Rewiring the value equation with the Internet of Things

The Internet of Things (IoT) is the greatest value-add opportunity a marketer could ever wish for, writes Steve Sammartino.

The value equation is a simple idea in the world of marketing: Value = Utility ÷ Price.

We refer to it as a tool of eternal importance, but we so often fail to be masters of the equation itself. Instead, we modify the price to improve value once a product or service is established. And recently, the direction of that change is almost always down, as it’s the simplest and quickest way to improve the value equation and respond to the market.

But it wasn’t always this way. Once upon a time, the traditional big brands had some significant things to their advantage in the value equation. Mostly, they had big barriers to entry for anyone who might arrive.

This enabled powerful brands to keep their prices artificially high in Australia. Our market was too small for multinationals to really care about, while local brands rarely had the scale to really be price competitive globally and remain profitable. Add to this our history of trade tariff protection and it was a very cosy existence indeed – one that favoured small incremental improvements in products and stable pricing. Then one day, without notice, the world changed.

Consumers behind the curtain

The job of marketing brands went from an opaque process to a very transparent one. The consumers’ lack of knowledge worked very much in the brand owners’ favour. The process of the buyer finding out the best price, the closest place to buy it, a broader range of options and product comparison information were all very sketchy processes. There were only so many phone calls a person could make, only so much shopping around we could do and very little information to assist in informed decision-making. The deck was stacked heavily in favour of the brands, until it wasn’t.

As if overnight, everything changed. Once we had access to real market knowledge, we could demand full distribution and get access to a brand’s global range whether they liked it or not. We could guarantee ourselves the best price and find fair reviews of the product options written by us, not some magazine review from the brand’s personal advertised client list.

The market knowledge options opened up and the power flipped. Once the transparency barriers got removed, the world went from a sellers’ to a buyers’ market.

Fear and loathing in brand land

As a result, many established brands panicked. Marketers didn’t know how to react when the curtain was removed. In the end, they responded in the way most marketers would – by improving the value equation. But they did it the quick and dirty way: they dropped the price. Value problem solved. Short-term sales boost achieved. Happy management and shareholders ensue.

The temptation of the price drop death spiral is easy to understand:

  • Mobile marketing will get a short-term market share increase,
  • sales will love the discount – it inflates sales and it’s easier to make budget,
  • research and development get the pressure taken off them for new product launches, and
  • finance will say yes, because they always say yes to the highest proposed revenue option.

 

But it goes even deeper than that. The supply chain likes it too. They get increased demand for their inputs at not extra cost. And the retailer (if there is one) gets the sales increase at the cost of the brand owner. Add to this the unexpected delight for loyal end users and it’s happy days all round.

The problem is this is where the rot sets into brands. It not only cheapens the brand, but it cheapens the mindset of those who manage them. It’s an easy option when what brands need to do right now is really hard stuff.

When price is our answer – product is our problem

In an age of global and transparent competition, there is no hiding from our need to be making better products, smarter services and more connected brands. What we need today is serious innovation in the realms of product design and distribution. It’s funny how when these two elements are right in the mix, price is less important and the audience spreads the word on our behalf.

The type of thinking brands need, regardless of what they are is how to create more value by becoming more connected with the end user. And I’m not talking about pointless and banal conversation in social media forums. No, I don’t want to be friends with my cereal brand. We need to turn dumb, highly substitutable products and services into smart brands.

Smart devices to smart everything

We are currently circling the edge of an all-product, all-service revolution which, while driven by the internet, will very quickly become bigger than it in terms of connections: the Internet of Things, or IoT. The shortest definition of this revolution is exactly as it sounds. Things in our world will become connection points to the internet – everything from runners to fridges to pens to clothes to notebooks to milk to cereal packets.

The reason this is possible is because many of the technologies underpinning the internet are now at disposable price points. Riding on the coat tails of the almost two billion smartphones already manufactured, all manner of memory chips, sensors and identifiers now cost mere cents in the dollar.

This is the greatest value-add opportunity a marketer could ever have wished for. While there is little else we can do to improve the quality of the toothpaste in a tube or a general life insurance policy, there is a lot we can do to the packaging it comes in and the transactions around it. A consumer product that knows who bought it, how often they buy, where it is and what other products are near it, can create no limit of potential value sources.

And it is very likely that the value we create will live outside of the actual thing we sell, and be more about what it happens to be connected to. If we take the example of insurance and toothpaste in an IoT world, a new value equation could quickly emerge. An oral care brand adds various sensors to its products. Frequency of brushing and flossing is linked to gum and dental health.

A dental insurance provider gets data of customers with lower risk profiles, while the insurer provides free dental healthcare products from a savvy dental healthcare brand and lowers the cost to the insured. The oral care brand gets a new customer set and brand loyalty purchasing through data enabled products and it could even circumvent the retail requirement.

The question we must ask to make it happen is a simple, yet grandiose sounding one: how do you turn your product into a computer?

Our IT and R&D departments are no longer in separate worlds.

The benefit of adding technology to improve the value equation won’t just make the product better; it will also invent a new product innovation layer for any brand. We put ourselves into the world of the related revenue realm.

Welcome to the related revenue realm

If we have a look around us, there is a clear shift to second-tier revenue models. These are business models where the product is low priced, freemium and even given away. The information around it is where the new revenue streams reside.

Just look at Google. The search product is free, and your intention is sold to advertisers on the sideline. It’s the connection point of the data that creates the value, not the search transaction in and of itself. And, as we make more transactions over time, the value of that data compounds.

It compounds in the brand bank the same way interest does.

Data value doesn’t just happen

The move from dumb to smart things requires the opposite approach of what most established companies reward. It’s most likely that we need to increase our short-term cost in traditional products if we want to make the transition needed to avoid price competition.

It requires a lack of fear. It requires value to be created outside of discounting and a belief that creating more value is rewarded even if the new revenue can’t be quantified in the early stages of the evolution.

One thing for sure is that value is increasingly being created in integrated systems thinking, and no longer about a singular transaction between producer and end user where price is the focus.

 

 

 

 

 

 

Steve Sammartino
BY Steve Sammartino ON 4 August 2015
After investing 15 years in managing some of the world's biggest brands, Steve took his marketing mindset into the entrepreneurial space. His ventures include rentoid.com, an air-powered car made of Lego and he’s the co-founder  of surfing technology company Sneaky Surf. He blogs at Stevesammartino.com, is a regular technology commentator on the ABC and his best-selling book The Great Fragmentation has been translated into multiple languages. His breadth of experience provides a unique perspective on the future of marketing.