What is a Service Economy? Overview & 15 Facts

The service economy is a new approach to running a business where goods and services are exchanged for money. The article below will tell you all the information about it in the most specific way.

What Is the Service Sector?

According to U.S. statistics, the service sector creates intangible things, or more accurately, services rather than physical commodities.

Census Bureau, this sector includes warehousing and transportation services, information services, securities and other investment services, professional services, waste management, health care and social assistance, as well as arts, entertainment, and leisure.

What is a Service Economy?

As opposed to industrial or agricultural economies, service-based economies are seen as more developed.

What is a Service Economy?

A service economy is a financial concept that asserts the importance of service in product offers is growing. While the majority of manufacturing businesses continue to offer physical goods, the incorporation of intangible services into those goods is becoming a market difference.

Servitization of goods refers to the notion that products and services are intertwined and that service has become an increasingly vital component of a product. On a service-product continuum, the integration of products and services is said to occur.

Key Driver of the Service Economy

The information revolution is a primary driver of the service economy or system. Manufacturers of computer hardware and software, as well as software application developers, now see service as an intrinsic component of their product offerings.

These businesses often tout their “solutions,” which are inseparable bundles of goods and services. Marketing connections and value constitute services marketing. This style of marketing may rely more on reputation or connection than on product characteristics.

Comparing the offers of two or more vendors may be challenging, since service offerings cannot often be returned. These qualities distinguish services marketing from product marketing.

The Change When Shift Toward a Service Economy

The transition to a service economy has resulted in further changes to the macroeconomic environment.

Current accounting procedures used by both the public and commercial sectors were designed before to the servitization of goods and are thus better suited to a product-based economy. In order to more truly represent the present realities of a service economy, it has been advocated to modify accounting practices.

One of these changes is full cost accounting, which refers to a process that takes into consideration not only the economic expenses but also the social, environmental, and other intangible aspects of a particular plan.

Sometimes, total cost accounting is referred to as full cost accounting. A potential result of a service economy might be monetary reform, which would alter the manner in which money is used in the economy.

How does the service economy affect workers?

The service economy has an effect on employees when firms migrate from stable, long-term employment to precarious, intermittent, or uncertain labor. Contract or independent workers may work from home or telecommute.

What is a Service Economy?

They just labor and get compensated as required by the corporation. Labor expenses are more directly proportional to production, which is advantageous to the corporation. Workers have less job security and negotiation strength, though.

Characteristics

It should come as no surprise that a service economy’s defining trait is its emphasis on services rather than manufacturing. The objective of a shoe salesman, for example, is to sell shoes to customers, not to develop and produce shoes.

Our physician does not produce drugs or medical equipment; rather, he or she diagnoses and treats injuries and illness.

The service sector tends to give many options for freelancers and entrepreneurs, which is another essential trait. It is far less expensive to establish a lawn care company than a factory to produce lawn mowers.

On the other hand, a significant portion of the expansion in the service sector is comprised of positions that pay far less than conventional industrial ones.

While some service sector employees, such as doctors, lawyers, and investment bankers, may earn very high salaries and excellent benefits, the vast majority of service sector jobs, such as those in retail and food services, pay low wages and provide few, if any, opportunities for professional advancement.

Sectors of Service Economy

A mature service economy may be highly varied. The United States Census Bureau has segmented the service industry into thirteen distinct categories, including:

  • Utilities
  • Transportation and storage
  • Financial Information and Insurance
  • Real estate and leasing and rental services
  • Services professional, scientific, and technological
  • Administration of corporations and businesses
  • Administrative & support services, as well as trash management & remediation
  • Educational facilities
  • Healthcare and social support
  • Culture, amusement, and leisure
  • Offering lodging and dining services

Environmental effects of the service economy

In particular, green economics and more specialized theories within it, such as Natural Capitalism, see this as having the following benefits:

  • Much simpler accounting integration for nature’s services
  • Much better integration with state services as a result of globalization, e.g. meat inspection is a service that is believed to be included in the price of a product, but which might vary significantly from jurisdiction to jurisdiction, with grave consequences.
  • Association of goods movements in raw materials and energy markets with the associated negative environmental effects (representing emissions or other pollution, biodiversity loss, and biosecurity risk) public goods so that no commodity can be traded without assuming responsibility for damage caused by its extraction, processing, shipping, and trading – its total outcome.
  • Integration between urban ecology and industrial ecology modeling is facilitated.
  • Making it simpler to connect with the Experience Economy of real quality of life choices made by humans based on assumptions about service, and better integrating economics with marketing theory about brand value, e.g. items are bought based on their supposed dependability in a recognized process. This presupposes that the user’s experience with the brand (indicative of the service they anticipate) is far more essential than its technical attributes.

Product stewardship or product take-back are terms for a particular need or measure in which trash disposal is integrated in the distribution chain of an industrial product and is paid for at the time of purchase.

What is a Service Economy?

That is, paying for the safe and correct disposal at the time of purchase and depending on the seller to dispose of the merchandise.

Those that support it are concerned with the final stages of a product’s lifespan and the whole result of the manufacturing process. A rigid service economy interpretation of (fictitious, national, legal) “commodity” and “product” linkages requires this.

It is often used to paint, tires, and other items that, if improperly discarded, produce hazardous waste. It is most often associated with the container deposit on deposit bottles. The cost of the bottle is distinct from the cost of the liquid it holds.

If the bottle is returned, the deposit is refunded and the supplier is required to return the bottle for reuse or recycling.

If not, the tax has been paid, which probably funds landfill or litter management procedures that dispose of diapers or broken bottles. Also, as the same money may be collected by anybody who finds and returns the bottle, it is popular for individuals to collect and return these bottles in order to generate a modest revenue.

This is fairly prevalent, for example, among homeless individuals in American cities. Legal requirements vary: the bottle itself may be deemed the purchaser’s property, or the purchaser may be required to return the bottle to a depot so that it may be recycled or reused.

In certain nations, such as Germany, the law mandates consideration of the whole result of a product’s extraction, manufacture, distribution, usage, and disposal, and holds those who benefit from these accountable for any consequences along the way.

This is also the overall trend in the UK and the EU. In the United States, there have been a large number of class action lawsuits involving product stewardship responsibility – holding corporations liable for things the product does that were never stated.

Rather than assigning blame for these issues to the public sector or assigning it randomly to corporations via litigation, several accounting reform projects aim to achieve full cost accounting.

This is the financial reflection of the full result, including the benefits and losses for all stakeholders, not simply those investing or buying. Such actions have increased the desirability of moral buying, since it eliminates responsibility and potential litigation.

Role of the service economy in development

Services account for more than half of the gross domestic product (GDP) of low-income nations, and as their economies continue to improve, so does the significance of services.

In sub-Saharan Africa, the service sector provided 47% of GDP development between 2000 and 2005. (industry contributed 37 percent and agriculture 16 percent in the same period).

This indicates that recent economic development in Africa is as reliant on services as it is on natural resources or textiles, despite the fact that many of these nations benefit from trade advantages in primary and secondary commodities.

Consequently, employment is also adapting to the changes, and many are leaving the agriculture sector for the service industry. This job development is especially beneficial since it often employs low-skilled workers in the tourist and retail sectors, so primarily benefitting the poor and providing a net gain in employment overall. The following constitute the majority of the service economy in emerging nations:

What is a Service Economy?

  • Financial services
  • Tourism \sDistribution
  • Education and Medical

However, new possibilities are appearing in other industries, such as the health industry. As an example:

Indian firms that offer scanning services to American hospitals.

South Africa is expanding its markets for surgical procedures and vacation packages.

In India, the Philippines, South Africa, and Mauritius, IT services such as contact centers, back-office tasks, and software development have expanded rapidly.

Servitization drivers

Compared to twenty years ago, the trend of servitization is readily apparent in the rise in the service sector’s proportion of the United States and European economies’ gross domestic product.

Services are becoming an inseparable component of the product, as the provider delivers them alongside the product’s core to enhance its performance (IBM, 2010).

However, what are the primary motivations for the company’s business model transformation? Financial, strategic, and marketing motivations are cited by Baines, Lightfoot, and Kay (2006) as motivating corporations to grow into services industries.

Visnjic, Jovanovic, Neely, and Engwall identified value drivers including efficiency, originality, lock-in, complementarity, and responsibility.

Financial drivers

The financial driver is shown in servitization’s increased profit margins and steady revenue. In the face of increasing price rivalry among product offerings, businesses might regain lost income potential via the provision of services.

The transportation segment of GE had a 60 percent decline in the number of locomotives sold between 1999 and 2002; nonetheless, this was not catastrophic since income from services rose from $500 million to $1.5 billion between 1996 and 2002.

According to a 1999 analysis by AMR Research, corporations make over 45 percent gross profits from aftermarket services despite the fact that they account for just 24 percent of sales. It also demonstrates that GM generated more profit in 2001 from $9 billion in after-sale earnings than from $150 billion in vehicle sales.

In addition, servitization reduces the seasonality of the product and lengthens the life cycle of complicated items, as shown by the aviation sector, in which corporations shift their attention from product supply to maintenance and aftermarket operations.

Strategic drivers

Strategic drivers are primarily concerned with achieving and maintaining a competitive edge for the organization. For a business to preserve a competitive edge, its resources must be valued, scarce, difficult to copy, and organized. Servitization may not be the company’s last and sole assurance of success.

However, it proves to be useful since it is not offered by many vendors and because it simplifies the customer’s use of the product. As a result of the producer’s superior understanding and expertise of the product’s operation, it is also unusual and difficult to copy. Fewer than a handful of firms are capable of delivering customer service.

What is a Service Economy?

In addition, since services are less apparent and take more labor, they are more challenging to mimic. Last but not least, commoditization drives costs down, compelling businesses to innovate continuously.

Adding services to a product increases its perceived value to the consumer since service delivery may be performed in a more individualized manner in response to the client’s specific demands.

Marketing and sales drivers

As services are supplied on a long-term basis as opposed to a one-time transaction, they provide more opportunity to form relationships with clients and let the provider to establish its brand.

In addition, it helps the sales staff to influence purchase choices by providing them with chances to upsell further product extensions or other complementary product components.

The increasing need for services in the B2B business stems from the customer’s desire for non-universal, customized solutions, which necessitates a comprehension of his scope of work.

This kind of job requires time and discussions on both sides, during which trust and understanding are built, resulting in subsequent loyalty.

Working closely with customers and considering their perspectives from a new angle gives the supplier with significant industry insights that enable him to develop with a more customer-centric approach.

The development of a solid go-to-market plan (aligned with an operational strategy) is a crucial success element for the market introduction of the PSS. Application of the 5Cs marketing framework analysis:

  • Context (PESTEL analysis)
  • Customer Rivalry Collaborators (suppliers and distributors)
  • Company (Internal capabilities, for instance with a VRIN test)

Particularly crucial is the pricing strategy, which, in order to be effective, must use a Total Economic Value approach and be backed by a conjoint analysis to establish client preferences and price sensitivity. Servitization contracts are often based on fixed-fee escalating-risk structures:

Flat-rate for Product-oriented PSS have the lowest amount of risk compared to usage-based PSS, since an agreed uptime level is the basis of price. Result-based PSS have the greatest level of risk, which is captured with a set cost.

The TEV analysis must determine how the shifting of such risks from the customer to the supplier provides value for the client and must be included into the pricing plan.

The Service Sector in the Three-Part Economy

The third component of a three-part economy is the service or tertiary sector. The first economic sector, the primary sector, is comprised of agricultural, mining, and farming enterprises.

The secondary sector comprises the manufacturing and commercial operations that permit the manufacture of tangible items from the primary sector’s raw resources. Despite being categorized as the third economic sector, the service sector accounts for the biggest share of worldwide economic activity.

Economic Development

According to the tri-sector economic theory, in addition to distinguishing distinct areas of economic effort, the three economic sectors also represent the evolution of economies across time.

The primary economic activities of the most basic economies are raw material extraction, agricultural production, and fishing. As economies expand and mature, the manufacture and sale of completed items constitute the majority of economic activity.

The service sector is the final economic sector to achieve considerable expansion and is the distinguishing characteristic of developed countries and advanced economies.

The Primacy of the Service Sector

The designation of the service industry as the tertiary sector does not imply that it is ranked third in terms of economic significance.

The service industry has developed substantially during the last century. By the start of the 21st century, it had surpassed the manufacturing and retail goods sectors as the biggest economic sector in most industrialized countries.

In the early 20th century, the United States became the leading global economy due to its vast manufacturing sector; but, by the early 21st century, its economic supremacy was based on its enormous service sector.

In the United States, the service sector’s contribution to the country’s gross domestic product (GDP) increased from less than 50 percent in 1919 to around 85 percent in 2019.

The rise of the service industry has been made possible by the exponential growth of knowledge over the last 50 to 70 years, the fast development of technology, and the advent of instantaneous, global communication through internet connections and mobile phones.

What is a Service Economy?

The transition from a manufacturing-based economy to a service-based economy is also facilitated by increased automation, which decreases the number of workers needed for industrial activities.

The vast development of government services in industrialized countries is another key element contributing to the service sector’s growing dominance.

Technology in the Service Industry

Technology, notably information technology systems, is influencing the operations of service sector firms.

Businesses in this industry are rapidly placing a greater emphasis on what is becoming known as the knowledge economy, or the ability to outperform competitors by understanding the wants and needs of target customers and operating in a way that satisfies these wants and needs quickly and at low cost.

Nearly every industry within the sector adopts new technology to boost output, enhance speed and efficiency, and reduce the number of personnel necessary to run the firm. This reduces expenses and increases incoming income sources.

Economic Development

According to the tri-sector economic theory, in addition to distinguishing distinct areas of economic effort, the three economic sectors also represent the development of economies across time.

The primary economic activities of the most basic economies are raw material extraction, agricultural production, and fishing. As economies expand and mature, the manufacture and sale of completed items constitute the majority of economic activity.

The service sector is the final economic sector to achieve considerable expansion and is the distinguishing characteristic of developed countries and advanced economies.

The Predominance of the Service Industry
The designation of the service industry as the tertiary sector should in no way be interpreted as indicating that it ranks third in terms of economic significance.

Over the course of the last century, the service industry has developed dramatically. At the start of the 21st century, it had surpassed manufacturing and retail goods as the biggest sector of the economy in the majority of industrialized countries.

In the early 20th century, the United States became the leading global economy due to its vast manufacturing sector; but, by the early 21st century, its economic supremacy was based on its enormous service sector.

Between 1919 and 2019, the service sector in the United States increased from contributing less than 50 percent of the country’s gross domestic product (GDP) to contributing around 85 percent of the country’s GDP.

The rise of the service industry has been made possible by the exponential growth of knowledge over the last 50 to 70 years, the fast development of technology, and the advent of instantaneous, global communication through internet connections and mobile phones.

The transition from a manufacturing-based economy to a service-based economy is also facilitated by increased automation, which decreases the number of workers needed for industrial activities.

The vast development of government services in industrialized countries is another key element contributing to the service sector’s growing dominance.

Conclusion

A service economy is an economy in which goods and services are exchanged for money, not directly with each other. In a service economy, it is much easier to start up a business than it is in a traditional one.

You can also find yourself in a service economy if you have a high level of education or knowledge, and you have lots of experience.

FAQ

The service sector, also known as the tertiary sector, is the third tier in the three-sector economy. Instead of product production, this sector produces services maintenance and repairs, training, or consulting. Examples of service sector jobs include housekeeping, tours, nursing, and teaching.
Service industries include everything else: banking, communications, wholesale and retail trade, all professional services such as engineering, computer software development, and medicine, nonprofit economic activity, all consumer services, and all government services, including defense and administration of justice.
Already in 1940 the U.S. became a so called “service economy” meaning that more than half of its work force is employed in producing intangibles.
You do not have to manufacture, so you have no production facility, and you don’t have to wait on products to be finished and inspected so you can sell them. This frees you up to focus on sales rather than inventory or manufacturing.
5/5 - (1 vote)
Pat Moriarty
Follow me

Leave a Comment