Turning Products into Digital Services
Globalization and the Internet have profoundly altered customer expectations. As digital technology has increased the ways in which product benefits can be created and delivered, buyers are demanding more control and customization. As a result, what customers want to buy and why they want to buy has changed. This new Purchase Logic is driving the transformation of product businesses into information-based digital services.
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, mostly sourced from China: apparel, electronics, food, housewares and sporting goods. Walmart created and fulfilled expectations that prices will go down.
The US Durable Goods Price Index fell 25% from 1997 through 2019. In 2020, this gain was given back as supply chain disruptions and a flood of COVID relief money forced durable goods prices back up to their 1997 level. Today, the cost of consumer durables is 6% lower than in 2021. Durable goods bought in the US now cost what they did in 1994.
Today, the retail price leader is Amazon. By providing shopping as a digital service, Amazon offers customers unmatched price, selection and convenience. More than 180 million US households get free delivery as Amazon Prime members. This is 80% of all US households.
“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. British Petroleum (BP) sells FedEx “fuel to the wing when needed” as a service rather than bulk jet fuel sales.
Cost reduction for FedEx.
Elimination of FedEx need to store, transport and handle fuel.
BP achieves productivity gains.
2. Dupont: Paints cars instead of selling paint to auto manufacturers.
Increased profit for both partners.
New formula and application methods produce better finish on cars.
Reduced environmental waste.
3. General Electric and Pratt & Whitney sell hours of flight propulsion rather than jet engines.
Lower maintenance costs.
Fewer canceled flights.
More flights on time.
4. Caterpillar and John Deere sell “guaranteed hours of operation” for heavy equipment used in mining, farming or highway construction.
Lowers operating cost and eliminates maintain and expense.
Sharp reduction in “downtime”.
Operators save capital usually tied up in equipment ownership.
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.
Machine Learning is Changing Digital Services
Today, awareness and use of machine learning and generative AI, is now widespread. Digital services have been redefined by these capabilities:
Advertisers use AI to direct the content and placement of digital ads.
Search now uses AI to answer questions by aggregating information from multiple sources rather than offering up a list of websites that might provide useful content.
Ideation uses AI to expand thinking, stimulate creativity, organize thoughts and obtain suggestions regarding how to communicate ideas. AI output becomes material that stimulates critical thinking. This enhancement of thinking may be the most transformative use of digital services.
The growing demand for digital services reflects a desire to “own less and buy use when you want some.”
Entertainment: Instead of buying a television or owning albums, stream the programs and music you want when you want it.
Current events: news consumption is selective, fragmented and delivered through social media, podcasts or YouTube.
Shopping: Save time, money and find the item you want by ordering online.