Should Brands Consider a Service-based Business Model?

Consumers are moving toward using a service for recurring needs

Photo by chris robert on Unsplash

Over the last few months, I have been having ongoing conversations and debates with clients, both corporates and startups, regarding the emergence of service-based business models. As the world goes through continuous change, organizations try to find new ways to improve customers' experiences, leverage their unique capabilities, deliver value to the consumer, and develop new products/services.

These dimensions can impact the way they develop new business models. Throughout different industries organizations are starting to adjust their proposition as businesses try to re-invent themselves and consumers try to make decisions on what they should purchase.

The question that remains is how ready are consumers and businesses to embrace service-based business models?

What is a service-based model and why is it important?

For clarity, a service-based business model, or ‘product as a service’ (PAAS), will be defined as a business model that shifts to a new form of value through creating, delivering, and characterizing the core aspects of a business. This can also be in the form of helping the user get their jobs done by redefining the purpose, target market, products, strategies, infrastructure, sourcing, trading practices, operational procedures, and policies in the modern business culture of a circular economy.

Value perception for many service-based business models involves not having to own an item or product. Instead, value is shifted to the business solving problems for the consumer in exchange for the consumer paying an ongoing fee, giving them access to the newest features or customized services with little risk.

What does your business model say about your business?

Service-based business models are not just delivering value through a service offering; it is also important to consider models that impact pre-existing products, systems, and stakeholders within the ecosystem. Tesla does not just focus on electric vehicles; they are an energy company. Amazon does not just focus on e-commerce, as they are also a marketplace that owns the delivery and storing elements of that process. These innovative companies have re-designed expectations for many industries as customers demand smarter, faster, and cheaper products and services.

Choosing a model that works for you

Your organization does not need to wait until your business model is out of date before acting. If an organization can move toward a service-based business model as a strategy that will win across its market, doing so will increase customer relationships and provide lifetime value.

Some of the most transformative businesses are those that embrace improving the end-to-end experience to generate new revenue streams or increase efficiencies that go beyond technology and data. This is more than just a trend, but is a new normal as the service business model can cover different categories.

1. Service Subscription: Customers/users pay a recurring price to subscribe to a service instead of ownership, with a fee that could be fixed or usage-based. ClassPass offers its customers access to over 3,000 fitness studios in 2,500 cities around the world.
2. Managed services: A service that focuses on maintaining performance or specific operational activities that are outsourced. BMW and Daimler created YourNow, offering on-demand mobility at the touch of a button.
3. Rental or lease: Customers have access to a product that can be used flexibly. Zilok is a centralized online rental marketplace that allows its users to rent their belongings to other people, such as cars, strollers, fondue sets, PlayStations, and power tools.
4. Information goods and services: Customers gain access to media or information services that they rely upon. These are normally subscription-based and provide a premium experience; Apple’s iTunes is a perfect example.
5. Product plus service: A business model that focuses on providing service and benefits, rather than features and functions, such as installation, maintenance, advice, etc. A core part of this value proposition is to improve the overall experience. Amazon’s Alexa device adds value by connecting to Amazon e-commerce and other connected devices to enrich the users' experience over time.
6. Consumables: Access to a frequently used product that is consumable and based on the consumer’s preference. European airline KLM used to provide a flight bundle service that allowed you to go anywhere you want at a discounted rate by pre-booking tickets.

Examples and categories credited to Business Model Shift

A business can change its model to fit within any of these categories to support any opportunity.

Why do businesses need to rethink their current models

A majority of companies are starting to understand the value of moving toward services as a competitive advantage to enhance the user experience, build long-term relationships with consumers, and leverage their assets in new ways.

More consumers are willing to pay for a frictionless experience; paying for premium services such as ad-free music via Spotify is becoming the new normal. This is becoming more evident as new and old brands adopt a service-led approach to better fit into their customers’ lives.

Here are just a few of my favorite service-based business models that are disruptive to different industries:

• Rent a Sofa by Ikea: Furniture as a service is just one of many concepts the iconic Swedish furniture maker has brought to life. By starting to lease their furniture in 2008, they changed customer behaviors from buying an item to sharing it from a pool of Ikea items. This business model is positively disrupting the industry, as it is a profitable and successful method for the circular economy movement.
• Heat, Not Heater: Heat, as a service can reach an underserved market as energy prices for homes, continues to increase and the energy market remains competitive. Consumers are asking more of their current providers and think, “What have you done for me lately? Where is the added value and what makes you better than the other players who can offer more affordable prices?” Nihonkai Gas is a Japanese gas provider that has a heater program that lets homeowners rent fan heaters (gas appliances with a fan that blows warm air to heat a room). Since 2001, Nihonkai Gas has rented out over 22,000 fan heaters, a service that has saved customers money on their heating bills.
• Subscriptions that grow with you (kid’s clothes as a service): The clothing industry has been one of the quickest to adopt different service models. Ralph Lauren’s Rent the Runway service is helping consumers access the latest appeal. Circos is tackling the issues associated with the short lifespan of children’s clothing for as little as €6 per month. Organizations that can adapt to the needs of their consumers and create better experiences through clothing subscriptions like Circos and Ralph Lauren have better opportunities to remain relevant.
• Hassle-free bike travel (cycling-as-a-service): If you ask many bike owners in an urban area, bike theft is one of their biggest fears. Vanmoof aims to give riders peace of mind through a service that tracks their bike if it's stolen and provides bike maintenance for a monthly £17 subscription fee.
• Better sleep through data (sleep as a service): Oura Ring, best known for helping users track Covid symptoms via a wearable ring, has shifted from a one-off product to a subscription service. The Finnish health technology company has recently come out with their Gen 3 ring, and with it comes a new proposition as Oura has transitioned to a new subscription model. The service will roll out new features such as blood oxygen measurements, personalized insights, and guided videos for $6 a month.

Rent the Runway, ClassPass, Dollar Shave Club, and many more organizations are going beyond traditional industry models to explore the ways in which they can offer new value. There are many more examples out there of ‘X’ as a service, share your favorites in the comments below.

The evolution of service-based business models

Owning versa subscription and leasing have been key disruptors for service-based business models. Consumers are moving toward using a service for monthly/yearly recurring needs rather than wholly owning something. Spotify’s service does not just give its users the ability to access millions of songs, but also exclusive podcasts and assistance discovering new content through their algorithm.

Even historical retailer Selfridges, high-end department stores in the United Kingdom, have embraced the move to letting their customers rent clothing, as this trend has grown over the last three years across the fashion industry.

This type of business model has gained momentum as consumers are becoming more open to renting. Rent the Runaway’s business model was an early disruptor, servicing over 9 million customers since its inception in 2019. There has also been a shift as businesses look to become more sustainable. Selfridges, along with Adidas and Ralph Lauren, are trending toward helping their consumers find convenient ways to access the brands they want. Compared to the hassle of owning an expensive outfit a consumer might wear once or twice, these clothing rental options offer consumers another viable option rather than owning the item.

How are businesses and consumers changing their behaviors?

This shift to service-based models has meant that consumers, enterprises, and society as a whole are changing how they interact with products and services as the two begin to blur.

Moving away from an existing business model can be challenging, even at the best of times. Even when convenient, shifting a current business model strategy to a service-based one can be an uphill struggle. This is especially true when current business models are profitable; what is the incentive to consider anything that could be seen as risky or threatening to how they generate revenue?

Working with leadership is important to understand what the future of a business model could be. In many cases, existing offerings have a life cycle, market value compared to competitors, or a limitation for market growth within one business model. Listening to concerns is important to understand where there is a need for growth. Once you have highlighted any challenges, it is easier to educate leadership on the benefits and trends around service-based business models.

Helping leadership to step back, see the bigger picture, and adopt a mindset around moving to a service-based business model is a necessary step. Business leaders will always fear that a new business model may disrupt their current business model.

Consider asking yourself these five questions:

1. Are you the right type of business to have a service-based business model?
2. How can you change the mindset of existing shareholders that what to stop service-based business models?
3. How will a service-based business model impact your business if they are B2B compared to a B2C?
4. Are there any other similar organizations going through a business model transformation toward a services approach?
5. Can you consider working with a partner to accelerate a new type of business model?