The dissemination of digital technologies enabled massive data generation and new forms of cooperation. Hence, a new type of innovation named digital innovation emerged. Digital innovation has evolved in different domains and contexts, one of which is called Smart Product-Service System (Smart PSS). Many research works have been done on the development of Smart PSS by leveraging various digital technologies and exploiting its digital capabilities along its lifecycle to generate personalized and innovative solutions. However, there are scarcely any works to explore how the digital innovation process can be manifested to fully exploit digital capabilities throughout Smart PSS development. Aiming to fill this gap, this research provides a theoretical basis for digital innovation in Smart PSS and investigates how it can be in line with the development of Smart PSS from an engineering lifecycle perspective. This work also provides a definition of Smart PSS from the context of digital innovation. A case study on smart office chair is employed to demonstrate the digital innovation process in the usage stage. This work can provide insight and guidance for Smart PSS development and further harness its digital innovation process.