Revenue models for digital solutions in manufacturing firms. Investigating the interaction between revenue models and the digital solutions of a Swedish manufacturer

Abstract

Manufacturing firms are increasingly expanding their traditional product portfolio to include a larger extent of digital solutions. As these inherently differ from traditional products in the way value is created, new forms of value capture and revenue models are enabled and required. The heavy equipment manufacturer Company V is currently expanding and increasing the emphasis on its digital solutions and therefore needs to find effective ways to charge for them. Thus, the purpose of this study is to research and develop value capturing strategies, in terms of revenue models, and to put those in the context of Company V. A literature review on digitalization in manufacturing firms and revenue models was combined with a total of 16 interviews with Company V and external experts on the subjects. Three categories of factors that should be considered in the revenue model design were identified in the literature: firm objectives, solution fit, and market factors. These factors were applied in the context of Company V and resulted in a suggested revenue model concept for its digital solutions based on a combination of subscription and tiered pricing, where the price should be scaled per machine. This thesis argues that charging for digital solutions is necessary to emphasize the value offered and ensure commitment by customers, despite the recommended shortterm strategy for Company V to view digital solutions as complementary to the core machine sales. Key implications of this are that Company V should embrace a global approach for the revenue model while utilizing local sales offices for local solution adaptions. This should be supported by continuing to include sensors in machine sales to grow the installed base, reduce the marginal cost of adding customers and increase network effects. While there is an identified need for a better and clearer definition of what value the digital solutions bring, an increased installed base would in the future improve the offerings with more and better data. It will also be possible to form new offerings based on this, which have the possibility to be leveraged to new types of customers in the ecosystem. This will allow for the digital solution business to transition from complementary to a stand-alone business of Company V, with major growth potential.