Digitalization allows companies to fundamentally improve the way they deliver value to customers from transactional to continuous. Transactional value delivery is where a mostly physical product is sold as-is and then deteriorates over time until it’s replaced with the next product. Continuous value delivery is concerned with using the installed base as an enabler to continuously deliver new value to customers through various ways including DevOps, DataOps, MLOps and A/B testing.
Although this may be obvious to many of you, many companies struggle with the fact that changing the way value is delivered necessitates a review of the business model used to capture part of that value for the company. The danger is that we monetize the offering using the traditional, transactional business model but then commit to a continuous cost structure where we’re expected to conduct R&D and other efforts to deliver continuous value over the lifetime of the product.
The only way in which a continuous cost structure can be combined with a transactional revenue structure is when you can charge a significant premium for the product. Apple mobile phones are a good example of this model as you, after you’ve bought the phone, basically receive product updates for free. However, if you’re unable to charge the premium due to competitive pressures, you’re painting yourself into a corner.
When you can’t charge a premium on the product, you basically have three options: don’t deliver continuous value, complement your existing transactional business model with a continuous business model or entirely replace your business model with a continuous one.
Deciding to not deliver continuous value is always an option in the short term, but customer expectations are rapidly shifting towards that model. For instance, my car, a German brand, provides lane-keeping and adaptive cruise control. However, different from Tesla, where new software is delivered periodically, I’m stuck with the same quirks and, frankly, sub-par functionality. I expect the products I use to get better and I get really annoyed if they don’t. And I believe I’m far from the only one.
Complementing a transactional business model with a continuous one is what many companies I work with are opting for: the idea to create a secondary service revenue stream to complement the primary transactional revenue stream is quite appealing as it’s viewed as low risk – it’s optional for customers and doesn’t put the current business model in jeopardy. The challenge in this model is, however, that whenever there’s a conflict between the product and the service, the product wins as it tends to generate a vast surplus of revenue.
The more radical approach is to shift all revenue from transactional to continuous. Many years ago, Rolls Royce, the jet engine company, adopted their “power by the hour” model where you pay for use of the engine, rather than the engine itself. I believe you can’t even buy a jet engine as a product anymore.
Continuous business models aren’t all born equal. In addition to usage-based monetization, there are subscription models, which are concerned with access, as well as performance-based models, where monetization is based on the value measurably created at the customer. Some companies I work with use DevOps to continuously experiment with ways to improve certain KPIs and have contracts with their customers to equally share the created value between them. This is but one model; there are many more to consider.
Shifting from a transactional model of value delivery to a continuous one calls for a continuous cost structure to deliver new value. In turn, this requires a review of the business model or models used by the company to compensate for this. This can result in charging premium prices for the product, complementing the transactional business model with continuous revenue, eg through services, or replacing the existing business model with a continuous one. Which alternative to choose is highly context dependent, but ignoring the ability to deliver continuous value and the emerging cost structure if you do are non-starters, to begin with. In the end, although the purpose of a company shouldn’t be about making money, we still need to make money to have a viable business. Remember, as Bing Gordon said: “In any business that grows big on one business model, transitions can throw everything in the air.”