“People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.” – Theodore Levitt
Service needs to be redefined from the perspective of the customer. Perceived use is on the rise, whilst the principle of ownership is on the decline. That has far-reaching consequences.
by Winfried Felser
In the old goods-dominant economic logic, the value of a product is that of the object itself. A car is a car. A washing machine is a washing machine. But in service-dominant logic (SDL), the basis for economic exchange is the actual or potential service for the customer: a product or service only acquires value for the customer in the context of its use.
A car can have value as an asset, but in the absence of a driver’s licence it has no immanent value. Similarly, as a status symbol a car only derives its value from its owner’s individual assessment of the popularity of other brands. This value arises on a purely subjective level, and is phenomenological. The product called a drill is not the machine. It is the hole.
Service-dominant logic has actually been around for quite a while. Theodore Levitt, a German-American Harvard economist and one of the most well-known figures in the field at the time, formulated the main idea more than 50 years ago. But the full force of the idea has only become evident to companies in the age of digitalisation.
In a groundbreaking article entitled Marketing Myopia, Levitt asked the following question: What business are you in? His answer: companies have to extend the boundaries of their respective sectors as much as possible in order to make the best possible use of opportunities for growth. Two marketing experts, Robert Lusch and Stephen Vargo, pursued the idea further. In 2004 they published their first article on the subject, “Evolving to a New Dominant Logic for Marketing”. The theory had reached maturity.
It calls for radically rethinking a traditional goods-based approach and exploring the idea of service from the customer’s perspective.
As a product, a washing machine provides what is expected of it – it washes. No more and no less. Washing, or clean laundry, is its value in use. The value in use is based on a value in exchange, i.e., a value for which one can purchase a washing machine. As a first step, smart washing machines are more transparent (they provide extensive information about all the performance indicators). They are more intelligent (for optimal energy consumption). They show future maintenance requirements, and they are becoming more autonomous and more collaborative.
SDL adds a second step that promises an entirely new dimension in the orientation toward use and value. Wouldn’t it make more senseif customers did not have to think in terms of washing machines but instead could have a service network in the form of comprehensive home service, perhaps on a flatrate basis? If customers no longer paid for washing machines but instead for the services they use as part of a comprehensive home service plat form? And if this platform combined different household services on a very individual basis?
Instead of the old model that optimises added value only along the axis of efficiency, SDL takes an entirely new tack. Instead of enhancing technology, it seeks to transform all levels of design, including the company as a whole, the associated ecosystem, and the community of everyone active in the respective industry. The result is a new, holistic approach and a real break in the company’s interacting systems. And a changed perspective on our economic future. It places the focus on optimum service – above and beyond the previous product, company and transaction-dominant perspectives. And that from the standpoint of customers in the context of applications rather than the context of companies and their transactions with goods.
Porsche Road Trip
Service-dominant logic means a shift in marketing from a goods-centred to a service and value-centred approach. The focus has long since moved from manufacturing products to creating values. Values in the sense of service values with the human being at the centre of the value-adding process. What is needed are customer-specific solutions. The product itself becomes the service, which in turn means that services in the future will become as tradable as products once were. Servitisation describes the shift from a technology production company to a service company, such as one that offers customers not just driveable cars but mobility in the broadest sense. Car makers are becoming mobility service providers, and the car is becoming a mobility solution.
Service is the foundation. And if service is not a service in the classical sense but rather the perceived use of a product or service from the perspective of the customer, that necessarily dissolves the duality between companies and customers. Customers and other agents participate in the process as co-producers. Creating value is the work of an entire ecosystem of resource integrators – according to SD logic.
How do customers experience their product? What services do they need for their everyday lives? What supplementary digital features do they expect? No one knows better what customers want than the customers them selves. The value of a product only arises from the acquisition of knowledge and skills, and from its integration into the sociocultural environment of the buyer. Or, as Lusch and Vargo explained: the value of a service only arises during the process of consumption. The only thing of importance to the customer is the service experienced by means of a product. Value only arises from the provision of the service.
Service first, products second – digitalisation accelerates this development. Layers of digital services, which radically rethink user experience and the value of products and services, are creating a new dimension of product use. Libraries fit into compact readers, record collections into streaming services. Access
to books, films, lectures and music is now digital. Apps and cloud services are making this new type of use possible. Digitalisation commands enormous creative potential. It erases material boundaries, and creates products that once must have sounded like science fiction. Platform and sharing economies are meta-disruptive provocations for our current material state of affairs.
Cars can be used without having to own them. Strategies and models for convenient temporary access to cars have been in existence since the late 1980s. They only became – and are still becoming – a key component of mobility since smartphones made it possible to reserve, locate and return them in uncomplicated ways.
Ever more people around the globe are making ever greater use of carsharing, whether in traditional station-dependent or free-flowing station-independent forms, and of peer-to-peer (P2P) models that offer shared use of one or multiple vehicles. They share the view that ownership can be more of a burden than the expression of a successful life. In 2015 there were around seven million carsharing users worldwide. In 2025 that figure is expected to reach 36 million.
Sharing is just one aspect of this shift. Under standing disruptions like digitalisation is a complicated matter. Especially in the early phase, responses to change were often marked by cargo-cult thinking, pseudo-measures with no chance of sustainable success, or purely technology-centred refinements of old forms of logic.
In SDL, value only arises if a service, solution or use is provided within the respective context and is perceived as value. Those who take this view seriously have to reorient their future scenarios, business models and organisational concepts to customers and their ecosystems in completely new ways.
Digital transformations are radical, in order for provocations to lead to opportunities. The future will not only change cars, but also the experience of driving. Following the launch of the Porsche Passport subscription model, the P2P pilot programme known as Host is now underway in Los Angeles and San Francisco. It offers app-based rentals of privately owned Porsche cars for anywhere from a day to a month.
Porsche 360+ Your Lifestyle Assistant
The Porsche e-performance era is beginning in 2019 with the Taycan. The first purely battery run sports car made in Zuffenhausen marks a turning point: the shift from a leading provider of exclusive sports cars to a leading provider of exclusive and sporty mobility, and the change from a hardware producer to an integrated hardware, software and service company. The user experience (UX), not the hardware, is at the forefront. It is the sum of all the customer’s interactions with a product or software.
Whether the use is digital or nondigital is irrelevant. In very simple terms, a car that seldom needs repairs or maintenance meets a basic expectation of its buyer. Emotionally charged moments with the car reinforce a positive user experience – according to the UX approach. Emotional experiences can be triggered by a lap on the Nürburgring-Nordschleife, but also by the use of supplementary digital features.
One example is the Porsche Impact emissions calculator. It enables customers to determine the specific CO2 footprints of their Porsche cars and offset them with financial contributions to climate protection and biodiversity. The amount depends on the car’s model, characteristics and mileage. Porsche itself is leading the way. The company’s entire fleet of nearly 6,100 vehicles, including its race cars, are part of the project. Porsche 360+ is a 24/7 digital lifestyle assistant. With the help of certified partners it can also fulfil exceptional wishes such as tickets for a sold-out concert, exclusive gifts and individualised trips.
“Porsche stands for fascinating experiences that also transcend the car,” says Thilo Koslowski, CEO of Porsche Digital. The company serves as Porsche’s centre of expertise for digital customer experiences, products, business fields and processes.
360+ seeks a digitally connected world that is self-learning and that fulfils customer wishes before they are even expressed. This approach is also reflected in Porsche’s Road Trip app, which shows the world’s most beautiful routes with appropriate points of interest – including spectacular views as well as unusual hotels and restaurants.
As customer requirements change, so too do the opportunities for a company to attach value to products. The journey has long since begun and the course is clear: physical products will remain important to people. They bring out our emotional sides, mark our identities and give us a sense of stability in the world. The benefits they bring and the opportunities they should provide are being completely rethought in the course of digital transformation. The most important questions for customers today are: Do I really need that? And how can it be integrated into my life?
Service-dominant logic can offer satisfying answers to such questions and provide fertile ground for new models of creating value. Because SDL always focuses on the customer or the user, and on fulfilling their wishes and meeting their needs along the entire value chain, even and especially when these wishes and needs change.
Viewed in this way, the process of designing services is never over. This means that the concept, design and generation of products and services will be continuously developed, tested and adapted to new requirements – like software. Ever more sophisticated product betaversions will arise on an ongoing basis – and will become part of a connected world in which the new constant is continuous change.
Dr Winfried Felser as the deputy director of a Fraunhofer Application Centre, assisted companies with exploiting new technologies to transform products and valuecreation processes. Today, his work focuses on intelligent, collaborative production and organisation systems, Business 4.0 and (digital) transformation.