services provided by the product rather than the product itself. It is a business model that might be environmentally superior to conventional selling. Servitization promises accessibility to the product's functionality, pooling of consumer use, and potentially products of better design. However, it can also inflate consumption and result in a bigger environmental impact overall. In this paper, we compare servitization with traditional selling for a monopolist durable goods manufacturer from both an economic and environmental perspective. In this comparison, we define the durability of a product as the use capacity; that is, how many usages it can endure before reaching end of life. We study the firm's durability decision, followed by the price/fee decision, and the consequent usage in the market under each model. We find that servitization produces durability levels that are robust to customer heterogeneity, and higher than selling. Overall, environmental superiority of servitization hinges on product related costs, customer heterogeneity, and market composition. It is, however, robust to varying environmental factors in the use and manufacturing phases. When we compare environmental preferability with the economic incentives of the firm, we observe that they are not always aligned.