Smart product-service systems (Smart PSS), as an emerging transdisciplinary paradigm, leverages smart, connected products (SCPs) and their generated services as a solution bundle to meet individual customer needs across different engineering fields. Owing to the advanced information and communication technologies, Smart PSS development differs from the existing product and/or service design mainly in three aspects: 1) closed-loop design/redesign iteration; 2) value co-creation in the context; and 3) design with context-awareness. These unique characteristics bring up new engineering design challenges, and to the authors' best knowledge, none of the existing design theories can address them well. Aiming to fill this gap, a novel design entroy theory is proposed by adapting the information theory with engineering design. In this context, Smart PSS can be regarded as the information container. Hence, the closed-loop design/redesign iteration can be treated as the dynamic change of information and entropy in a balanced system. Meanwhile, the value co-creation process is considered as the exchange of accumulated information via the container. Lastly, the design contextawareness represents the process of eliminating entropy. As a novel prescriptive design theory, it follows Shannon's information theory to determine the best solutions by considering the three characteristics integrally. It is envisioned this appraoch can largely facilitate today's industrial companies' digital servitization towards Industry 4.0 with better performance and user satisfaction.