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A product-service system (PSS), also known as a function-oriented business model, is a business model, developed in academia, that is aimed at providing sustainability of both consumption and production.
What is PSS?
Product Service Systems, put simply, are when a firm offers a mix of both products and services, in comparison to the traditional focus on products. As defined by (van Halen, te Riele, Goedkoop) "a marketable set of products and services capable of jointly fulfilling a user's needs". PSSes can be realized by smart products.
The initial move to PSS was largely motivated by the need on the part of traditionally oriented manufacturing firms to cope with changing market forces and the recognition that services in combination with products could provide higher profits than products alone. Faced with shrinking markets and increased commoditization of their products, these firms saw service provision as a new path towards profits and growth.
While not all product service systems result in the reduction of material consumption, they are more widely being recognized as an important part of a firm's environmental strategy. In fact, some researchers have redefined PSS as necessarily including improved environmental improvement. For example,(Mont)defines PSS as a "a system of products, services, supporting networks, and infrastructure that is designed to be competitive, satisfy customers' needs, and have a lower environmental impact than traditional business models" Mont elaborates her definition as follows: A PSS is pre-designed system of products, service, supporting infrastructures, and necessary networks that is a so-called dematerialized solution to consumer preferences and needs. It has also been defined as a "self-learning" system, one of whose goals is continual improvement.
"Servicizing" is a transaction through which value is provided by a combination of products and services in which the satisfaction of customer needs is achieved either by selling the function of the product rather than the product itself, or by increasing the service component of a product offer. The concept is based on the idea that what customers want from products is not necessarily ownership, but rather the function that the product provides or the service the product can deliver. This means that the provider of "servicizing solutions" may get paid by the unit-of-service (or product function) delivered, as opposed to the (more traditional) unit-of-products sold.
One type of servicizing solutions is based on transactions where payment is made—not for the "product"—but for the "product-service package" (part of PSS) which has been sold to the customer. This servicized purchase extends the buying transaction from a one-time sale (product acquisition), to a long-term service relationship (such as in the case of a long-term maintenance-free service contract).
Another type of servicizing may be a strategy for providing access to services for people who cannot afford to buy products outright. For example, in the case where auto ownership is economically unfeasible, creative servicizing offers at least three possible solutions: one in which transportation can be achieved simultaneously (as in car-pooling); one in which transportation can be achieved sequentially (as in car-sharing); and one in which transportation can be achieved eventually (rent-to-own).
Types of PSS
There are various issues in the nomenclature of the discussion of PSS, not least that services are products, and need material products in order to support delivery, however, it has been a major focus of research for several years. The research has focussed on a PSS as system comprising tangibles (the products) and intangibles (the services) in combination for fulfilling specific customer needs. The research has shown that manufacturing firms are more amenable to producing "results", rather than solely products as specific artefacts, and that consumers are more amenable to consuming such results. This research has identified three classes of PSS:
- Product Oriented PSS: This is a PSS where ownership of the tangible product is transferred to the consumer, but additional services, such as maintenance contracts, are provided.
- Use Oriented PSS: This is a PSS where ownership of the tangible product is retained by the service provider, who sells the functions of the product, via modified distribution and payment systems, such as sharing, pooling, and leasing.
- Result Oriented PSS: This is a PSS where products are replaced by services, such as, for example, voicemail replacing answering machines.
Van Ostaeyen et al. criticize this typology for failing to capture the complexity of PSS examples found in practice. They propose an alternative that categorizes PSS types according to two distinguishing features: the performance orientation of the dominant revenue mechanism and the degree of integration between product and service elements. According to the first distinguishing feature, a PSS can be designated as input-based (IB), availability-based (AB), usage-based (UB) or performance-based (PB). The performance-based type can be further subdivided into three subtypes:
- Solution oriented (PB-SO) PSS: (e.g. selling a promised level of heat transfer efficiency instead of selling radiators)
- Effect oriented (PB-EO) PSS: (e.g. selling a promised temperature level in a building instead of selling radiators)
- Demand-fulfillment oriented (PB-DO) PSS: (e.g. selling a promised level of thermal comfort for building occupants instead of selling radiators)
According to the second distinguishing feature, a PSS can be designated as segregated, semi-integrated, and integrated, depending on to what extent the product and service elements (e.g. maintenance service, spare parts) are combined into a single offering.
The following existing offerings illustrate the PSS concept:
- Xerox' pay-per-copy model for selling office equipment
- Rolls-Royce's Power-by-the-Hour service package for aircraft engines, whereby maintenance, repair and overhaul services are charged per hour of flight
- Atlas Copco's Contract Air service, whereby air compressors are sold per m³ of compressed air delivered
- Philips' pay-per-lux model for selling lighting equipment, whereby customers pay for a promised level of illuminance in a building
- Michelin's fleet management solution whereby truck tires are sold per kilometer driven
Impact of PSSes
Several authors assert that product service systems will improve eco-efficiency by what is termed "factor 4", i.e. an improvement by a factor of 4 times or more, by enabling new and radical ways of transforming what they call the "product-service mix" that satisfy consumer demands while also improving the effects upon the environment.
van Halen et al. state that the knowledge of PSS enables both governments to formulate policy with respect to sustainable production and consumption patterns, and companies to discover directions for business growth, innovation, diversification, and renewal.
Tietze and Hansen discuss the impact of PSS on firms' innovation behavior identifying three determinants. First, product ownership is not transferred to the customers, but remains with the PSS operating firm. Second, the purpose of a product is different if it is used within PSS solutions than compared to the purpose of products in classical transaction based business models. When offering PSS, products are used as a means for offering a service. Third, the profit function of PSS operating firms differs substantially from profit functions of firms that develop, manufacture and sell their products.
From a manufacturer's perspective, the business potential of a PSS is determined by an interplay of four mechanisms: cost reduction, increased customer value, changes to the company's competitive environment and an expansion of the customer base.
- M.B. Cooka, T.A. Bhamrab and M. Lemonc (2006). "The Transfer and Application of Product Service Systems: From Academia to UK Manufacturing Firms". Journal of Cleaner Production (Elsevier Ltd) 14 (17): 1455–1465. doi:10.1016/j.jclepro.2006.01.018.
- Cees Van Halen, Carlo Vezzoli, Robert Wimmer (2005). Methodology for Product Service System Innovation. Assen: Uitgeverij Van Gorcum. p. 21. ISBN 90-232-4143-6.
- M. Sawhney, S. Balasubramanian, and V. Krishnan, “Creating Growth with Services,” MIT Sloan Management Review (Winter 2004): 34-43.
- K. Bates, H. Bates, and R. Johnston, “Linking Service to Profit: The Business Case for Service Excellence,” International Journal of Service Industry Management 14, no. 2 (2003): 173-184; and R. Olivia and R. Kallenberg, “Managing the Transition from Products to Services,” 160-172.
- "Sustainable Services Systems (3S): Transition towards sustainability?"; Towards Sustainable Product Design, 6th International Conference, October 2001, Amsterdam, The Netherlands. Centre for Sustainable Design. 2001-11-09.
- Bill Cope and Diana Kalantzis| pages=19,26| date=2001| publisher=Common Ground| isbn=1-86335-071-3
- Eva Heiskanen (2000). Dematerialisation: the potential of service-orientation and Information Technology; Eva Heiskanen, Mikko Jalas, and Anna Kärnä (2000). "The Dematerialisation Potential of Services and IT: Futures Studies Methods Perspectives". Quest for the Futures Seminar Presentation, Helsinki School of Economics, Organisation & Management, June 2000; Eva Heiskanen and Mikko Jalas (2000). Dematerialization Through Services — A Review and Evaluation of the Debate; Finnish Ministry of Environment. pp. 436.
- Rothenberg, Sandra, Sustainability Through Servicizing, Sloan Management Review, January, 2007; White, A., M. Stoughton, and L. Feng, “Servicizing: The Quiet Transition to Extended Product Responsibility.” Tellus Institute for Resource and Environmental Strategies, 1. [Submitted to The U.S. Environmental Protection Agency Office of Solid Waste, May 1999].
- Toffel, Mike. "Contracting for Servicizing". Harvard Business School. Retrieved 23 May 2013.
- Stahel, W. (1994). The Utilisation-Focused Service Economy: Resource Efficiency and Product-Life Extension. Washington, DC: National Academy Press. pp. 178–190.
- Stahel, W. (2010). The Performance Economy. London: Palgrave-MacMillan.
- M Cook (2004). "Understanding the potential opportunities provided by service-orientated concepts to improve resource productivity". In Tracy Bhamra, Bernard Hon. Design and Manufacture for Sustainable Development 2004. John Wiley and Sons. p. 125. ISBN 1-86058-470-5.
- Van Ostaeyen, Joris; et al. "A refined typology of Product-Service Systems based on Functional Hierarchy Modeling". Journal of Cleaner Production. doi:10.1016/j.jclepro.2013.01.036.
- Van Ostaeyen (2014). Analysis of the Business Potential of Product-Service Systems for Investment Goods. PhD thesis, KU Leuven. p.2 ISBN 978-94-6018-805-3 https://lirias.kuleuven.be/handle/123456789/429733
- Cees Van Halen, Carlo Vezzoli, Robert Wimmer (2005). Methodology for Product Service System Innovation. Assen: Uitgeverij Van Gorcum. pp. 21. ISBN 90-232-4143-6.
- Tietze and Hansen (2013). To Own or to Use – How Product Service Systems facilitate Eco-Innovation Behavior. Academy of Management Meeting, Orlando, Florida.
- Van Ostaeyen (2014). Analysis of the Business Potential of Product-Service Systems for Investment Goods. PhD thesis, KU Leuven. p.39 ISBN 978-94-6018-805-3 https://lirias.kuleuven.be/handle/123456789/429733
- Books and papers
- Sakao, T. and M. Lindahl, Eds. (2009). Introduction to Product/Service-System Design. London. Springer. Springer Publishing.
- Oksana Mont (2004). Product-service systems: Panacea or myth?. IIIEE Dissertations 2004:1. Lund University. ISBN 91-88902-33-1.
- Oksana Mont (2002). "Clarifying the Concept of Product-Service System" (PDF). Journal of Cleaner Production 10 (3): 237–245. doi:10.1016/S0959-6526(01)00039-7.
- Oksana Mont and T. Lindhqvist (December 2003). "The role of public policy in advancement of product service systems". Journal of Cleaner Production (Elsevier Science Ltd) 11 (8): 905–914. doi:10.1016/S0959-6526(02)00152-X.
- Arnold Tukker and Ursula Tischner (2006). "Product-services as a research field: past, present and future. Reflections from a decade of research". Journal of Cleaner Production (Elsevier Ltd) 14 (17): 1552–1556. doi:10.1016/j.jclepro.2006.01.022.
- Oksana Mont (December 2003). "Editorial for the special issue of the Journal of Cleaner Production on Product Service Systems". Journal of Cleaner Production (Elsevier Science Ltd) 11 (8): 815–817. doi:10.1016/S0959-6526(02)00163-4.
- Nicola Morelli (2006). "Developing new product service systems (PSS): methodologies and operational tools". Journal of Cleaner Production (Elsevier Ltd) 14 (17): 1495–1501. doi:10.1016/j.jclepro.2006.01.023.
- Cees van Halen, Harry te Riele, and Mark Goedkoop. PSS Reports. – a set of reports commissioned by the Dutch Ministry of Economic Affairs and the Ministry of Housing, Spatial Planning and the Environment
- Ezio Manzini and Carlo Vezzoli (2002). Product Service System and Sustainability (PDF). Paris: United Nations Environment Programme.
- L. Penin and C. Vezzoli (2005). Designing Sustainable Product-Service System for All. Milano: United Nations Environment Programme.
- C. Vezzoli and E. Manzini. "Design for Sustainable Consumption, in Perspective on Radical Changes to Sustainable Consumption and Production". SCORE workshop, 2006, Copenhagen.
- A. Tukker and U. Tischner, ed. (2006). New Business for Old Europe: product-service development competitiveness and sustainability. Sheffield: Greenleaf Publishing.
- Sandra Rothenberg (January 2007). "Sustainability Through Servicizing". Sloan Management Review (MIT Press).
- Arnold Tukker (2004-07-13). "Eight types of product-service system: eight ways to sustainability? Experiences from SusProNet". In Frances Hines and Otilia Marin. Business Strategy and the Environment (John Wiley & Sons, Ltd and ERP Environment) 13 (4): 246–260. doi:10.1002/bse.414.
- Hockerts, K. (1999). "Eco-efficient service innovation: increasing business – ecological efficiency of products and services". In Charter, M. Greener Marketing: a global perspective on greener marketing practice. Sheffield: Greenleaf Publishing. pp. 95–108.
- P. Hopkinson and P.James (2000). Typology of Eco-efficient services. Bradford: University of Bradford.
- Oksana Mont (2000). Product-Service Systems. Stockholm: Swedish Environmental Protection Agency. AFR-Report 288.
- Oosterhuis, F., Rubik, F., and Scholl, G. (1996). Product Policy in Europe: new environmental perspectives. London: Kluwer.
- Rocchi, S. (1997). Towards a new product-services mix. Masters thesis: International Institute for Industrial Environmental Economics. Lund: Lund University.
- Schrader, U. (1996). "Consumption without ownership—a realistic way towards a more sustainable consumption?". 5th International Research conference of the Greening of Industry Network; Heidelberg, Germany.
- Helma Luiten, Marjolijn Knot, and T. Van der Horst (2001). "Sustainable Product – Service-Systems: The Kathalys Method". 2nd International Symposium on Environmentally Conscious Design and Inverse Manufacturing (EcoDesign'01). EcoDesign. p. 190. doi:10.1109/.2001.992344.
- Robin Roy  (2000). "Sustainable Product-service Systems". Futures 32 (3–4): 289–299. doi:10.1016/S0016-3287(99)00098-1.
- Van Ostaeyen, Joris; A. Van Horenbeek, L. Pintelon, J.R. Duflou (2013). "A refined typology of Product-Service Systems based on Functional Hierarchy Modeling". Journal of Cleaner Production. doi:10.1016/j.jclepro.2013.01.036.
- Tietze, Frank; T. Schiederig; C. Herstatt (2013). "Firms transition to greenproduct service system innovators: Casesfrom the mobility sector". International Journal of Technology Management.
- On dematerialization
- Eva Heiskanen (2000). Dematerialisation: the potential of service-orientation and Information Technology.
- Eva Heiskanen, Mikko Jalas, and Anna Kärnä (2000). "The Dematerialisation Potential of Services and IT: Futures Studies Methods Perspectives". Quest for the Futures Seminar Presentation, Helsinki School of Economics, Organisation & Management, June 2000.
- Eva Heiskanen and Mikko Jalas (2000). Dematerialization Through Services—A Review and Evaluation of the Debate. Finnish Ministry of Environment. p. 436.