W34 - Product Servitization

The book Digital Leap mentions six modes of digital transformation, divided into two categories: internal and external. One form of external transformation is product-to-service. Two events this week reminded me of that point.

The first was one noon when I happened to overhear a group of classmates in an elevator discussing how credit cards make money. They doubted whether credit cards were profitable because customer acquisition costs are high and few users use installment plans.

To answer that question, an important point is to clarify the essence of the credit card product. On the surface, a credit card is a plastic card, an electronic account. Further, a credit card satisfies users’ need to reuse a revolving line of credit. Going further, a credit card is a foundational product for building a large trust network.

What is the value of credit? Modern social order is constructed on trust and contracts. The best domain where trust is monetized is within financial institutions. Credit cards are a key product financial institutions use to build trust networks; they weave together individuals, merchants, platform companies, and financial institutions. Within this network, not only can installment fees be charged, but almost any value exchange can occur. The AmEx Centurion card illustrates this: banks provide virtually limitless services to cardholders. Although that highly customized model cannot be scaled and only serves a very wealthy few, it reveals something about the essence of credit cards. I view the credit card product as a service built on a credit account. Today’s wave of digital technology will make credit card design align more closely with that essence — for example, CMB’s experiments in local lifestyle services.

The second event was hearing Wang Yuquan use an example in a talk. He said a drill is a product, but what users actually need is the hole in the wall. If someone can come and make the hole, there’s less need to keep iterating the drill itself. Moving from drill to hole implies a shift from product to service. The question is how to scale that shift and when transformation will occur. Today, relying on digital technological infrastructure, it’s quite possible to achieve a dual leap: from atoms to bits and back to the atomic world.