Customers have become accustomed to the all too familiar process of buying a product and being stuck with it until the time comes to upgrade or replace it. Although the object – whether it is a light bulb or copier, an MRI machine or piece of telecommunications equipment – seems to fit your needs at the time, it is fixed and unchanging, commencing obsolescence from the moment it is purchased writes Steve Beards, VP APAC, Flexera Software.
Tesla completely transformed this process when they announced that, for $2500, customers were able to download a software update that would upgrade their car with an autopilot feature. Not only did this change the automobile and the automobile industry, but also the relationship between individuals and the automobiles they buy.
Tesla demonstrated that a car is no longer a fixed object but an ever-changing, ever-customisable service that can be tailored on an on-going basis to accommodate the evolving wants and needs of the owner throughout the lifecycle of the automobile. Want added help when driving? Pay for a software upgrade and customise your automobile so it operates the way you want it to.
Through this, Tesla has accomplished something that has traditional auto-manufacturers were unable to grasp: it has innovated a new mechanism for differentiating its products (leveraging the power of software to deliver new products, features and enhancements); it has created a new revenue stream by monetising that software (i.e. selling the autonomous driving software upgrades to existing customers); and it has done all this while minimising manufacturing costs (Tesla is able to slash costs by delivering this new functionality via software, rather than having to manufacturer new hardware parts and automobile models, which is a very expensive proposition).
Tesla has just delivered on the dream and promise of the Internet of Things (IoT). If manufacturers wish to deepen their customer relationships and grow profits, they will need to become more strategic and provide on-going solutions tailored to evolving customer needs as Tesla has done.
Within this is a great opportunity for manufacturers of Internet-connected devices to reap the reward of recurring revenues from sales of hardware, upgrades, apps and services.
The recipe driving the transformation consists of this essential formula:
Platform + Apps + Service. This is delivered through a combination of:
• Hardware platform (the actual hardware device and its component parts)
• Software applications that control features and functionality of the hardware, software and services delivery; and
• Software Monetisation (licensing and entitlement management, which sorts out which device features, functions and services a customer has paid for and can therefore access).
This model not only creates tremendous opportunities for innovation – turning traditional manufacturers into platform and service providers – but it also creates tremendous new revenue stream opportunities, cost and efficiency advantages, which all amount to increased profits.
Software Monetisation is becoming essential to profitability now that services are becoming critical to selling solutions. By adopting software monetisation processes, for instance, medical device makers can use big-data to provide better diagnostics based on segmenting national, socio-economic or ethnic characteristics of an overall population pool.
Or building automation manufacturers can equip their control panels with every feature and upgrade available – and simply turn on or off specific features via software and licensing based on what the customer has purchased. Such an approach will allow IoT device makers to monetize every single feature in their product – at no additional physical unit manufacturing cost.
This trend is already beginning to reshape the manufacturing space.
According to a recent Flexera Software survey, the proportion of manufacturers adopting this new model is growing rapidly. 30 per cent of manufacturers today develop IoT devices – and 34 per cent more will within two years. 79 per cent of device makers say they are or plan on delivering remote monitoring and maintenance to their product/service mix.
And 60 per cent leverage Software Monetisation systems to generate revenues from their software-enabled devices.
Traditional device manufacturers need to stop viewing their products as fixed and unchanging objects and need to begin their transition into thinking and acting like service providers.
Ultimately their goal is to constantly deliver new value to existing customers that will accommodate their changing needs. In order to achieve this, they need to understand the power of software and its role in transforming fixed hardware objects into solutions, and most importantly, the role that Software Monetisation plays in transforming that new value proposition into revenues.