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Does your product stand out? Differentiation in Manufacturing
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Does your product stand out? Differentiation in Manufacturing

We are all facing competitive pressure.  To be good, is not enough- you got to be different! – captivating and compelling to stand out in todays crowded marketplace. The number of competitors and number of products on the market is growing quickly in almost every sector.  Well, you are not alone; this article will talk about why differentiation is so difficult for manufacturing and strategies on how to improve.

While competition increases, many markets are growing and entirely new markets are also being created.  The rewards for standing out, and serving more customers only increases the pressure to stand out.  Its not uncommon to see areas where the top 20% of companies serve 80% of all customers, sometimes the ratios are even more skewed.

Competing on cost:

Manufacturers focus on cost optimization to increase margins; however, many companies have realized that you can’t succeed by focussing on costs alone.  Almost no matter what you do, there are competitors with lower cost of labor, lower cost of rent and lower cost of raw material.  Companies operating overseas also don’t have to deal with regulation costs for minimum wage, safety, certification or environment.  We’ve consulted many companies (perhaps like yours) who have competitor/copy-cat companies offering a similar quality product overseas for 60% less.  The Huffington Post published an article on why Chinese can produce products cheaper.: “The average hourly wage for Chinese manufacturing workers is less than a tenth that of their average U.S. counterparts, according to the Bureau of Labor Statistics.  It being about twice as cheap to live in China, those lower Chinese wages go further. But Chinese factory workers also tend to work longer hours, making them more appealing to some employers.”  Companies based in North America can not succeed by competing on cost alone.

Competing on Innovation:

Innovation has been touted as a key way to compete, innovation is also vague, unclear and just really hard to do.  How can you convince customers to pay more for your product?  How can you change your products and increase margins?  We’ve seen blockbuster products like the iPod, iPhone charge three times more for a product with fewer features – how can you do that?

In this article we’ll break down the strategy behind one connected product and show how the business model works; and what’s happening behind the scenes.  IoT technology products have shown impressive customer adoption and profitability.  All of these techniques may not apply to you, but we hope there are elements you can take away and apply to your products:

Google’s Nest is a thermostat that enables users to change the temperature in their home.  The latest model (2017) retails for $249 and a traditional programmable thermostat costs between $20 and $150 dollars.  The price of a connected thermostat is 2X to 10X higher, and the Nest’s revenue potential is quite a bit higher because of additional factors we’ll describe soon.  The connected product approach isn’t incremental, they didn’t charge 10% more just to control your thermostat from your phone.

Connected Thermostat Breakdown of costs

The Nest hardware costs about $68 to produce and retails for 249, based on analysis from CNN.  This does not include the upfront engineering costs, supporting software application or marketing costs.  However, the product produces an impressive per-unit-margin of 73%. Source

Connected Thermostat Value Propositions

Why would someone spend so much more for a connected product?  What is so compelling about the value proposition that would cause consumers to open their wallets?

  • Reduce in other (Energy) related Costs
    The Nest has internal software algorithms that optimizes use of your furnace or air conditioner to reduce energy costs. This is something that most consumers want to do, but don’t know how to do it.
  • Convenience
    The nest allows the ability to change the thermostat from your phone in the bedroom without going downstairs to change it.
  • Smart Consumers
    The Nest was a big hit with consumers who want to appear to have the best, latest, cutting edge technology. Something that isn’t offered by traditional vendors.

GenX consumers are now beginning to expect connected capabilities and have the willingness to pay for them.  Products such as Google’s connected thermostat, connected lightbulbs, connected car, connected coffee makers are all examples of connected products that have found a market for new customers and sells at a premium price.

Future Revenue Potential

Connected products strategy has a bigger future growth potential.  A thermostat is sold as kind of a commodity, consumers don’t really expect a lot from a thermostat so long as it works.  A connected thermostat has many future revenue opportunities:

  • Network referrals/ Social media sharing:
    The Nest can provide ways of taking advantage of social networks; when you and neighbor, or brother-in-law can compare power usage and costs, it increases likelihood of your neighbor also purchasing the same product.
  • Complementary products
    Selling other connected home products was one of the master strokes of the Nest strategy. They can now conceivably sell and co-ordinate sales of any other connected product in the home including: connected lightbulbs, connected doorbell, connected cameras (Google Acquired DropCam), connected smoke detectors; and consumers are likely to stick with the Google brand rather than Siemens (even though Siemens is a bigger company), because these connected products work together.
  • Recurring add-on products
    A connected products introduces the possibility of add-on recurring revenue. For example, the Google nest can introduce an advanced algorithm to optimize energy costs based on time-of-day rates, or keep an eye on seniors for a monthly fee.  They are monthly fees to store hi-resolution data from the video camera.  There are multiple options to introduce new additional products.
  • Collaborating with utilities
    Once the install base is large enough, google has predictive data on millions of homes major energy consumptions. In aggregate, this data is useful to utilities to manage and predict energy consumption.  The data collected by Connected products.
  • Brand Loyalty
    Consumers are using and interacting with a thermostat on the phone. This means that Nest customers are getting notifications daily, they are interacting with the Nest brand all the time.  The app provides a connection point to send out new offers, comparisons, and build a relationship with the users.  As a comparison, most people don’t know the brand of their existing traditional thermostat they have at home, mostly because they don’t interact with that brand all the time.

If you want to learn more about Internet of Things technology and how it can be applied to your product lines or business; Esprida offers a free whiteboard session to share industry experience delivering Internet of Things solutions for the past 15+ years.  Email: info@esprida.com to get started.

 

 

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