Practical guide to monetising digital manufacturing services

In our recent blog post, “Monetising digital services in manufacturing – turning digital euphoria into sales,” we showed you how to successfully monetise digital services in manufacturing. The key takeaway from that article was that, for many manufacturers, what looks simple on paper turns out to pose seemingly insolvable problems in practice. So, I’d now like to share some of my own experiences with the VDMA monetisation canvas, a tool for helping you evaluate a digital service’s monetisation potential. Below, I’ll answer the following key questions: What kind of canvas are we talking about? How do you use it in practice? What benefits does it deliver?

Monetising digital services: do we really need yet another canvas?

Why do so many established manufacturers fail to make a profit from new digital services? What is it about ‘digital’ that’s so different? Sure, a digital product is not a physical thing you can hold in your hands, but other than that, is it really so different? You generate and develop an idea, you manufacture the product, you market it, you sell it.  Or not. 

Conventional equipment and product development is dominated by a broadly sequential development process. Most established manufacturers have achieved mastery of this process. They compare expected development costs with expected revenues based on set prices. Essentially, they use an ROI analysis to gain an accurate estimate of whether a product idea is likely to be sufficiently profitable and the time scale for realising profitability.    

Unfortunately, this approach can’t be applied directly to digital services. Firstly, because when you start developing a digital product, the exact shape and scope of it is often unclear. You have an idea for the service you want to offer, but the exact nature of this service, as well as the digital, technical, and organisational solutions needed to realise it, will only be revealed over the course of an exciting, but intense journey. Calculating the ‘cost to manufacture’ – i.e. your initial development costs – for the service is, at this point, not possible. More importantly, these costs represent only a fraction of your total costs. That’s because digital solutions only reveal their full value once in use. Plus, running the solution involves ongoing operating costs for items such as hosting, ongoing development, essential security updates, etc. 

That’s where the VDMA monetisation canvas (MTC) comes in (available in German and with a VDMA login only). Designed by the German mechanical engineering trade association, the MTC records and structures a range of information relevant to the monetisation of a digital business idea. The tool offers clear guidance to help users find their way through the digitalisation jungle and pose the right questions at the right time. Each of these questions is looked at along two different dimensions: qualitative vs. quantitative and internal perspective vs. customer perspective. 

From an initial idea to a successful digital service: how to use the monetisation canvas?

Here at Zühlke, we generally use the MTC during interactive workshops with product or project teams who are not sure how to go about evaluating ideas for digital or hybrid services and other offerings.  

The first step is to develop a shared understanding of the business case within the team. When starting out on a project, we very often find that while everyone is saying the same thing, what they mean by it is quite different. This is where an outside perspective really helps, as it enables you to identify and name these differences, and to then help the team reach a genuine shared understanding. It’s very common that these discussions bring to light lots of hypotheses from which team members have been consciously or, more often, unconsciously working. One aspect of creating a shared understanding of the business case is making these hypotheses explicitly clear to everyone. That means recording them and working out what they mean for the business case. 

Once you’ve laid this foundation, you can work out what value or risk the new digital service will be transferring from the customer to your company. Based on this analysis, you can then explore the effects on your company, the benefit to the customer, and the implications for platforms, ecosystems, and key partners.  

The canvas helps you keep a clear view of the overall picture and gradually tackle all the key questions at the appropriate point in time. With the full picture in sight, you can work out what your payment model and revenue streams need to look like. Last but not least, you need to identify relevant metrics for evaluating the success of your service after launch. 

By following through on the above steps, you will have achieved the following: 

Monetisation in practice: my personal recommendations on using the monetisation canvas

Below, I’m going to share some of my personal experience and recommendations for using the MTC in digitalisation projects.

To uncover its full potential, the canvas needs to be applied iteratively 

The road from initial idea towards maturity and an established digital service is a lengthy one. Filling out the canvas during the discovery phase for your rough business idea will generally provide you with a good, quick overview of what you don’t yet know. You can then use this to create a plan for reducing major uncertainties. For example, you can test key hypotheses about customer benefits by interviewing potential customers. Using the insights from these interviews you can then revise the information in the monetisation canvas. By doing so, you will gradually arrive at a monetary value for your business case. 

The MTC helps the product team work through issues arising as the product idea matures. It also helps create clarity in cases where the right thing to do with your business idea is simply not pursue it. In evaluating the last point, when designing your metrics for evaluating potential, ensure that they are suitable for the current level of business idea maturity. In the discovery phase, metrics that tell you whether you’ve reduced your uncertainty are particularly useful. By contrast, once the solution is in operation, the focus is on measuring success through metrics like the number of active users, churn rate, or monthly return rate. 

Customers don’t care about your production costs, they’ll pay based on value 

Changing from a conventional cost-based pricing mindset to a value-based pricing mindset is essential and should not be underestimated. Often, companies are hesitant to do so because measuring a customer’s willingness to pay is extremely challenging. Plus, calculating prices on this basis feels a lot more ‘open to interpretation’ than making calculations based on production costs. The business needs to be willing and able to tolerate this feeling of uncertainty.

Look beyond the customer to include platforms, ecosystems, and key partners 

Customers and users are the key factor in determining the success of a digital solution, but that doesn’t mean you should neglect your partners, ecosystem players, and distribution platforms. It’s worth doing some research to identify established platforms on which you could sell your new service. Which platforms and systems are your potential customers currently using? Is it worth getting involved in a partnership to either benefit from an existing ecosystem or create a joint new one? And what are your and your partner’s roles in this ecosystem? 

Until you have answered these questions, your view of the business idea remains incomplete. It's important to remember that not all your users are going to be happy if they need to set up another system to use your digital service. They’re also unlikely to see a benefit in being offered a new service that’s completely isolated from their existing solutions.

The monetisation canvas in practice: helping ask the right questions at the right time

The advantage of the VDMA monetisation canvas is that it represents a structured approach to evaluating the profitability of a digital business idea. It helps you to iteratively undertake the complex process of defining and developing a digital solution and to ask the right questions at the right time, from qualitative, quantitative, internal, and external perspectives. Used correctly, the canvas helps you overcome the challenges involved in monetising digital services in manufacturing and guide your solution to success. 

If you have questions on digital services in manufacturing or on using the VDMA monetisation canvas, we’d love to hear from you!