In this eight-part series, we talk about the Third Wave of Digital Transformation which is already underway. In Part 1, we looked at the driving forces behind this transformation. In Part 2, we introduce a few new ways of thinking about how companies will find their roles to take advantage of this $1.7 trillion opportunity and where they should look for them.
The digitization that will be driven by data and analytics will change, more than anything, the shape and pace of a company’s learning curve. This new learning will crack the code on how much faster customers’ value gap can be reduced or eliminated. We believe that the future digital offerings will be born out of the gap in value that customers have at a point in time. Contextual, behavioral, and immersive analytics will lead the process by which we identify and quantify that value gap. The notion of value gap is an interesting one to understand as we think of the future digital offerings. So let’s look at that next.
This new learning will crack the code on how much faster customers’ value gap can be reduced or eliminated.
What’s Value Gap?
A value gap exists between what a customer needs or expects, and what they are likely to get. As this gap widens the customer sacrifice increases because customers end up settling down for more or less than what they expect. You can charge more for an offering, as you reduce the value gap. Because your offering is tailored to a customer’s needs, the customer perceives a greater value, and as a result they willingly pay a premium price.
Contextual, behavioral, and immersive analytics will lead the process by which we identify and quantify that value gap.
How can you reduce the value gap?
Analytics, learning, and the connected intelligence present companies the opportunity to systematically reduce customer sacrifice – and therefore the value gap. Companies can accrue additional pricing power by creating context specific and immersive offers in ways that the value proposition to the buyer is more clear than before. And with data, this can happen even before the buyer was seeking out the offering themselves.
In order for companies to unlock this kind of pricing power, they need to be looking for it.
What’s the source of pricing power?
Pricing power is a factor of your customers’ perceived value of your offering and your competitive position. One of the coolest ways we’ve seen this depicted is in this book “The Experience Economy.” It first came out in 1999, but it didn’t quite catch on at the time. When it finally did, the authors revised and published it again in 2011.
The authors Pine and Gilmore studied the progress of economic value over time. They suggest that customers’ perceived value for offerings increase as they move from commodities, to goods, to services, and then to experiences and finally to transformations. Each step of the offerings advances to the next stage with further customization and they downgrade to a lower perceived value as they get commoditized.
Figure recreated by Pricing Innovations using the concepts from The Experience Economy.
What we particularly like about this model is the fact that it suggests where to look for the most monetizable opportunities by demonstrating the direction in which customers’ willingness to pay increases. Customers’ willingness to pay increases as customization, personalization, and individualization increases.
Customers’ willingness to pay increases as customization, personalization, and individualization increases.
Pine and Gilmore suggest that while goods are transactional, services are relational, experiences are personal, and transformations are individual. They posit that services inherently imply that the benefits to customer are delivered/realized over a period of time and throughout the contractual relationship. Experiences on the other hand are memorable and their value is realized even long after the experience itself. And lastly, transformations are the highest degree of economic value for which customers are willing to pay most because transformations change the outcomes, and those outcomes and benefits are sustained over a much longer period of time.
In a way, Pine and Gilmore brilliantly suggest that there’s a time element in customers’ perceived value – customers value not only the benefits they receive but also the duration of the impact of those benefits. This is a really interesting way of thinking about creating new digital offerings.
Through this lens, and as you think about how you’ll take part in this new digital economy, think about where your offering will fall within the time-value spectrum and how you can raise the value perception of your innovation to higher levels.
The service design firm Fjord says, and we agree, that “every product is a service waiting to happen.” If you think about it, digitization further enables the notions of “every service is an experience waiting to happen, and every experience is a transformation waiting to happen.” Analytics is key to transition from service to experience economy and then into a transformation economy.
While riding this new wave of digital transformation is already shaping up how we think about our future products and services, so few digital offerings actually make it in the market. And that’s the focus of rest of our series. In part 3 of our series, we look at why 7 out of 10 digital innovations fail to make it in the market, and we begin to reimagine a new innovation process for making it in the market. We introduce the notion of the “innovating for the value gap” and discuss a few news ways of finding the gap and quantifying it.
Want to keep reading? Download the entire series as an e-book.