Jan Bosch is a research center director, professor, consultant and angel investor in start-ups. You can contact him at jan@janbosch.com.

19 June

In last week’s post, I mentioned our framework describing the transformation that companies go through when going digital. I also discussed one of its four dimensions – the business model dimension. In this post, the focus is on the product upgrade dimension.

As shown in the figure, we’ve identified five steps or phases in the transformation from a traditional to a digital company. In the first stage, the company focuses on selling a physical product. It’s sold ‘as is’ and except for warranty issues, the company spends no time or resources on it once it has left the factory. The product may well include electronics and software, but these subsystems are treated in the same way as the mechanical parts.

Evolution of product upgrades as part of the digital transformation.

As a second step, many companies set out to offer their product as a service to certain customer segments. This often starts as a mechanism to expand the clientele. Especially potential customers that don’t need the product all the time or that have issues financing the capex may need a service offering in order to become customers. In this step, the company often starts to offer periodic upgrades to the product software – predominantly to protect itself from unwanted downsides. In service contracts, there typically are service level agreements (SLAs) and software upgrades can be used to decrease the risk of violating these SLAs and avoid the associated penalties.

In the third step, the company has, from a business perspective, started to offer complementary services around the product. Frequently, the quality and appeal of these services can be improved if the core product has updated software functionality. In this case, the company upgrades the software in its products not only to protect from any downside issues, but also to create an upside in terms of additional revenue from complementary services. As a simple example, an automotive company may upgrade the software to provide an API for querying the location of a vehicle that can be used by complementary services to offer more relevant information for the context in which the vehicle and the driver may find themselves.

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Once we reach the fourth step, the business model often has started to be based on the KPIs that the customer cares about, such as churn, fuel consumption or number of successful transactions per time unit. This means that the company generates revenue when it improves these KPIs by taking a part of the additional revenue of its customers. By far the easiest way to positively drive KPIs is to deploy new software versions in the product and consequently, in this stage, there are continuous software updates. Here, the company may also start to deploy updated electronics or mechanics as a mechanism to improve KPIs. For instance, in automotive, for the longest time people have talked about offering customers buying a two to four year old car an upgrade of the electronics in the car to provide the ‘headroom’ to roll out new functionality that can be monetized.

Finally, the concept of a physical product is completely replaced with its digital alter ego. In this case, all parts of the product can be upgraded on a periodic basis, with software being the most frequent and mechanics the least frequent. Even replacing the complete physical product is done as part of the continuous improvement of the digital product. As an example, although Apple most certainly makes the money on the physical product, from a user experience perspective, there’s a constantly improving experience that has small upward bumps when replacing the phone with a new model, but by and large, the improvement of the product is a continuous one.

Concluding, the digital transformation is a complex, multi-dimensional challenge that affects all parts of the company, including the way products get upgraded. Although this may seem like a technical challenge, it’s the business strategy that (should) drive the architecture and technology decisions that either allow for or prohibit the product upgrades discussed here. With business models increasingly moving from transactional to continuous, the product that’s being monetized by the business model needs to become continuous in terms of it constantly improving the user experience and value delivery to customers. One can’t exist without the other!