As digitalization progresses, companies are increasingly supplementing traditional services with a wide range of digital services. This is often through the use of data , accelerating the shift from a product-based business to a service-based business. However, companies still have to ask themselves, “Do we actually want to earn money from our services?”
Digital services refer to services that companies deliver or provide through digital channels. These services can include software as a service (SaaS), cloud computing, online subscriptions, digital marketing services, and more.
In addition, digital services can add advanced features and capabilities to hardware devices that would not be possible with hardware alone. For example, automation, customization, remote control, and real-time data processing, enabling richer user experiences and improved performance.
Why introduce digital services?
The shift from traditional product-based sales to service-based sales is an evolution that conventional industries cannot ignore. This transition reflects broader changes in consumer preferences, technological advancements, and market dynamics.
Customers today often value experiences and outcomes over physical products, seeking solutions that address their needs comprehensively and provide ongoing value. By embracing a service-selling approach, traditional industries can tap into new revenue streams, foster deeper customer relationships, and differentiate themselves in competitive markets.
Moreover, offering services alongside or instead of products allows you to adapt to changing market demands, increase customer loyalty, and capture recurring revenue streams. This transition requires you to rethink business models, invest in technology and talent, and align your offerings with evolving customer expectations.
Ultimately, those traditional industries that embrace service-selling stand to gain a competitive edge and drive sustainable growth in today's dynamic business landscape.
Examples of digital services
In each of these examples, the integration of digital services with hardware enhances functionality, convenience, and value for users, demonstrating the potential for synergy between physical products and digital offerings.
- Smart Home Devices. Devices like smart thermostats, security cameras, and lighting systems often come with accompanying mobile apps or web platforms that enable users to remotely control and monitor their homes. These digital services enhance the hardware's functionality by providing features such as scheduling, automation, and real-time alerts.
- Fitness Trackers. Wearable fitness trackers, such as Fitbit or Garmin devices, collect data on users' physical activity, sleep patterns, and health metrics. Companion mobile apps or online platforms offer digital services like personalized workout recommendations, goal tracking, and social sharing features, enhancing the overall fitness experience.
- Connected Cars. Modern automobiles are increasingly equipped with digital features and connectivity options. These include services like in-car entertainment systems, GPS navigation, real-time traffic updates, remote diagnostics, and vehicle tracking. Digital services enhance the driving experience, improve safety, and provide convenience for users.
- Gaming Consoles. Gaming consoles like the PlayStation and Xbox offer not only hardware for playing video games but also digital services such as online multiplayer gaming, digital downloads of games and content, streaming services, and social features like friend lists and messaging.
- Smart Appliances. Appliances like smart refrigerators, washing machines, and ovens often incorporate digital features such as internet connectivity and smartphone integration. Digital services may include remote monitoring and control, recipe suggestions, energy usage tracking, and maintenance alerts.
- Healthcare Devices. Medical devices like blood pressure monitors, glucose meters, and ECG monitors increasingly come with digital connectivity and companion apps. These apps provide users with features such as data analysis, trend tracking, medication reminders, and the ability to share data with healthcare providers for remote monitoring and telehealth consultations.
Why do companies struggle to monetize digital services?
Companies often struggle to monetize digital services due to several reasons:
Lack of understanding of customer value
Digital services often provide intangible benefits, making it challenging for companies to quantify and communicate their value to customers. Without a clear understanding of what customers are willing to pay for, companies may struggle to set appropriate prices.
Freemium models and pricing pressure
Many digital services adopt freemium models, offering basic features for free and charging for premium features. While this can attract users, converting them into paying customers can be difficult. Additionally, the prevalence of free alternatives and fierce competition can exert downward pressure on prices, reducing the ability to monetize.
Monetization strategy misalignment
Companies may fail to align their monetization strategy with their overall business objectives. For instance, they may prioritize user growth over revenue generation, leading to under-monetization of services.
Complexity in pricing structures
Digital services often have complex pricing structures due to various subscription plans, add-ons, and customization options. This complexity can confuse customers and hinder their willingness to pay.
Inadequate marketing and sales efforts
Even if a digital service offers significant value, inadequate marketing and sales efforts can limit its adoption and monetization potential. Companies need to effectively communicate the benefits of their services and reach their target audience through targeted marketing campaigns.
Resistance to paying for intangibles
Some consumers are accustomed to getting digital content and services for free. This leads to a perception that digital services should be inexpensive or even free of charge. Convincing them to pay for intangible digital offerings can be challenging.
Many companies regrettably only consider the pricing strategy only once the innovation process has ended. They then find themselves struggling to answer crucial questions, such as:
- What exactly am I offering – software, data analytics, or services?
- How should I structure the offer?
- What is the right type of revenue model and what is the right price?
Often, there are no comparable offers on the market, and particularly for software-based services, incurred costs don’t reflect the actual added value they provide. Cost-plus pricing is, therefore, out of the question.
At Simon-Kucher, our approach to monetizing digital services revolves around understanding customer value, segmenting the market, designing innovative pricing strategies, and effectively communicating the value proposition to drive revenue growth and profitability.
Example of digital service monetization
One success story is Hitachi. It completely restructured its revenue model as part of the innovation process.
By employing cutting-edge big data technology, Hitachi managed to significantly reduce the breakdown rate of their trains. This raised their performance level considerably.
To monetize this added value, Hitachi concluded a deal with UK Rail Networks. This was in keeping with their motto, “Train as a service.”
Hitachi continues to own the trains. Meanwhile, the British railway company only pays to use on-time trains. An effective price model, lower failure rates, and higher revenues from subscriptions create a win-win situation.
How to establish the best monetization approach for digital services
We recommend the following eight steps, which can be used in numerous industries:
- Value/customer value analysis. Analyze customer value/added value of the services or individual features (from the customer’s perspective) and quantify them.
- Customer and service segmentation. Categorize your customers into uniform groups based on their needs and ability to pay. It's important to note that not all customers have identical service needs or equal buying capacity.
- Service proposal. Establish your upcoming service package (bundling, modular, etc.) considering the unique value each customer segment brings. For digital services, enabling add-on features has a significant influence on the design of the offer.
- Price model. Choose the most appropriate pricing strategy to achieve the optimal blend of customer retention and profitability. This should be in line with your overall strategy.
- Value-sharing. Shape your strategy around the requirements of your customers. Implement a "value distribution" model (splitting the additional value between your business and the customer) to alleviate any uncertainties the customer might have about your service. The Hitachi example mentioned above is value sharing at its best.
- Pricing differentiation and pricing tiers. Ascertain the appropriate pricing tier that aligns with the structure of your product or service (including the gradual variation between each choice). This should be differentiated according to customer segment. We recommend using quantified customer value as a basis to estimate each customer segment's willingness to pay. You can derive a differentiated price level by using a variety of methods (Simon-Kucher’s PriceStrat, Van Westendorp, Conjoint, etc.).
- Market validation. Confirm the appeal and pricing structure of your product through a comprehensive customer survey.
- Sales training. To unleash the full potential of your innovative offerings, you also need to adequately train your sales teams. Only when the sales team truly understands the value of the offer to the customer (increased efficiency, longer maintenance cycles, shorter downtime, etc.) and is able to communicate the added value properly will you be successful with your digital services.
How Simon-Kucher can help
At Simon-Kucher, we help companies monetize their digital services through a comprehensive approach that leverages our expertise in pricing strategy and market segmentation.
By understanding the unique value propositions and customer needs associated with various types of digital products, we help our clients determine the optimal pricing models and strategies. Through our segmentation analysis, we tailor pricing approaches to different customer segments, maximizing revenue while ensuring competitiveness and customer value.
Whether it's creating digital versions of physical products, developing new types of digital offerings, or enhancing existing digital services, we can help you identify opportunities to create and sell your digital products profitably.
Looking to tap into the monetization potential of your digital offerings? Reach out to Simon-Kucher today!
