Since the publication of our book  “Mastering Digital Transformation” , many customers approach us with a question: “How will digitalization change my industry?”  

We cannot make any general statements. The detailed developments heavily depend on the characteristics of the good itself. Will it be suited to improve through artificial intelligence? Is there additional benefit of interaction withers environment? 

But as our book describes, there is a set of rules by which the development of innovations can be anticipated. This does not yet say when these developments will occur. Estimating the correct point in time is an essential component of success. It results from the mixture of one’s own position and power in the value chain (your influence) as well as from long-term trends. It represents a challenge of its own and must also be assessed individually. However, the changes to be expected as a result of digitalization can be roughly anticipated, as I will outline below using the example of consumer goods.  

Impact depending on the type of good 

The observation begins with a segmentation of the goods themselves. Are these goods goods or consumables? Consumables themselves usually do not change much as their characteristics are primarily determined by the context of consumption. In this context, however, the sales channel is subject to potential change. IoT-supported dispensing mechanisms, such as dispensers or portioners, can help to stabilize sales and increase customer loyalty. 

However, an externally controlled sales channel may limit the possibilities of digitalisation (B2B2C). If sales intermediaries are elementary for subsequent procurement, digitisation of sales should also provide advantages to the intermediaries. It would be possible, for example, to involve them in the information and insights gained into the consumption habits of consumers in order to open up cross-selling and upselling options for them through campaigns or corresponding information. The optimization of the shopping basket, the combination with other products not in the own portfolio, might be a fruitful approach,

Particularly in the consumer area, where a change of brand often is just an eye-blink away, customer benefit should be the guiding principle when designing digital options. A few months ago, a well-known consumer brand launched a battery-operated hand soap dispenser that serves two tasks:  On the one hand, it ensures a monopolisation of sales by locking the consumer into the dispensing container. Anyone who has such a filling station at home will be bound to buy fitting refills from this manufacturer. On the other hand, it increases consumption through the fixed delivery quantity, that cannot be modified by the customer. This procedure has little to do with digitalisation, but in my opinion it illustrates very well how not to approach the matter. From a customer perspective, this brand lost its acceptance in our household.

A suitable digitalisation approach in this context would monitor consumption, report this back, suggest optimization and (probably) offer a subscription model for continuous supply by e.g. mail order. This could exclude the retail trade and still provide  a discount of 15 to 30 percent below retail price.

It remains a question of the product price from which order quantity a direct delivery is worthwhile and whether the provider can get the necessary warehouse logistics managed. Depending on organisational talent and sales volume, this should be possible for basket value starting from EUR 25-30. But if you think in that direction, run a sample with external partners and a limited number of variants before starting to invest and build! Such a change will be a very costly endeavour.

In the case of a consumer good, the distribution process can also be the subject of digitalisation. However, the design options are much more far-reaching. For example, usage can now also be observed. Depending on the scenario, the usage itself can also be “optimised”. Here, too, great care must be taken to ensure that the optimisation is not carried out from the point of view of the provider but from that of the customer. Amazon is successful not primarily because it focuses on its own EBIT, but because it focuses on customer benefit. The latter leads to conditional loyalty, which creates a bond that can in turn be monetized. 

The options naturally correlate strongly with size, and price of the good as well as consumer behaviour. A first starting point that pays off for both the customer and the company is usage statistics. These include time and duration, but also usage settings. All of these reveal usage patterns that allow for further product differentiation and specialisation. Also upselling potentials can be discovered.

At the same time, attention should be paid as early as possible to the expandability of the local control solution in order to open up up-selling options even after the sale. A very interesting but so far only rarely used pattern is the activation of new features for a fee. Let’s illustrate the mechanism with a sample:

Product P1 was purchased with a Feature Set A. A little later a new product P2 will be released, which complements a new feature set B. To upgrade, the customer now has two options: Either he buys the new product at full price or he invests an „upgrade fee“ to supplement P1 with the hardware-independent sub-set of the new features. Whether this already generates a new cash stream or only a proportional shift of the new purchase remains to be evaluated in the respective case and is typically strongly determined by the ratio of emotionality vs. rationality in the procurement behaviour of the buyers. But it offers a way to address recent buyers and increase purchase frequency

Upselling is comparable with added value content. These can be billed either in the form of an additional subscription or on a transaction basis. Vorwerk’s Thermomix is a good example of the subscription model.

Both variants transform the one-off customer into a recurring customer relationship with continuous cash flow. The dream of every investor. Perhaps the most successful example of this is Sony’s Playstation, which – now in the fourth generation – has visibly established itself  as a platform for the distribution of music, video and games content with over 100 million units sold. Sony’s stereo systems have not yet found their way into the subscription model for music, however.

Of course, not every product is suitable as a purchasing or upselling platform. Market power, number of units, market price and interaction potential clearly define the scope of possibilities here. The sale of lipsticks at EUR 3 each will not be a profitable business even in Internet-based direct sales if the shopping basket cannot be enlarged. In such a scenario, however, it could be interesting to interact with the customer at the point of sale in order to learn more about him and his needs, to enlarge the shopping basket – from the customer’s point of view – in a way that makes sense and, if necessary, to expand the product range accordingly. Good options here are augmented reality approaches, which also enable less imaginative people to envision the purchase and impact of such products or to be inspired for such purchases. 

While the distinction between consumer goods and durable goods is still quite clear, the distinction between durable goods and capital goods might not be so clear. We define capital goods as goods that are part of a deliberate, long-term procurement process, possibly linked to financing and less frequent purchases. In contrast, we see consumer durables as still being below this threshold. The border may be blurred, but cars, houses and even high-priced sports equipment are part of this segment. Mobile phones, computers and expensive home electronics constitute the borderline, but in general they tend to belong more to the consumer goods segment.

In the context of capital goods, meaningful, digitally-supported additional services that optimize application and usage are now the norm. For example, good solar or heating systems already come with online reporting of consumption statistics. Usual extensions of the business model are then consulting services regarding optimizations, depending on the complexity online or even offline, replacement demand prognosis, remote maintenance and operating contracts. The latter successively lead to a change from a one-time high acquisition investment to a multi-year, monthly operating and maintenance contract. 

Tesla, for example, recently offered a USD 2,000 update for improved engine performance – an upselling moment that BMW, Audi and Mercedes can only dream of. This helps to understand the USD 100 billion market capitalization!

The required technical capabilities for these scenarios (communication, event-based messaging, encryption, event stream analysis, update mechanisms and security etc.) are meanwhile quite common. Inexpensive hardware modules are available, which allow secure, WiFi-based communication. The basic control parameters and probably most of the necessary status information is already available within the devices. Depending on the degree of proprietary development, the effort to make the solutions accessible and configurable – as well as updateable! – might still be more or less substantial, but it will be worth evaluating!

Interessant sind hier Modelle, welche wiederum das Upselling ggf. erforderlicher Zulieferer einschließen. Durch moderne Bewirtschaftungsverträge, vorausschauende Bedarfs- und Logistikplanung lassen sich den Herstellern vollkommen neue Ertragsströme erschließen.

Acquisition values of capital goods will lose importance in favour of services or service provision!

These developments will take effect at different speeds in various industries and segments. However, the possibility of subsidising equipment through supply is too tempting not to prevail. This development has been known for a long time in the field of printers: The purchase prices are negligible in contrast to spare parts or consumables.

Conclusion

The examples presented illustrate that digitisation offers a lot of opportunities to open up new value streams. As already described in previous articles, the ambition, the goal of the entrepreneur is the variable that determines success in the course of digitalization. From a business management point of view, a tendency towards constant income streams can be expected by shifting from acquisition values to subscription and platform models.

Von technischer Seite sollte man die Komplexität nicht unterschätzen, entsprechende Lösungen lassen sich in einem konzentrierten Prozess gut umsetzen. Wer sich dabei nicht dazu verleiten lässt, bei der Lösungsfindung nur die neuesten Technologien einzusetzen, kann verlässlich ins Ziel navigieren. Das haben wir bei EACG bereits mehrfach bewiesen.

Prerequisites for success are a clear goal, the determined will to achieve it, focus and sufficient stamina (see Blog Post Financing). Depending on the size of the company, it may therefore make sense to shape the project together with suitable partners. (Externals, Financiers, see also book p…) However, it would be fatal to sit still and hope that “digitalisation” will take care of itself.