A practical method for zeroing in on where value is created by digital products and services; it depends a lot on the Value Chain (how products eventually get to the End Customer). (Updated)
When introducing the idea of Smart, Connected Products (a.k.a. the Internet of Things, or IoT), a critical early conversation is about creating value. The focus will be different, based on who you’re talking with; a Product Manager (for example) should be thinking about where and how revenue can be generated. The General Manager / Managing Director, on the other hand, will want to hear about creating value from a broader perspective, including the entire chain of connections between yourself and your end customers. Value can be created in a number of different places, and a broader view will shed a different light on your overall digital strategy.
For our purposes, we need to take the Product Manager’s viewpoint. If I want to launch a product and “monetize” my ideas, who will be deriving the most value? Understanding this will help target our efforts when defining a new product or service.
Define Customer Value Chain
The Customer Value Chain refers to the macro steps between the manufacturer and the end customer – multiple participants will be able to derive value from information added to our products. The Customer Value Chain will differ based on your specific path to the ultimate buyer. For this exercise, we’ll keep it fairly simple; a product manufacturer, selling to a distribution channel, with limited direct contact to the ultimate end user. (Yes, I know this is an oversimplification of Porter’s value chain. We are trying to illustrate some high concept here; a little poetic license to make your point is always permitted.)
Note that Channel Partners are a critical part of the conversation – and are often the complicating factor that slow down disruptive change, since there is a common (and very legitimate) fear of disintermediation – or, at the very least, an upset to the delicate balance of forces that has evolved over the years.
Note also that we call out your Customers – and also their customers. If you can identify value created creating for your Customers’ customers, it can generate additional customer pull, and help get these new ideas into the market.
Identify IoT Features / Functions
Next, let’s think about potential use cases – how might we add IoT technology to our products? What features and functionality will we be adding? Again, we’re borrowing from Porter here; the rows in the table extends the hierarchy of functionality outlined in his first Smart, Connected Products article. The diagram captures some typical applications for Things that want to connect to the Internet – stated broadly enough that they cover most IoT ideas.
- Raw Data: Early-stage efforts may want only to collect data from product in the field to help R&D efforts. Also, some customers may ask only for the raw data generated from the device, for their own in-house applications and analysis.
- Monitoring: Tracking activity out in the field, aggregating the data for central visibility, and sending out alerts when there are problems.
- Control: Remote configuration and operation of products in the field.
- Optimization: Leveraging algorithms “in the cloud” to sense operations and tune the performance of devices in the field.
- Autonomy: Enabling “smart” devices to communicate and coordinate with other devices in the same system or network of operations.
Understand the Value Opportunities
We are primarily interested in creating value that is clearly quantifiable. To keep the discussion simple, we will classify value creation as top line growth (ex. new revenue, increased market share) versus bottom-line savings (ex. labor productivity, asset optimization, cost-cutting).
Some market spaces may find it worthwhile to call out value creation that is a bit harder to quantify; ideas like “better customer service” (which can lead to top line growth and/or customer retention), or “loss prevention” (risk reduction, an indirect benefit that is often hard to quantify). This really depends on the audience; when arguing for investments, hard benefits are preferred – but when having a value-selling conversation, or evaluating the strategic impact, these indirect and “soft” benefits can be valuable.
Fill Out the Grid
Now it’s just an exercise of thinking through each of the intersections on the grid as specific use cases, and capturing the impact on each part of the Customer Value Chain.
Let’s walk through the second row, labeled Monitoring. How do features like real-time monitoring and automated notifications impact each of the links in the Customer Value Chain? Let’s start (as we should) with the Customer, and work backwards through the chain …
- Connected products let the Customer know if and when maintenance is required, and generate bottom-line savings by avoiding service that is not required. Unplanned downtime is also reduced, even eliminated, with an early warning system that predicts bad things before they happen.
- Typically, Channel Partners provide service and training, and IOT-enabled devices that actively monitor themselves will help make sure that required service is performed (generating new revenue for the channel). These products might also let the distributor know when the operator is not using the device correctly – a nice justification for additional training. And since this information is a new and differentiating feature in the market, the dealer channel will see incremental sales due to growing market share as Smart, Connected Products are preferred over their unconnected competition.
- There is plenty of value for the Manufacturer as well. In addition to incremental revenue for unit sales, the Product Management team will benefit; Engineering will see live data from devices in the field, and develop a deeper understanding of operational characteristics and areas for improvement (including, perhaps, areas to take cost out of overengineered products). And Channel Management folks will be able to quantify things like product pull-through and territory saturation.
There is a story to be told for every row in the grid. It frames the conversation, so Marketing & Engineering teams can add a wee bit of structure to your brainstorming.
Where’s Your Value?
Note that the structure of your Customer Value Chain – the ultimate path to your customer – can have a significant impact on this conversation. I’ve walked through this exercise with many businesses, and each is a little different. For example – a distributor once engaged me in conversation on how they might benefit from Smart, Connected Products at their customer sites. They had some great ideas – but thought they were “just the middleman”, with no leverage to turn on their information flows. How could they convince the OEM to participate? By monitoring status, and sending pre-emptive communications (email or text) that included handy links to automatically order the correct replacement parts, and schedule a service call where required. In the end, this wasn’t just a simple revenue generator – these Smart, Connected Products helped control market share loss for replacement parts (a very profitable line of business).
By understanding the Customer Value Chain, and the different points where value might be created, Product Managers can brainstorm their way to breakthrough ideas. Can you apply the Customer Value Chain approach for your organization? Let me know in the comments below …
Note: This is an updated version of the original post.
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7 May, 2019
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