For the development of new, innovative services, it is usually essential to have access to data from the field. Unfortunately, the installed base is not always as digitally capable of providing information as we would like it to be in service.
Data-driven services such as Predictive maintenanceperformance monitoring and remote diagnostics, but also new business models from the XaaS environment, which are billed on a usage basis, require products to be connected to the internet in the field. Unfortunately, this so-called connectivity rate is not as pronounced in many companies and markets as would be required to scale these new services.
As a result, many business cases find it difficult to become profitable in this environment. This is because they can never address the entire installed base, but in some cases only a very small fraction of it. In this respect, a high connectivity rate is a basic prerequisite for the profitable use of future-oriented services. In the following, we show you four ways of tackling the issue - and which one is the most promising!
The classic approach very often does not lead to success
The transactional strategy is the classic approach that most providers take at the beginning. The connectivity solution is treated in the same way as all other products. It has development, manufacturing and distribution costs and a price is formed on this basis that meets the company's typical margin requirements.
Unfortunately, this approach often leads to the problem that sales fall well short of expectations. There are a number of reasons for this. The sales force is not used to selling digital topics or digital "enablers" and therefore does not approach the topic proactively. Incentives for sales are based on the traditional sales model and are primarily linked to a commission based on the turnover of a product.
As these solutions are generally much cheaper than other options, products and accessories, there is little incentive for sales. Alternatively, the benefits cannot be conclusively explained by the responsible sales teams, as they are new, digital and unfamiliar and there is no high affinity with the offering.
The reasons can be manifold, but usually lead to the sales targets being missed by a wide margin, which in turn massively weakens the basis for the business cases of data-driven services. But there are also other ways of dealing with the issue. We will run through these using examples from the Mercedes Group (as of 2021).
Integration ex works with activation option offers alternative approach
Mercedes-Benz Group AG has chosen a different approach for its Smart brand vehicles. They already install the connectivity solution at the factory, but do not activate it automatically. The customer must purchase an additional option for this. This can also be done after purchase and no technical retrofitting is required to activate the feature for a fee.
This has lowered the sales hurdle, as the hardware has already been installed and no complete retrofit needs to be purchased. This offers an alternative to transactional sales with a lower barrier to entry. However, Smart's figures show that this approach has only been moderately successful. At the end of 2021, it is estimated that only 1% of the fleet had purchased the connectivity solution (source: ratio of app downloads based on App Annie with correction factor / vehicles sold based on IHS Markit).
Free retrofitting further lowers barriers to entry
The main Mercedes brand pursues two other strategies. For older vehicles, there is the Mercedes me retrofit. As the name suggests, this is not fitted ex works, but is offered free of charge to all compatible vehicles. Vehicle owners can have the option retrofitted free of charge at all authorized workshops. This strategy of increasing the connectivity rate in the field lowers the barrier to entry even further.
There are no costs for the hardware. Nevertheless, the customer must make an active effort to retrofit and the topic is not a sure-fire success in this environment either. At the end of 2021, around 5% of vehicle owners with a compatible vehicle had opted for retrofitting (source: ratio of adapter units sold / compatible vehicles sold based on IHS Markit).
Connectivity ex works with holistic benefit assessment from an overall company perspective as the most promising approach
For new vehicles, Mercedes goes one step further and installs the connectivity solution on which Mercedes me is based as standard. The customer can use Mercedes me free of charge for the first few years and the calculation is that most customers will have become so deeply embedded in the Mercedes me ecosystem at the end of the trial that they will stay with it afterwards, even if some of the services have to be paid for after this period.
By the end of 2021, this strategy had led to around 15% of new car buyers actively using Mercedes me (source: ratio of app downloads based on App Annie with correction factor / vehicles sold based on IHS Markit). The trend is even rising. We are actively working to keep the entry barriers to the digital ecosystem as low as possible and to initially bind customers to the ecosystem as part of a multi-year trial.
The monetization of the business model will only start afterwards, but this lays the foundation for a broad addressable basis for the digital services. Mercedes is subsidizing the standard ex works installation up to this point through the benefits that the operating data generates in other business functions relating to development, market research, product management, production and sales, as these can achieve considerable savings through the active use of the data.
Here too, the service business case does not have to be self-sustaining, at least initially. The view of connectivity and the associated access to the fleet's operating data is viewed holistically from an overall company perspective.
The concept can also be transferred to other industries such as mechanical engineering in a similar way and, in our view, is the key to success for increasing the connectivity rate across the board. Once you are able to use remote service and operating data for the majority of your machines, services such as predictive maintenance or Remote Service The business case of your customers will also look much better. Your customers benefit from outstanding services, your colleagues in other departments benefit from the operational data and you benefit from a positive business case. A classic win-win-win scenario based on the holistic benefit assessment of the connectivity rate from an overall company perspective.
