Service-Dominant Logic

Service-dominant logic is a way of thinking about how companies create value for their customers. The older view was simple: a company manufactures a product, the value is embedded in the product, the customer buys it and consumes it. Service-dominant logic contradicts this. It says: an object alone is worthless. Value only arises when someone uses the object and achieves something with it. The customer is therefore not the endpoint of a chain, but participates in value creation themselves. This idea was formulated in 2004 by the US marketing researchers Stephen Vargo and Robert Lusch.

From sold object to solved problem

An example makes the difference clear. A drill on a shelf has no benefit for anyone. The benefit is the hole in the wall, and more precisely: the shelf that has been hung up. Whoever thinks this way no longer sells machines, but solutions. Some providers therefore rent out tools by the hour instead of selling them.

This shift explains many business models of the last twenty years. Software is no longer bought as a CD, but subscribed to monthly. Car manufacturers offer ride services. Machine builders sell guaranteed operating hours instead of machines. The technical term for this is servitization, meaning the conversion of a product business into a service business.

This is relevant for investors because it changes the numbers too. A one-time sale brings in money once. A subscription brings in predictable revenue over years. Companies with such recurring revenues are often valued higher on the stock market than pure product manufacturers.

Resources that can do something, and resources that something is done with

The core of the theory is a distinction between two types of resources. One type is passive: raw materials, components, machines. Something is done with them. The other type is active: knowledge, skills, experience. These are what actually bring something about. In service-dominant logic, the second type is the real source of competitive advantage.

This leads to the second key idea: joint value creation, known in jargon as co-creation. Provider and customer each contribute their own knowledge. A gym provides equipment and trainers, but without the customer’s own training, nothing happens. The provider can therefore only make a value proposition, not deliver a finished value package.

A common misconception is to confuse the theory with the service industry. It’s not about hairdressers being more important than factories. What is meant is that every offering is essentially a service — even a car. The car is merely the means by which the manufacturer passes its know-how on to the customer.

Where the idea shows up in the tech industry

It is most visible in Software as a Service, i.e. software that is rented online rather than bought. Customers pay for ongoing access, while the provider updates it in the background. Cloud computing works similarly: you rent computing power instead of buying your own servers.

The pattern also fits AI products. A language model is rarely sold as a file. Instead, customers pay per request or per month for access via an interface. And the benefit depends heavily on how well the customer formulates their questions and contributes their own data. This is exactly joint value creation in the sense of the theory.

In business reports and analyst commentary, one encounters the follow-on terms more often than the theory itself. When there is talk of recurring revenue, customer retention, platform ecosystems, or subscription models, the same underlying assumption is at work. It states: the relationship with the customer is more valuable than the single object sold.