CES recaps and reviews often focus on the technology innovation trends shaping our tomorrow, but this year’s event is ushering in a new trend largely absent from said recaps— the business models driving innovations today.
While every innovator dreams the famous line, “build it and they will come” will come true, it rarely does. Something around 95% of innovative products fail, according to Harvard Business School. While there are many issues that plague new products, one significant issue is a sustainable commercialization strategy.
Watching the many hardware announcements from CES, it’s clear that the hardware innovation is often powered by underlying software that provides utility, access, convenience and/or insight to the end-user.
To the business, this marriage of software and hardware translates into a valuable, magnetic product ecosystem—that many businesses are giving away with free apps or dashboards. When hardware is unlocked through software, without access to the software, an end-user’s hardware is rendered as useful as a paperweight. This, in turn, establishes a tiered pricing system, that guarantees both payment upfront for the physical hardware and future income through the “gated” software. To the consumer, this pricing strategy can ease the impact of initial sticker shock, distributing cost of the product over multiple installments. Levering a subscription-based model to access the software also enables more elastic pricing, which can expand the pool of the target audience as the business can offer a price range accessible to a mass audience, instead of an elite few.
While every innovator dreams the famous line, “build it and they will come” will come true, it rarely does. Something around 95% of innovative products fail, according to Harvard Business School.
For a startup company, or a company with the pressure of realizing a profit quickly, this type of subscription model can ensure a steady stream of income that fuels further innovation. From the business perspective, this software-driven approach to a subscription model also proves strong over traditional subscription business models. The traditional model is best exemplified by the shaving or printer industry. An initial investment pays for a portion of the razor or printer, and subsequent installments of purchasing accessories (the blade or ink cartridge) that make the base hardware work, return the profit. While the pricing model may be similar to the prior mentioned software-based subscription model, the lack of data from a direct-to-consumer source remains.
Products with software integrated in the ecosystem guarantee a steady stream of customer data and, moreover, customer insights. And, as the user base grows, the more significant the data the brand collects— upon which further product development decisions can be made. Therefore, there is not only merit to attracting a customer to the product ecosystem, but also incentive to keep the customer engaged, so profits and insights flow, thereby fueling a perpetual cycle of innovation.
Now, getting back to those product announcements at CES…
Though this year saw the beauty and home industry heavily push innovation, the subscription models at play largely followed the standard razor-printer business framework. Foreo UFO, a device calling for the “end of the sheet mask” through LED light therapy, still requires microfiber towel masks to function, thereby requiring continued investments by the product users. Similarly, much like the Keuirg pods of the early 2000s, the wellness market saw the launch of pods for aromatherapy, except with the addition of a personalized scent plan and a device that dynamically changes which “pod” it diffuses scents from.
Though this year saw the beauty and home industry heavily push innovation, the subscription models at play largely followed the standard razor-printer business framework.
In the last couple years, fitness has returned to the home, moving the boutique gym experience to an intimate socially-driven experience. The more notable foray into this arena, Peloton, merged boutique cycling classes with live-steaming and an on-demand Netflix-like concept to realize over 600,000 subscribers, who pay roughly $39 a month to engage with others while riding along at home. At this year’s CES, FightCamp followed Peloton, tapping into the boutique fitness market by bringing studio boxing to living rooms. Fitness legacy brand, Bowflex, also looks to makes a comeback with a connected gym experience and an associated “fitness assessment app.” Both brands provide their new value-added service through monthly or yearly subscriptions.
While products designed with the razor-printer commercialization model render useless without a subscription, the software-driven model can still provide some utility, albeit diminished utility. Product design teams could look at this as a “freemium state” or MVP—the state at which the product functions, but the experience is just painful enough to provide the frustration or desire to drive a tipping point of subscription. The key is thinking about the value prop of the premium state and the pain it solves, so that while the freemium state solves some pain-points, the essence of that pain is still impacting the user pre-subscription—forcing them to subscribe. Both states—freemium MVP and the commercialized subscriber state — must be placed in the product roadmap together. Audi’s exploration of the 25th hour does a great job of demonstrating this. The 25th hour is the extra hour in the day the autonomous car gives back to passengers. This hour should be relaxing, since the car is doing the hard part, leaving the autonomous car experience open to be optimized for entertainment. To sweeten the value prop, Audi looked for a content provider and announced at CES their intention of developing a commercialization plan together with Disney.
Perhaps one reason for their widespread presence at CES is the impact of a subscription models’ tribal network effect. Subscribers are often loyal, especially customers with automatically renewing membership, as the friction is removed and the sunk cost of engaging is often heaviest up front, so their only choice to recoup the investment is forge ahead. And, with the loyal customer base comes referral network that further perpetuates the innovation cycle.
While the appropriate business model for a product varies but situation, considering commercialization early serves as valuable guidance to developing the product experience. What opportunities might your company have had or have if a subscription or platform-model drove your consumer adoption? In your next innovation endeavor, consider the commercialization aspect of the go-to-market strategy early in the design process will guide and alter the actual product experience.