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Turning Products into Digital Services

Globalization and the Internet have profoundly altered customer expectations. Today, customers expect prices to go down while received value increases. As a result, what customers want to buy and why they want to buy as changed. This new Purchase Logic is driving the transformation of product businesses into information-based digital services.

Two phenomena have come together to change customer behavior radically. First, twenty years of falling producer prices have conditioned customers to expect ever lower prices for improved products. Second, as digital technology has increased the ways in which product benefits can be created and delivered, buyers have demanded more control and customization. These changes are driving the digital services economy.

Lower Prices Drive the Demand for Digital Services

Customers of the global economy expect the prices of goods and services to go down. They expect to pay less than last year and are confident that next year’s prices will be even lower.

Many decades of rapidly falling computer prices greatly altered customer expectations about price and performance. Price declines of 30% per year were common.

Next came Walmart stressing “Falling prices!” across a broad range of items: apparel, electronics, food, housewares and sporting goods. Walmart created and fulfilled expectations that prices will go down.

Producer prices, as measured by the US Durable Goods Price Index fell 20% from 1997 to 2017. Today, the cost of durable goods in the United States is the same as it was in 1984, 33 years ago.

Today, the retail price leader is Amazon. By providing shopping as a digital service, Amazon offers customers unmatchable price, selection, and convenience.

Delivering product benefits as a digital service does more than disrupt pricing; it offers multiple ways of enhancing customer value.

Digital Services Offer Control and Customization

Delivering product benefits as a digital service does more than disrupt pricing; it offers multiple ways of enhancing customer value.

The first aspect of increased control made possible by digital services is “pay for only what is used.” Farmers and construction crews want to pay only for their number of hours of heavy equipment use. Likewise, airlines want to pay only for hours of engine use by their fleet of planes. They all choose to leave ownership costs and maintenance responsibilities to someone else. Also, they want a guaranteed number of productive hours each season or year.

Customers expect that digital technology will allow them to control and shape the product benefits they buy. Today’s buyers demand the opportunity to customize their actual experience with your product. By customizing their experience, buyers become co-creators of value.

Example: Photography

When photography involved film and prints, it was an analog product business. Consumers bought cameras, film, and prints. Distribution was physical; pictures were stored in boxes or albums. Because picture forms were static and fixed, communication was one-way: from the picture to the viewer.

Now that photography is a digital electronic business, consumers use devices and services that allow them to store, edit, and share images, immediately after taking the shot. Recipients of pictures can also modify them. Communication has become two-way between the picture and the viewer. The consumer has become a co-creator of value.

Digital Services Align Customer and Provider Goals

Aligning customer and provider goals produces big benefits

1. BMW and GM offer cars-as-a-service instead of single vehicle purchase

  • Fulfills unmet needs: variety and freedom from maintenance responsibilities
  • Sales of digital services/advertising increase revenue per customer
  • Improved customer satisfaction and strengthened Brand loyalty

2. Dupont: paints cars instead of selling paint to auto manufacturers

  • Increased profit of both partners
  • Better finish on cars
  • Eliminated environmental waste

3. General Electric: monitors performance and maintenance needs of jet engines instead of simply selling the equipment to an airline

  • Lower maintenance costs
  • Fewer canceled flights
  • More flights on time

Impact of Selling Digital Services

By selling the use of equipment as a service, the information and logistics needs of OEM vendors has been redefined. In order to fulfill “guaranteed hours of performance” contracts, many functions previously handled by equipment users must now be carried out by OEM vendors themselves:

  • Contact subcontractors to ensure the availability, amount, and location of spare parts inventory
  • Monitor equipment performance and wear in order to develop information about the need for repair
  • Provide high-quality and timely technical service

In addition to these traditional maintenance and support functions, OEM vendors that sell performance have huge incentives to explore product designs that increase durability and reliability. Increasing the amount of time that equipment runs without needing service will improve the OEM vendors’ profit. Decreasing the number of service failures is an essential part of meeting contract performance standards.

In order to forecast maintenance needs, equipment is now being designed with sensors that continuously report performance and condition data. Current and historic maintenance needs are gathered and analyzed to predict and prevent failures. Vendors use this information to improve equipment reliability and to reduce the time and cost needed for repairs.

The switch to equipment performance service contracts changes the very nature of the OEM business by increasing the amount and kinds of risk assumed by vendors. Cost plus profitability is replaced by risk management. Severe penalties are incurred if contractual performance standards are not met. The cost of failure is hugely increased.

Example: Military Suppliers Become “Service Companies”

Service contracts that purchase “hours of performance” are irrevocably changing the business of “selling equipment” to military organizations in the US, Canada, and the UK. Now, for the first time, military buyers and equipment sellers share an identical goal: battle-ready performance. If the equipment fails to work, neither partner survives.

Military procurement is now changing from the purchase of vehicles and weapons to the purchase of “guaranteed hours of performance.” Vendors are now measured by hours of operation and percent of time available instead of selling the item and leaving all maintenance to the military. This means that military OEM vendors are now responsible for decades of performance by their equipment.

In order to adjust, military suppliers have become service companies. Today, fighter planes, war ships, and tanks are all being purchased based on a desired amount of use. Anyone involved in the design, manufacturing, or maintenance of such equipment is now operating in a new world.

In the past, military supply depots purchased and held in inventory the spare parts needed for maintenance or repair. Although OEM vendors often performed equipment maintenance, military supply officers were responsible for spare parts, and thus, were ultimately responsible for equipment availability and hours of performance.

Now, OEM vendors must deal directly with hundreds of suppliers and subcontractors who used to sell directly to the military. By purchasing equipment performance rather than the machinery itself, the military now forces suppliers to shoulder responsibility for decades of functionality.

Machine Learning Will Power All Digital Services

The next generation of software that runs digital services will include Machine Learning. Of course, many digital services already do.

Digital services collect huge amounts of data in real time about equipment performance and customer behavior. This flow of localized data, often augmented by relevant external data, makes Machine Learning possible and powerful.

For instance, the software that monitors large farm equipment combines precise GPS location with satellite imagery and weather predictions to make better decisions about the application of fertilizer and pesticides. This is one example of how Machine Learning improves the quality and accuracy of digital services.

Example: Big Data Mining – The Fourth Industrial Revolution (Financial Times October 26, 2017)

In July 2017, a Siberian miner and his brigade dug more than 1.5 million tons of coal out of the ground – more than had ever been cut from a single coalface in a month anywhere in Russia.

This modern-day miner and his team take direction from an increasingly smart machine. Manual tools have been replaced by a semi-automatic, German-built device that shears chunks of coal from tunnel walls.

Big data systems pump information from 200 meters below ground via the internet, while an array of sensors built into the workers’ white helmets allows engineers on the surface to track their every move along tight, sloping tunnels.

This is the brave new world of Russian industry. Suek, the coal mining group that runs this mine, is currently rolling out big data tools and automation across its 26 mines in Siberia.

“The main challenge is to participate in the global trends of technological revolution. It can bring completely new levels of productivity, which we lack,” says Alexie Kudrin, a former finance minister, now working on Putin’s next economic development plan.