So I have been conferencing this week and a recurring topic has been servicization. Servicization is a made up word to describe business models that (roughly) convert the customer experience from owning a good to using it as a service. I have, for example, some colleagues who have worked with Rolls Royce (the jet engine maker not the luxury car firm). RR has moved to offering customers “power by the hour” — a customer pays Rolls Royce when an engine is up and running. When the engine is in the shop being fixed, they don’t owe Rolls Royce anything.
Here is another spiffy example:
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The article that goes with the video (Solar power done cheap, Jun 28, CNN Money) explains a little more on how it works.
Under the company’s [SolarCity] model, customers agree to a monthly lease and sign the rights to claim subsidies over to SolarCity.
In return, homeowners get a solar array installed on their roof, maintained for the life of the lease. They’re hooked up to the electric grid, so when they need more power than the panels provide, there’s no disruption. And SolarCity guarantees the panels will produce a set amount of power, which the company says should offset the electric bill and more than compensate for the monthly fee.
“Our goal is to get millions of homes to go solar, but the biggest barrier is the experience,” said Lyndon Rive, the company’s 33-year old CEO with major entrepreneurial connections. “Humans are lazy by nature. They want to do the right thing, but they don’t want to jump through ten hoops to do it.”
So part of the firm’s goal here is to get greater penetration fast. They will also sell you a solar system (just like Rolls Royce will still jet engines without a power by the hour contract). But a lower entry price allows them to more quickly develop expertise installation as well as gain some leverage on suppliers. What’s interesting about servicizing the product, however, is that it raises some interesting operational challenges. For example, SolarCity as the owner of the solar panels is presumably responsible for maintenance. Suppose there is tradeoff between efficiency (ie generating power) and maintenance costs. What should SolarCity choose? If it’s an outright sale, there may be incentive to push a really efficient piece of equipment. If it is leased, there is a reason to favor low maintenance cost. After all, the SolarCity does not share in the customer additional energy savings.
If you are interested in this topic,you should check out the work of Sang-Hyun Kim at Yale.