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What is a Service Economy?

By K.M. Doyle
Updated May 16, 2024
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A service economy refers to a financial concept that says that service is becoming more and more important in product offerings. While most manufacturing companies continue to sell tangible products, the intangible service that is being integrated into the product is becoming a market differentiator. The concept that products and services are interconnected, and that service represents an increasingly important part of a product, is called servitization of products. The merging of products and service is said to occur on a service-product continuum.

The information revolution is a key driver of the service economy, or service system. Manufacturers of computer hardware and software, as well as software application developers, now consider service to be an integral part of their product offering. These companies commonly promote their "solutions," which consist of both products and services that cannot be separated.

Services marketing consists of marketing relationships and value. This type of marketing may be based more on reputation or relationship rather than on product features. It can be difficult to compare the offerings of two or more suppliers, and service offerings typically cannot be returned. These are the features that differentiate services marketing from product marketing.

The shift toward a service economy has brought other changes in the macroeconomic environment. The present accounting methods used by both public and private-sector organizations were developed prior to the servitization of products and so are more suited to a product-based economy. Accounting reform measures have been proposed to more accurately reflect the current reality of a service economy.

One of these reforms is full cost accounting, which refers to a method that takes into account not only the economic costs of a given proposal, but also the social, environmental, and other intangible costs. Full cost accounting is sometimes referred to as total cost accounting. Monetary reform, which would change the way money is utilized in the economy, may be a future byproduct of a service economy.

The service economy is impacting workers as well, as companies shift from regular, long-term employment to precarity, or work that is intermittent or insecure. Workers may be hired on a contract or freelance basis, and may work from home or telecommute. They work, and are paid, only when needed by the company. The benefit to the company is that labor costs are more closely related to output. Workers, however, have reduced job security and negotiating power.

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Discussion Comments
By PelesTears — On Apr 07, 2011

@submariner- I read about a company that is already doing what you say. There is a carpet manufacturer in Atlanta that is leasing reclaimed carpet to corporate clients and virtually reducing their waste to zero. The company makes multicolored carpet tiles that are installed in office buildings across the country. Once the tile is worn out, the company replaces the worn tiles with new tiles. These worn tiles are then shredded and made into more carpet only to be put back into the fray again.

The company is more of a carpet service rather than a carpet manufacturer. Similar services in other industries exist. Think of diaper services, appliance leasing services, etc. The new innovation in the service based economy is the combining of the manufacturer with the retailer.

By cougars — On Apr 06, 2011

@submariner- What you described is a service-based economy by definition. It may be a little more advanced than the service based economy that we are currently moving toward, but it is a service-based economy nonetheless. Companies in the scenario you describe would not compete as much on product, rather they would compete on the services they provide.

The article did a good job of describing a service-based economy, but maybe it highlighted more of the negative effects than the positive effects. Service economies can create stability in the job market, but it does require a transition that is less stable than a fully scaled service based economy. Entire institutions would need to adapt the way that they do business, how they engineer products, and how businesses deliver goods. There will almost certainly be some economic turmoil while this occurs, but its occurrence likely inevitable. Resources are running scarce, and populations are increasing so a purely consumption based economy cannot exist in the long-term.

By submariner — On Apr 04, 2011

I am wondering if there are more than one definition of a service based economy. I have heard the term in reference to making economic growth more sustainable. In the context that I have heard of a service based economy is in reference to the way that goods are delivered, not the services included with expendable consumer goods.

The idea I heard is that a service economy would be better because it can significantly reduce waste streams. The example I heard was that things would not be consumed, rather things would be leased. Cars, televisions, carpeting, appliances, everything would be leased and maintained by the manufacturer. This would make the manufacturer want to design goods with fewer proprietary parts, better durability, and higher quality. Once the lease was terminated, the goods would be dismantled and re-used for other goods, or refurbished and leased again.

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