This is a guest post from Fergus O’Reilly of SAP. Fergus has written here on the subjects of Billing as a Revenue Opportunity and Monetising app stores. Here, he tackles CRM and two-sided business models. SAP will be exhibiting at Mobile World Congress (Feb 15-18) and hosting a roundtable with Accenture, RIM, Telus and Microsoft on this topic of monetizing services across multiple industries in Barcelona on Feb 15.
The dynamics of the multi-sided business models for the Telecoms industry are well explored by the Telco 2.0 initiative. But what are the implications as this model is adopted by other industries? And how can telcos leverage their rating and billing capabilities to gain new business by empowering these other industries in their business model transformation?
The global explosion of the Internet, of wireless networks, and the rise in broadband capacity is constantly transforming how we connect to the world. Due to product commoditization, shrinking margins, and the need to develop greater customer intimacy, many industries are capitalizing on these technologies and launching innovative new services. By focusing on value-based services, companies stand to find new revenue streams and to profit from greater customer intimacy, but only if they can master the increased volume of transactions with customers and the complexity of the expanding value chain between diverse business partners.
Drivers for change: Services as a source of revenue growth
Many formerly product-centric industries have seen their core product revenues decline because of dwindling scope for innovation, commoditization and resulting price wars. Growth through acquisition and industry consolidation can lead to efficiencies and short term revenue growth. But it is only postponing the inevitable decline in product-based revenues.
One way out of this slump is to shift innovation from products to services: to make the product a platform for the delivery of services. This can create new streams of revenue as well as providing differentiation in the market, thus shoring up the underlying product revenues.
This is exactly what has been happening in the Heating, Ventilation, and Air-conditioning (HVAC) industry. Building owners and operators typically manage the various pieces of HVAC equipment distributed throughout the building. But as many companies in the HVAC industry are facing revenue growth problems due to competition from low cost manufacturers, some companies have started to introduce service packages with their equipment. Rather than sell just a piece of equipment that will sit up on the roof of the building, the companies are selling an entire environmental monitoring service.
New technologies such as Machine-to-Machine (M2M) communications and analytics means that all of these things, all of the heating and cooling devices and sensors are now networked and are accessible and controllable remotely. The companies now sell a service that will give building owner a certain level of energy efficiency or meet certain service level agreements (SLAs) for heating or cooling in an office building or on a manufacturing floor. The companies have transformed their product-based business models into a value added services network.
Drivers for change: Developing a greater customer intimacy
In most product-centric industries the product manufacturers have little direct ongoing interaction with their end customers. But we are now in an era where manufacturers must know their customers, rapidly adapt to their changing needs and involve them in product co-creation. Developing services sold directly to customers is one way of gaining that greater customer intimacy.
For example, high tech manufacturer typically have a multi-tiered distribution business model where it is their distributers and retailers who interact directly with customers. This gives the manufacturers great scale and reach and a simplification of their distribution network, but what the manufacturer does not have is a direct contact with the customers.
They may occasionally interaction with the customers through product registration forms, rebates, promotional programs, or to sell repairs and accessories but these tend to be one-off and occasional.
By turning their base product into a platform for services, high tech manufactures can establish an infrastructure where they now have a direct relationship with those customers. They can continue to deliver their product through their traditional channels and then on top of that product, they add a layer of services which allow them to figure out exactly how customers are using the products and what value they are getting from that product over time. From this information, the manufacturers can find new streams of revenue by up-selling and cross-selling products or other services from the catalogue.
Implications: monetizing customer interactions at high volume
Businesses who adopt the services model like this are generally well organized to do product-based sales through multi-tier distribution. But the dynamics of delivering and selling services direct to customers are very different.
First, services are priced very differently than products. Products have a unitary or bulk price, generally invoiced upon delivery. Selling services means entering into an ongoing contract with a customer. There can be fees charged up front, on a recurring basis and usage-based fees depending on how and when the customer consumes the service over time. Customers may pay for service in advance in a prepaid mode, or they may receive a bill and pay in arrears. So the way in which a business manages pricing, charging and billing of customers is very different for services.
Second, volumes of customers and transactions that must be managed go up by one or more orders of magnitude. When selling into multi-tier distribution, product manufacturers generally only need to manage pricing for transactions pertaining to bulk delivery of goods, and the number of distributors that must be managed and invoiced is generally measured in hundreds or thousands at most.
Selling services direct to customers means managing tens of thousands or even tens of millions of customers. And monetizing service interactions means putting a price on each and every service transaction that happens.
Product-centric businesses need to adapt their business processes and systems to support these new service pricing models and to handle the massive volumes that are entailed.
Implications: Third parties want to join in
Once product-centric industries establish these service platforms the next step is to bring partners into the mix. Having direct customer relationships and a way of monetizing those interactions is a key asset for any company and one which other third parties will be anxious to leverage. Third parties see the service platform owner as a potential distribution channel for their own service offerings. And if the platform owner can take care of the monetization of the bundle of services, then all the better.
For the platform owner the benefits are twofold. First, there are the potential commissions or revenue share to be gained by charging the third parties for access to the customer base. Second, and often more importantly, there is the additional creation of value for the platform as a whole each time a new third party is brought onboard. Bringing in third parties increases the value of the combined offering for customers, which generates increased customer loyalty, increasing the customer base and consequently attracting even more third parties.
This is the multi-sided market model benefiting from inbuilt network effects: participants have a built-in incentive to recruit others to the platform.
Telecom offers best practice for multi-sided service monetization
Telecom operators are familiar with the above trends within their own industry. They have built processes and systems to handle the resulting velocity of change in pricing models, to manage the huge volumes implied when monetizing services for millions of customers and to efficiently share revenues with third-parties in multi-sided business models.
But telcos are just waking up to the fact that many other industries are now beginning to face these same challenges as they move to add more and more services. Other industries are surveying the landscape and seeing telcos as a source of best practice, they want to learn from someone else’s mistakes and try to get it right the first time.
This is an opportunity for telcos to not just package and sell their learning and expertise as some sort of best practice business model consulting, although that is very valuable in itself.
Most of these emerging services businesses are powered by changes in communications: hyper-connectivity of devices and people, machine to machine (M2M) technology, and cloud computing. So telcos are involved already in empowering this change.
Telcos should go farther and recognize that monetization of multi-sided business models is a core competency. Service monetization can become a service offering in itself where the telco does billing and revenue sharing on behalf of some other non-telecom business or offers rating and billing to an enterprise as an enterprise solution.
To exploit this opportunity telecom operators need to equip themselves with business systems that are flexible enough to price, charge and bill for any kind of service which is metered and analyzed based on any criteria that makes sense in the target industry. And these systems need to support multi-tenant operations and scale up gracefully as services business take off all over the economy.
If telecom operators do not seize this opportunity then other industries will eventually figure this out on their own, probably poaching good ideas and some good people from the telcos in the process. But having telcos more actively involved would accelerate change for the benefit of all players.
Read our latest analysis and insights on our telco research hub here.