Monetising digital services in the industrial sector – turning digital euphoria into sale

It’s not that executives in the industrial sector have failed to recognise the potential offered by technological transformation and the need to pursue it – digital and hybrid servitization is viewed as a key factor in making the industrial sector fit for the future. If you want to know why, explore the first articles in our blog series, in which we discuss:

• the huge potential offered by apps and digital revenue models in the industrial sector,

• key questions on how commercial considerations influence software architectures, and

• specific cases, success stories and failures, and solutions from some of our client projects.

This fifth article in our series explores the question: how do you go about monetising digital services?

Conventional ROI analysis is not the right approach for digital services

In many cases, one of the key obstacles to successfully realising digital and hybrid services in the industrial sector turns out to be monetisation itself. That’s because it’s not just about calculating one-off development and manufacturing costs – digital services play by different rules. This is one area where companies often get caught out by a dangerous lack of expertise. Lots of businesses have identified some initial use cases and invested large sums in zervitisation projects. Examples include software solutions to notify users in advance when maintenance is required and software portals to help users coordinate all of their manufacturing equipment. First they undertake the extensive technical work required to implement the system, then comes product launch – soon followed by a rude awakening. But why? 

The reason this happens is that most manufacturers still see software development as part of equipment development. They aim to cover their software development costs from the up-front revenues from equipment sales. Conventional ROI calculations are predicated on allocating a share of software development costs to each unit sold. Where this approach comes unstuck is that lack of experience in this area means that these calculations fail to include software lifecycle costs – operating costs, IT infrastructure costs, support and ongoing development – which end up being booked as unplanned costs further down the line. There are no ongoing sales to cover the ongoing costs associated with digital services. 

In the face of these unplanned additional costs, initial euphoria can give way to rapid disillusionment. This can have dangerous consequences – management may decide to put digital services on ice, potentially jeopardising the company’s entire future. 

We want to help you rediscover your enthusiasm for digital offerings! To help you do so, for this article we’ve put together a summary of some of the key stages on the road to realising successful digital services.

Without customer benefits and the right sales strategy, digital services are doomed to failure

To implement digital services successfully and profitably, the very first thing you need to do is face up to key questions on monetisation. Be clear about the benefits your new app or digital services will deliver to your business and your customers, and work out how initial and ongoing development, operation and support will be financed before you start work on them. Before you even start to develop the technology for your solution, you need to undertake a detailed analysis of pricing – what will customers be willing to pay for your product – and whether the monetary benefits to the customer will be sufficient to allow you to recoup your costs. You also need to work out whether you can cover the ongoing costs for your digital services by generating ongoing sales. 

A further key factor is sales and your sales strategy. You can’t sell these products the same way you’ve always sold your equipment. Will you be selling your new services (at a price point orders of magnitude lower than your equipment prices) digitally only, or will your sales reps need to be selling it in combination with an online portal? And what implications does this decision have for your route to market, sales costs and revenues? 

Co-innovation as a route to monetising digital services

The people who should be providing the answers to all of the above questions are your product managers. While these product managers tend to have extensive experience in your target markets, it’s rare for them to have much experience with launching digital services. For many businesses, pricing new, digital or hybrid services can also be extremely challenging, as they just don’t have experience in this area and tend to underestimate the costs involved. One approach might be to recruit new staff with experience in both manufacturing and digitalisation. But while this sounds great in principle, recruiting these staff and then getting them up to speed is generally just too time-consuming, and takes too long to be practical. 

Consequently, many of our clients plump for a co-innovation approach involving external partners and networking. They look for partners like Zühlke, who can quickly get up to speed with a project, provide the expertise needed, and have already overcome similar challenges at other manufacturers. Zühlke generally commences this kind of project with a workshop in which we together identify and prioritise use cases for the service. In both the workshop and the subsequent implementation phase, you benefit from the whole of our multi-industry expertise. You also benefit from our experience in tackling similar projects in other sectors which are further along the digitalisation pathway. 

Monetisation canvas helps realise digital services

Developed by the VDMA, the monetisation canvas for digital services (available in German and with a VDMA login only) is a further aid to collaborating with external partners. The canvas helps you ask the right questions before you get started and helps you evaluate the commercial potential of ideas for new services and how likely they are to succeed. It guides you through the questions you need to be asking in order to offer the right services to the right target group at the right price. 

Are you looking to employ the VDMA monetisation canvas, but aren’t sure how to go about it or need support in estimating your operating and development costs? Read our blog post “Practical guide to monetising digital manufacturing services” and dive deeper into the canvas. We will be happy to use our multi-industry experience to support you. Talk to us today.