In the early years of this century, you knew when you bought a mobile phone that you were stuck with the built-in software functionality for the entire lifetime of the phone. If you needed a browser or specific calendar features, you had to choose a phone that offered these features out of the box. If your needs changed, you generally had to buy a new phone. In the middle of the first decade of this century, Blackberry started to sell phones which allowed users to install additional software after purchase. The big change came in 2007 when Apple released the iPhone. Users realised that they could install apps providing additional functionality after purchase and that this meant that their phone would be able to meet their needs for years to come. Based on its existing music download ecosystem Apple set up the App Store, which has delivered ever growing revenues from the sale of third-party apps ever since. In 2008, Google climbed on board with the Android ecosystem for smartphone apps.
Nowadays, apps are not just limited to phones. They have also become an integral component of TVs, sat navs, food processors and fitness equipment. Users benefit from new device functionality, device manufacturers from new business models and revenue streams.
Consumer electronics and automotive sectors showcase revenue potential of apps
The automotive sector is also catching up. By using software to add more and more functions, cars have moved away from being dumb lumps of machinery with minimal software. For electric vehicles in particular, software updates can now be used to enhance driving performance even after purchase. When a model is first launched, the batteries and motor operate using a standard set of parameters. After launch, the manufacturer is able to collect large volumes of operating data under a range of environmental conditions and to use this data to work out where and when it is safe to increase the load on the motors, batteries and motor electronics without running the risk of causing breakdowns and warranty claims. With the Tesla Model 3, for example, customers were able to pay $2,000 (€1,800) to increase vehicle acceleration, reducing the time taken to accelerate from 0 to 100 km/h from 4.4 to 3.9 seconds. Another interesting feature, introduced in 2019, is Dog Mode (which Tesla has since made available free of charge). To prevent overheating on hot days, it enables car owners to leave the air-conditioning on if they want to leave their dog in the car. The range of additional functions might also include unlocking existing hardware. Where, for example, heated seats are installed as standard in a vehicle but not activated, manufacturers could allow customers to pay to have them activated after purchase, which would then see seat heating controls added to the user interface.
In 2021, Volkswagen announced that it would in future offer an autopilot function as a paid-for feature. Unusually they proposed that, rather than paying a large one-off fee for the use of this feature, drivers would be able to pay for it on a pay-per-use basis. The carmaker is combining digital features like apps with novel revenue models. It’s innovative revenue models like this that are driving the market cap of companies like Tesla to such heights.
Apps have huge potential, and this potential can also be exploited in the industrial sector, delivering benefits for both customer and manufacturer.
App-based updates as a USP
Would you be able to market a mobile phone that couldn’t be updated and couldn’t install apps today? There are plenty of sectors where it’s taken as read by customers that the product will mature further after purchase. It’s now normal for products to be furnished with software updates that deliver new features or make them faster, more stable and more secure. Knowing that a product can be updated after purchase makes it more appealing to customers and enables it to be sold at a higher price – even where a competitor product that doesn’t support updates offers more features out of the box. Customers are happy to pay for this future-proofing.
Manufacturers from the DACH countries in particular are known for selling high-quality, long-lasting machinery and devices. Particularly with high-end products like these, many customers are keen on the idea of a product that reduces their investment risk by adapting to changing needs over the lifetime of the product. Updates to enable continued use of capital goods might be needed for a variety of reasons – new regulations, for example, or new areas of application. Using updates to prolong the lifetime of or extend the range of uses to which a machine or device can be put certainly makes economic sense.
After-sales revenues provide new source of income
Updates don’t have to be offered free of charge – on the contrary, paid updates offer manufacturers the potential to develop an after-sales business. Once again, the car industry is leading the way by meeting long-identified customer demand for upgradability. When buying a car, lots of customers are forced to compromise on features due to a limited budget. As a consequence, they forego various extras. Once they've been driving the car for a while, however, they start to hanker after these extras. By activating apps and functions, manufacturers are now in a position to offer customers these functions post-purchase without having to get the vehicle into a garage. Such purchases can boost revenues exponentially. The only costs are one-off, foreseeable software development costs, with no variable costs such as manufacturing costs. For manufacturers who just sell cars and don’t offer additional updates after launch, such revenues are just a pipe dream. Activating paid features free of charge for a few hours can also be a very effective marketing strategy, comparable to the practice of giving away free versions of software with restricted functionality.
Transforming yourself from a manufacturer of capital goods to a software company requires new revenue models
While a few manufacturers of capital goods have already transformed themselves into software companies, they are still a long way from achieving the revenue models employed by software companies – such as monthly license fees – on any kind of scale.
Software has been present in machinery and devices for many years. Right now, however, examples of machinery able to use apps to add additional functionality after purchase are few and far between. This means that many manufacturers of capital goods are failing to profit from the after-sales revenues described above. On top of this, many businesses are already being hit by increases in the cost of developing and operating their software. Historically businesses have passed on software development costs to customers by hiking the selling price. Given that costs for operating and updating software are ongoing, however, they are better recouped through ongoing revenues. There is therefore significant financial pressure on manufacturers to develop new after-sales revenue models to finance the costs of operating and updating existing software. So it makes sense to couple the launch of digital functions such as apps with the launch of new digital business models. The benefits are not all on the manufacturer’s side – customers benefit too. New revenue models will lower the barrier to purchase for expensive features or allow this barrier to be lowered for specific customers, making such a function affordable for a broader range of customers. These new payment modalities ensure long-term revenues.
A roadmap to apps and new after-sales digital revenues
For manufacturers, apps offer huge potential. Manufacturers of capital goods benefit in areas including greater product appeal, after-sales revenues and additional revenues driven by novel, digital revenue models. Users benefit from reduced investment risk. But how do you get these new revenue models up and running in practice? The simplest option is to sell licenses which offer updates for a fixed period. This allows you to cover the cost of ongoing feature development (and also the bug fixes you would need to be shipping anyway). You can also sell new features individually, either for a one-off fee or as a subscription service. The appeal here is that these sales are realised when the core product is already installed at the customer. This is of particular interest to vendors whose products have a very long life span. This enables them to make additional sales in between sales of the core product and also to strengthen ties with the customer.
But how do you add apps to machinery or a device? In much of the capital goods sector, software architectures are still pretty monolithic, with integrated software that can’t be modified after delivery. For a lot of machinery, safety considerations are a key driver of software architecture. Updating the software architecture to enable app installation and thus new, digital revenue models is often a major technical and above all financial challenge.
We have had the privilege of supporting a number of clients on this journey and will therefore explore the business and technical sides of these projects in the forthcoming blog post “Business first! For apps in the industrial sector, software architecture determines app costs and ROI”. Without giving too much away, we can, however, reveal that apps offer significant potential for manufacturers, but also carry the risk of missteps during implementation that can make implementing such a project economically difficult or impossible.
You can find further insights into novel revenue models in industrial businesses in our Digital Revenue Models white paper (only German).