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Industrial Paradigm Shift

Using digital add-ons to achieve better understanding

13 February 2018
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Reading time: 3 minutes

Digitisation is the key to a better understanding of your own customers. And also their loyalty can be improved, if you choose the right approach.

We have already shown in a previous blog post how the paradigm shift from product provider to service provider can work. The customer takes centre stage, and valuable data can be collected because information about the entire useful life of a product or service is identified. Now we would like to take a close look at the use of these data. Because data make it possible for a product with additional services, or even a service alone, to be constantly checked and for any sources of error to be detected in time and eliminated. Furthermore, customer behaviour and interaction can be analysed. The insights thus gained can be directly incorporated into new innovations and services.

Recognising customers’ needs better

Let us take a close look at the first example, the use of the data obtained. The car maker Tesla serves as a good example. Elgar Fleisch, a professor at ETH Zurich, provides a relevant definition here: “Digital add-on refers to a business model component in which a physical good is very reasonably priced, i.e. is sold with a low margin. Over time, the customer can purchase or unlock numerous high-margin additional digital services.”

If we say that Tesla’s cars are a physical product in their own right, we are at the level of the traditional product manufacturer. The transformation to an extended service provider in this case would be the possibility to sell an additional service. Due to the actual customer benefit and the fact that the added value for the customer can be demonstrated, the additional service can be priced accordingly. Customers are usually prepared to pay more for additional services – sometimes even more than for the actual product.

The autopilot results in a product upgrade

Back to our example from Tesla. The step away from the physical product to the digital product, or even the digital add-on, is in our case the autopilot. In this way, Tesla generates added value not only for the customer, with an additional service that is very welcome, but also for the car maker itself. The company can offer the customer differentiation and thereby receive additional data, for example about the distance travelled by the car. The graphic of Prof. Dr. E. Fleisch clearly shows that digital and physical products support each other and that the sharing of insights and data contributes to mutual improvement. The product and the service level have come together and complement each other.

In the case of Tesla, this might be a free software update or another add-on provided to loyal customers. But what good does this service do the company if it costs nothing? The additional, free digital service gives Tesla the opportunity to differentiate itself. Such added value excites the customer, which is conducive to brand loyalty, and can build up a switching barrier. Last but not least, Tesla obtains additional customer data, which are, in turn, strategically important – not for nothing is it said, “Data is the new gold”.

In addition, the data can be fed back to production as well as to the digital add-on. The service must offer customers a clear additional benefit, excite them and make them loyal to the company.

Grafik zur Funktion von Digital Add-ons nach Prof. Dr. E. Fleisch.

Digital add-ons bring considerable added value to the customer and further information to the company. (Prof. Dr. E Fleisch / ETH)

How can you generate added value?

From the customer’s point of view, an additional digital service is attractive when the service:

  • … is relevant and can solve an actual need, i.e. has a clear customer focus.
  • … can be differentiated from services offered by other companies and serves as a unique selling proposition.
  • … the additional benefit can be individualised or personalised, which increases customer loyalty.
  • … is not absolutely necessary to use the core product, but improves the user experience.

The additional benefit must be perceived by the customer as added value. From the company’s point of view, the channel of free additional services should always be used in order to bring about improvement of the product using the data received. Customers are reluctant, however, to hand over their data. How can you overcome this hurdle as a company? When are customers willing to share their data?

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