For decades, the prevailing view of economic exchange was rooted in a goods-dominant logic (G-D logic). This perspective centered on the production and exchange of tangible goods, seeing value as something embedded within the product during the manufacturing process¹. Marketing’s role, in this traditional view, was primarily focused on creating, promoting, and distributing these goods to passive consumers¹. However, the rise of the service economy, the increasing importance of intangible assets, and the empowered, connected consumer have challenged this long-held paradigm. In its place, a new framework has emerged, offering a fundamentally different perspective on value creation and exchange: the service-dominant logic (S-D logic)².
Pioneered by marketing scholars Stephen Vargo and Robert Lusch, S-D logic proposes that service – defined as the application of specialized competences (knowledge and skills) for the benefit of another party – is the fundamental basis of all economic and social exchange². Goods, in this view, are not ends in themselves but rather mechanisms for service provision, serving as vehicles for the delivery of embedded knowledge and skills². Value is not embedded in goods by the producer but is instead uniquely and phenomenologically determined by the beneficiary (typically the customer) in the process of using resources to achieve their own goals – a concept known as “value-in-use” rather than “value-in-exchange”².
A core tenet and perhaps the most transformative aspect of S-D logic is the concept of value co-creation³. Unlike G-D logic, where the firm is the primary value creator and the consumer is a passive recipient or, at best, a co-producer (involved in the production process itself), S-D logic posits that value is always co-created through the interaction between the firm, the customer, and other actors within a service ecosystem³. The firm can only make value propositions – promises of potential value – but it is the customer, integrating their own resources (knowledge, skills, time, effort) with the resources provided by the firm and others, who actually creates value in their own unique context³.
This shift from value provision to value co-creation has profound implications for marketing practice⁴. It necessitates a move away from a firm-centric view to a customer-centric and, more broadly, an actor-centric perspective⁴. Marketers are no longer seen as simply marketing to customers but as marketing with customers and other stakeholders in a collaborative process⁴. This requires a fundamental rethinking of traditional marketing activities, from product development and pricing to communication and customer relationship management⁴.
Implementing S-D logic in practice involves embracing several key principles and capabilities⁵. Firstly, it demands a deep understanding of the customer’s world – their goals, their processes, and how they use resources to create value for themselves⁵. This goes beyond traditional market segmentation and targeting to understanding the customer as an active resource integrator within their own value-creation system⁵.
Secondly, businesses must recognize and leverage the operant resources – the dynamic capabilities, knowledge, and skills – of both the firm and the customer³. While G-D logic focused on operand resources (tangible assets upon which operations are performed), S-D logic highlights the primacy of operant resources as the fundamental source of competitive advantage³. Companies must cultivate their own operant resources (e.g., employee expertise, organizational processes, technological capabilities) and facilitate the customer’s ability to apply their operant resources in the value co-creation process³.
Thirdly, S-D logic emphasizes the importance of resource integration within service ecosystems³. Value is created through the integration of various resources – market-facing resources (provided by firms), private resources (owned by individuals), and public resources (provided by government or other bodies)³. Firms operate within complex networks of suppliers, partners, intermediaries, and customers, and value co-creation occurs through the dynamic interplay and integration of resources among these actors³. Understanding and orchestrating these service ecosystems is crucial for facilitating value co-creation³.
Examples of businesses successfully implementing aspects of S-D logic and value co-creation are becoming increasingly common. Companies that actively involve customers in the design or refinement of products and services through co-creation platforms or feedback mechanisms are embracing this logic⁶. IKEA, for instance, involves customers in the assembly process, turning a traditional cost center into a value co-creation activity that provides value-in-use for the customer and reduces costs for the company⁶. Similarly, companies that build strong online communities where customers can share knowledge, support each other, and provide feedback are fostering value co-creation⁷.
The shift to outcome-based business models is another manifestation of S-D logic in practice⁵. Instead of selling a product, companies sell the service or outcome that the customer truly desires⁵. Rolls-Royce’s “Power by the Hour” program, where airlines pay for the hours an aircraft engine is operational rather than purchasing the engine outright, is a classic example⁵. This model aligns the incentives of the provider with the value-in-use experienced by the customer – reliable engine performance.
Technology plays a crucial role in enabling value co-creation and the implementation of S-D logic⁸. Digital platforms, social media, and data analytics facilitate interaction, resource sharing, and personalized service delivery, all of which are central to co-creating value with customers⁸. However, technology is seen as an enabler of service, not the service itself⁸.
The benefits of adopting an S-D logic perspective are numerous for businesses⁹. By focusing on understanding and facilitating the customer’s value-creation processes, firms can develop more relevant and valuable offerings, leading to increased customer satisfaction and loyalty⁹. Embracing value co-creation can also lead to greater innovation, as customers often possess unique insights into their needs and how products and services are used in real-world contexts⁶. Furthermore, fostering strong relationships and integrating resources within service ecosystems can lead to more resilient and adaptable business models in a rapidly changing environment⁹.
For consumers, S-D logic emphasizes their active role and empowers them in the value creation process³. They are not just passive recipients but active participants whose knowledge and efforts contribute to the value they receive³. This can lead to more personalized experiences, offerings that better meet their specific needs, and a greater sense of connection and involvement with the brands they interact with³.
Despite its growing influence in marketing thought, fully transitioning to an S-D logic perspective requires significant organizational change⁴. It necessitates a cultural shift away from a product-centric or even a purely customer-pleasing mindset to one that genuinely views customers as collaborative partners in value creation⁴. This involves changes in organizational structures, processes, and metrics to support co-creation activities⁵.
In conclusion, the service-dominant logic represents a fundamental paradigm shift in marketing, offering a more accurate and relevant framework for understanding value creation and exchange in today’s interconnected, service-driven world. By recognizing service as the fundamental basis of exchange and embracing value co-creation as a core process, businesses can move beyond the limitations of goods-dominant thinking. Implementing S-D logic in practice requires a deep understanding of the customer’s value-creation processes, leveraging operant resources, integrating resources within service ecosystems, and often adopting outcome-based models. While the transition presents challenges, the benefits of increased customer satisfaction, innovation, and resilience make embracing the principles of S-D logic and value co-creation essential for navigating the complexities of the modern marketplace and building long-term success.
Endnotes
- Vargo, S. L., & Lusch, R. F. (2004). Evolving to a new dominant logic for marketing. Journal of Marketing, 68(1), 1-17.
- Vargo, S. L., & Lusch, R. F. (2008). Service-dominant logic: Continuing the evolution. Journal of the Academy of Marketing Science, 36(1), 1-10.
- Prahalad, C. K., & Ramaswamy, V. (2004). Co-creation experiences: The next practice in value creation. Journal of Interactive Marketing, 18(3), 5-14.
- Grönroos, C. (2004). The relationship marketing process: Communication, interaction, dialogue, value dynamics and the service-dominant logic. Journal of Business & Industrial Marketing, 19(2), 99-113.
- Karpen, I. O., Bove, L. L., & Lukas, B. A. (2013). Linking service-dominant logic and strategic business practice: A conceptual model of a service-dominant orientation. Journal of Service Research, 15(1), 21-38.
- Ind, N., & Coates, N. (2013). The meanings of co-creation. European Business Review, 25(1), 86-101.
- McAlexander, J. H., Schouten, J. W., & Koenig, H. F. (2002). Building brand community. Journal of Marketing, 66(1), 38-54.
- Lusch, R. F., Vargo, S. L., & Tanniru, M. (2010). Service science: Perspectives from eighty years of business literature. Journal of Service Management, 21(1), 5-28.
- Vargo, S. L., & Lusch, R. F. (2016). Institutions and axioms: An extension and update of service-dominant logic. Journal of the Academy of Marketing Science, 44(1), 5-23.
