Digital revenue models – why consumer product businesses need to reinvent themselves

• Manufacturers of technical consumer products find themselves confronted with a make or break question – how should they be positioning their business in the brave new digital world of the future.

• Value-added digital services can help grab important market share, but they don’t come cheap.

• New revenue models based on features such as apps can cover the costs of providing these services and, by providing recurring revenues, deliver long-term profits.

In the past, established DACH-based manufacturers of consumer product have tended to stake out their position in the market by offering high-quality products and trading on the good reputation they gain by doing so. Ever changing, ever more exacting customer requirements and rising costs are forcing these businesses to reposition themselves. This blog post outlines the role of digital revenue models in this transformation.

DACH-based manufacturers of technical consumer products find themselves confronted with a make or break question – how can they secure market share while positioning their business in a brave new digital world in which value-added digital services are becoming more and more important? In looking to answer this question, businesses selling products such as household and garden equipment or household tools face a major challenge. Trying to pass on the significant costs entailed in developing and operating companion software by raising the up-front price of your product risks frightening away your customers. 

Customers will buy novel services which add genuine value

Customers demand simple, intuitive, extensible products. And they are no longer prepared to read long user manuals. Indeed nowadays consumers are used to being able to perform complex tasks on their phones without having to refer to the manual at all. In addition, the population in the DACH region is growing older and apps need to be made simple enough to be able to be used by growing numbers of silver surfers and other users who may not be digital natives. 

Software-based digital services delivered via, for example, a smartphone app have a big role to play here. Depending on the application, these services can take many different forms. Vacuum cleaners and lawnmowers, for example, were traditionally purely mechanical/electric. In recent years, robotic versions of these products have been grabbing significant market share. Image recognition systems are starting to turn up in refrigerators and food preparation equipment, and appliances are starting to be linked together in networks. Using mobile apps with access to recipes, even formerly simple devices such as kitchen scales are now able to do much more than just weigh out ingredients. The apps are able to guide users through whole recipes and even buy the ingredients. Suddenly, your kitchen scales have become a kitchen management system.

The high cost of software

The value-added digital services and intuitive user interfaces discussed above are achieved through software integrated into the appliance in the form of a mobile app or software infrastructure. 
In contrast to hardware development, development costs for this kind of software tend to increase from year to year. In addition, the software also costs money to operate and for ongoing development. 
Manufacturers therefore need to ask themselves how they are going to recoup the cost of developing and operating the software over the entirety of the product life cycle. Either they add that cost to the product price or they need to develop new revenue models. The problem with adding these life cycle costs to the product price is that it makes the product significantly more expensive, raising barriers to purchase for the consumer. Generally, businesses will only get away with big jumps in price or with adding the cost for these value-added services to the product price where the product is truly on-trend, is caught up in some major hype or is a first-of-a-kind product with major consumer appeal. Manufacturers should therefore be thinking about bringing in new revenue models from the outset – models which deliver genuine added value for consumers and, by generating recurring revenues, cover ongoing software costs. 

In practice, three new revenue models stand out, offering a range of advantages over bumping up the up-front price.

1. Subscriptions

A subscription is akin to renting or leasing and represents the simplest revenue model. With this model, services or software functions are activated for a specific period of time and billed on a recurring basis. Payments are often made monthly. When it comes to digital services for consumer goods, this model is definitely an option, as consumers are well used to recurring charges for similar services. Most consumers pay a monthly fee for their phone and for streaming services such as Spotify and Netflix. Since the benefits provided by functions and software are generally realised over a longer period rather than as a one-off, subscription services make it easy for customers to weigh up the costs and benefits. When calculating the price of the service, vendors can also take into account the actual value to customers. 

2. Pay per use

The boundary between a subscription and pay per use is somewhat fuzzy. There are time-based pay per use models, comparable in principle to a subscription, except that the time periods involved tend to be shorter, with usage often billed by the hour, minute or even by the second. In 2021, for example, Volkswagen announced that, as well as being able to purchase its autopilot feature as a one off for the lifetime of the vehicle, it would also offer a subscription option for under €7 per day per vehicle. Standard car sharing models also tend to combine both usage and time components. In future, washing machines might charge a one-off fee to run a special, rarely used wash programme. Apps for kitchen appliances could also charge for recipes on a per use basis, perhaps with a seasonal aspect, with recipes for biscuits, duck and roasts holding more appeal in winter and lighter meals and fruity smoothies more popular in summer. Additional benefits and sales could be generated by selling relevant cooking utensils.

3. Outcome-based payments

Now we come to the premium option. Outcome-based payment models are the hardest to implement, but the most appealing model for the customer. With outcome-based payments, billing is based on outcomes. And herein lies the challenge, as this means you need an automatic, fraud-proof means of measuring these outcomes. For a robot lawnmower, for example, this might mean mowing the lawn within a specified time, for a wine refrigerator keeping the temperature within a specified range or for a household appliance achieving the promised energy consumption. Availability is another possible metric. The customer would get money back if the appliance was out of action, but would automatically pay a fee if it was always working.

Manufacturers will need to work out which model is most suitable for their product and define an appropriate billing model. This will depend on the product segment, software functionality, measurability and monitoring options. What’s clear, however, is that manufacturers need to start thinking about payment and billing options now. Should their competitors – whether established vendors or up-and-coming start-ups – get there first, they might be able to grab significant market share.
 

White paper: New revenue models in manufacturing

This blog article takes a first look at new revenue models and how they might be applied. Want to find out more about the potential that new revenue models offer and how to embed them in your business? Read our free white paper "New revenue models in manufacturing" (in German only).