Digitalization is increasingly driving business in the building industry. Digital products such as smart home solutions, remote surveillance, and management support for construction sites are transforming mere ideas into usable offerings. Launching and monetizing digital offers successfully, however, are challenges for companies working in a more traditional path. Our five-step framework will help you optimize your pricing and packaging approaches.
While a good start, having innovative ideas alone will not guarantee suppliers’ commercial success with their digital offers. Despite many innovative ideas, suppliers must overcome traditional commercial principles in order to succeed with their digital offers. Value in use, customer segmentation, and price models are different in the digital world.
The construction industry can learn a lot from how products are packaged in software and technology. For example, support for digital process management is valued more highly for larger construction sites as they are inherently more complex. This increased complexity requires more elaborate solutions. Therefore, it would be advisable to go against a traditional cost-to-serve-based approach (lower unit prices for larger projects) but charge more.
Construction and building industry going digital: Carefully bundling offerings is key
Practices in the digital world that are applicable to the construction industry don’t end there. As the construction and building industry becomes more digitalized, it will become increasingly important for suppliers to carefully bundle their offerings. Combining features to address customer segments with different price points will prevent companies from missing out on profit potential or sales volume if they offer too much value for the price or price the offer too high for the value.
A smart home feature, for example, that checks whether all windows are closed is only seen as beneficial for customers with large homes, i.e., with lots of windows to be checked. Therefore, this feature should only be included in the premium version of an offer.
Launch pricing is also specific for digital products. Penetration pricing, which means starting with attractive price points in order to penetrate the customer base to reach a critical mass is much more important. Obviously, the risks incurred with penetration pricing not to get back on the profit track needs to be carefully managed.
How to tackle your profit challenges: Our five-step framework
We have developed a five-step framework that will help you tackle your profit challenges and keep you on the path to success:
Step 1: Focus on individual features
When developing your digital product, remember to step back and break it down into its individual features. This will help you to structure the features according to their value and suitability.
Step 2: Quantify and validate economic value of individual features
Estimate the economic value that the features provide. Let’s look back at the example of the open window alarm feature. This feature’s value can be quantified by assessing saved heating cost and damage prevention from theft. Take a digital tool tracking device and compare it to the regular search efforts within a company. Evaluate in-van delivery for products against the time spent by an installer to pick them up in a warehouse.
All this will give you an indication of the value delivered, which will help you set an appropriate price; however, a cross-check with customers might still be needed. Do customers share your economic value perspective? Do they see additional value in these features or are they just nice-to-haves?
Step 3: Understand customer needs and segmentation
Traditional segmentation in construction focuses on the obvious, e.g., customer size, if a project is commercial or residential, or if it’s a renovation or a new build. However, customers have specific needs and value offer features differently. In the case of a heating systems supplier that offered a remote surveillance service, market research helped identify different segments. Traditionalists used the remote surveillance primarily as a form of insurance against default, while innovators valued the transparency and heating efficacy optimization features of the offer. The supplier was able to tailor the offerings and provide customers with the features that best suited their needs.
Step 4: Design packages
Package products based on the (perceived) value of individual features and customer needs reflected in the segmentation analysis. Typically, packages follow the good-better-best type of pattern with an increasing number of features included and reflect the functional structure that meets customers’ requirements, potentially at different levels of the value chain.
Let’s revisit our example of the remote surveillance feature for heating systems. The traditionalists and innovators were end-customers with specific needs. However, the surveillance had to meet the needs of the service companies as well. For them, features like dashboards that cover their regional customer base are important. Offer packages need to reflect both.
Step 5: Determine the price model
Similar to package design, price models also need to be adjusted. Is the best option a one-off selling price, a subscription fee, or a pay-per-use or a pay-per-outcome price model? For digital products, the price model is based purely on willingness to pay, not cost. Choosing the ideal model requires strategic thinking and a thorough evaluation.
Monetizing digital products is both a pricing and packaging task which are closely linked to product development and ideally run in parallel. Pricing principles differ strongly from traditional pricing practices in construction and building technology and offer broad potential.
“If you want something new, you have to stop doing something old.” – Peter F. Drucker
