Are you a manufacturer that sells, or is thinking about selling, digital goods? If so, there are some common monetisation pitfalls and critical success factors you need to be aware of. Peter Colman, Xi Bing Ang and Saagar Mehta offer advice on getting the most from your digital offering.
While a commonly accepted GDP-like metric has yet to be agreed upon, by most authoritative accounts the value of digital goods and services as a proportion of the economy has grown dramatically over the past few decades.
Equally for mature manufacturers that have long-established heritages of making quality physical products, as well as younger manufacturing companies born straight into this digital age, the imperative to define and properly monetise the right digital products and services has never been greater.
Through our work with manufacturers of all shapes and sizes at different phases of their respective digitalisation journeys, we have codified the key elements for success in a Digital Monetisation Framework (see graphic below) – plus, we’ve learnt a few key lessons along the way.
Digital offerings can take the form of software, data services or even analytics services. For the purposes of this article, we will use the example of monetising a new software product.
#1: Set the metrics for success carefully
Many manufacturers make significant investments into digitalisation with high hopes for success, but realise subsequently that the business and financial metrics for that success are sometimes murky, or worse, divergent.
Is it the proportion of customers buying the digital offering? Is it revenue contribution? Average contract value or renewal rates? Make sure the entire management team is aligned with what the business objectives are.
#2: Define, but just as crucially, align the entire company on the digital value proposition
Building an intimate understanding of the customers and their needs, and articulating a clear value proposition that directly addresses those needs is naturally important. However, this is not enough.
It is equally critical to ensure that every part of your organisation has the same understanding of this value proposition – from sales to operations, and product/engineering to customer service.
#3: Think monetisation from day one
We have seen many manufacturers develop digital appendages (e.g. software, insightful data) to their physical hardware over time in the name of improving the overall solution and performance, often driven by product teams.
Customers are delighted, and one day these businesses realise that perhaps they should also monetise these digital offerings explicitly.
Often, it is too late, because customers have already been ‘trained’ to expect these offerings as ‘freebies’ and that they’re bundled into the hardware price itself.
A clear approach is key. At the very least, signal the monetary value of the software, even if it is not yet explicitly monetised.
#4: Price is important, but the revenue model is the make-or-break
We have a time-tested axiom: ‘how you charge beats what you charge’. For most manufacturers, moving from selling a discrete units-countable physical product (too often priced in a cost-plus manner) to selling a zero-marginal-cost digital good means that they not only have to understand how to apply the principles of value-based pricing, but also critically think about what the revenue model itself should be.
#5: Make it easy for the sales team
Renowned behavioural scientist Richard Thaler said, “If you want people to do something, make it easy.”
Many sales teams are well rehearsed when it comes to selling physical goods to their customers. But selling digital offerings is a different ball game altogether.
They need to be equipped with the right specific sales guidance and aids to ensure they are prepared to not just sell, but defend the value (and price) of digital offerings in addition to the existing physical product range.
In summary, there is a lot of profit potential for manufacturers looking to enhance their offering with digital products – as long as these common pitfalls are carefully navigated and turned into success factors.
This article first appeared in the November issue of The Manufacturer magazine. Click here to subscribe
The Simon-Kucher & Partners team will also be exploring these lessons in more detail in an upcoming series.
Simon-Kucher & Partners is a global consulting firm specialising in TopLine Power, which encompasses strategy, marketing, pricing, and sales. The company is regarded as the world’s leading pricing advisor and thought leader.
Dr. Peter Colman is a Partner with Simon-Kucher & Partners, leading the Technology & Industrials practice for UK/Ireland and based in Harrogate, North Yorkshire.
Xi Bing Ang is a Senior Director and Saagar Mehta is a Senior Consultant with Simon-Kucher & Partners, both based in London.
*Image courtesy of Depositphotos