What can traditional manufacturers learn from the new world of connected devices? The product is no longer where you make the profit
Digital has radically altered the landscape of virtually every industry, from news and music to healthcare and education. There’s a clash between old and new, as the business models that took hold in digital begin to permeate into a wide spectrum of connected products, from toothbrushes to cars.
A business model is a blueprint for how a product creates, delivers and captures value making profits for the company. In order for a company to capture attractive (above average) profits, the business model must be hard for the competition to imitate.
The transition to “connected device” business models cause fundamental shifts in how value is created, delivered and captured, as well as how competition is defined.
In the “old” world, industries operated largely through specialised value chains whose boundaries were neat and clear. Competition was mainly defined by products offered by companies within the same industry. In the “new” connected world the artificial barriers between industries have been eliminated, giving rise to cross-industry competition.
The very notion of competition has been redefined. Today a company with a profitable business in one industry can view a product in another industry as a mere vehicle for user acquisition and offer it at cost
Let’s look at one example that illustrates the deep structural changes that can be caused by the “connected device” business model.
Oral-B, one of the leading toothbrush manufacturers, creates value by improving dental health. The value is delivered through, well, a toothbrush. The value is captured by selling the toothbrushes through retail channels. Getting the product in front of as many shoppers as possible is of paramount importance – so access to the retail shelf-space becomes the key competitive advantage.
Modern technology means it’s possible to make a better toothbrush. Oral-B offers a Bluetooth-connected toothbrush that comes with its own smartphone app. The company says that the “smart” toothbrush helps maintain better dental health through such benefits as “focusing, tracking, motivating and sensing”.
Adding connectivity and an app to the product did indeed make it ‘smart” (and more expensive) but the business model largely remained the same. The connected toothbrush hopes to create new value for consumers through “focusing, tracking, motivating and sensing”, but the other elements of the business model didn’t change. The value is still delivered through a toothbrush device and captured by the sales through retail channels – and, since Oral-B’s connected toothbrush still directly competes with other toothbrush makers, access to the retail shelf-space is still the key competitive advantage.
Oral-B has learnt how to improve thanks to digital. The next step in the evolution of the connected product is an open toothbrush.
Apple has long understood that the spectrum of consumer utility offered by the company’s devices can be massively boosted by opening the device to external innovation by third-party developers. Millions of apps in Apple’s App Store drive demand for Apple devices by expanding the spectrum of consumer needs satisfied by the iPhone or iPad.
The same applies to Oral-B, albeit at a smaller scale. The company offers developers a Software Development Kit (SDK) allowing them to create apps that extend the utility of the basic product. At first, you might ask, “Who needs developers to extend the toothbrush?” But, when you consider the wide diversity of users’ needs and wants, an open toothbrush starts to make better sense. For example, mothers of young kids who resist brushing their teeth will see a big benefit: A developer can make a game that rewards kids for brushing their teeth properly. The game will save the mum the need to “hover over their kids telling them that a couple of brushes is not good enough”. (This is an actual quote from a conversation about the open toothbrush.)
The developer ecosystem that comes with the open toothbrush extends the product’s business model in new, important ways. Developers extend the utility of the product, but the apps also deliver new value: a person might decide to buy the open toothbrush because she wants the game that works with it, not the device itself.
Even more importantly, the developer ecosystem formed through Oral-B developer program creates substantial competitive advantage for the company that’s very difficult to replicate. Any new competitor would need not only create a Software Development Kit (SDK), but also convince developers to invest in learning different ways to work with the competing product.
That’s the key reason Microsoft – once all-powerful – lost the mobile battle. Apple and Google were first to create thriving developer ecosystems, which serve as competitive moats around their offerings. Microsoft spent billions of dollars vying to win developer attention for its Windows Phone operating system, to no avail – developers were busy making apps for more popular iOS and Android operating systems. Windows Phone devices had a small number of applications and as a result weren’t competitive with iPhone and Android.
A developer ecosystem around the open toothbrush can create a competitive moat around Oral-B’s product and substantially improve the value creation and value delivery aspects of its business model. At the same time, the product still has to make money via one-time sales of the “smart” toothbrush through retail channels.
To move to the next level and reimagine how value is captured we need to look beyond the competition between toothbrush makers.
Amazon uses connected devices (Kindle, Echo, Dash) to boost its ecommerce business. In contrast to traditional device makers, Amazon looks to profit when consumers use its devices for ecommerce transactions rather than profiting on the devices themselves. Amazon’s connected devices serve as a customer acquisition channel for its ecommerce business. That’s why Amazon is willing to sell the devices at cost, making it easier for masses of users to buy the devices.
Beam Dental, a Ohio-based startup, has taken this lesson on board. The company offers a connected toothbrush that comes together with dental insurance and a subscription for the supply of floss, toothpaste, and brush heads – all delivered to your door every three months.
Beam Dental goes beyond one-time product sales. The offering is a recurring service that makes money outside the “toothbrush market”. The toothbrush itself is part of the customer acquisition costs for the much more lucrative dental insurance and dental consumables market.
Beam Dental completely reimagines the business model of a “connected toothbrush”. The value creation is much more comprehensive and includes every aspect of dental health. The value delivery is through offering dental insurance and the re-supply service. The value capture is through selling insurance plans and consumables. The toothbrush and the app are “top of the funnel” consumer touchpoints that enable Beam to acquire new users and interact with their customers.
Notably, Beam doesn’t really compete with toothbrush makers like Oral-B. Instead, the company competes in the dental insurance market. By competing across industries Beam Dental creates competitive advantages on both sides of the equation. It can sell the connected toothbrush at cost and through different channels, making direct competition from Oral-B very difficult.
On the other side, the startup also has decisive competitive advantage in winning business from traditional insurance companies. The consumer data collected by the toothbrush and the app helps Beam Dental optimise its insurance premiums and offer insurance at prices that the traditional insurance companies find hard to match.
As simple as they may appear, this series of toothbrush examples shows that:
You can replace the toothbrush with almost any everyday object to see how adding connectivity, developers and data can help reimagine its business model.
The competitive priority in a world of connected products is shifting from discrete products and services to becoming the trusted gateway through which users fulfil their wider needs and wants. By seeing connected devices as means to an end, companies can become the privileged platform to “present” and sell their products and services, as well as to exploit other opportunities, such as ecommerce.
In turn this can facilitate more predictable service business models that will generate the steady, recurring revenues that all product companies desire.
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