While the world is obsessed with the idea of making everything “smart”, companies that have technical and human resources to deliver IoT solutions often fail to answer the most important question: “Where exactly is value realized?”
The IoT market is very young, and as a result proven business models haven't been established, largely because many companies in the sector are still trying to figure out how to capitalize on their technical innovations. As a consequence, we observe multiple misapplications and miscalculations in the area, which have plagued many ambitious IoT projects.
To understand why this happens, let’s first get to the definition of what a business model is:
A business model describes the rationale of how an organization creates, delivers, and captures value.
When applied to the IoT sector, the definition above given by Alexander Osterwalder and Yves Pigneur, authors of Business Model Generation, revolves around two main points:
- Focus on capturing and delivering value as a primary goal of an IoT project.
- Leveraging innovative value delivered by smart products, which differentes them from other solutions. This value includes 24/7 connectivity, low-cost sensors, and efficient connectivity networks, like LoRa, LTE-M, and Sigfox.
Significant upfront costs. Though components in an IoT network are getting cheaper, developers need to deploy a significant number of sensors and actuators in order to scale their systems and gather sufficient data to analyze.
Large user base. Consumers buy IoT-enabled products — a thermostat, a fitness band, or a sensor-equipped machine deployed on the factory floor — to get valuable insights. In order to provide such insights, the system must be feeding off large volumes of data from real users. That's why most manufacturers of smart devices aim at quickly gaining a sufficient user base and gathering the insights they have been promising to end users. Soft launches and small sets of devices delivered to early adopters rarely prove efficient in IoT.
Ongoing support costs. These costs include a cloud server with data processing functions, cloud storage, OTA updates, and so on. Quite often we see a case when Profit & Loss (P&L) costs are not factored into the upfront costs, which results in lost profits.
When a company brings a smart connected product to market, there are many questions to ask and tradeoffs to make to figure out a reliable IoT business model.
Or, more precisely: what is the target customer segment? Its geography? Novelty of the product?
Connected products come into the world from one of two lineages:
Novel products developed from scratch and regarded as “smart” from the start. In this case, the market deals with a completely new or majorly redesigned product, which didn’t exist in similar fashion before. The product doesn’t have an established base of users, who are acquainted with the product’s benefits.
Existing products equipped with sensors and aimed to provide additional value to the same customers. In this case, sensors come as a small addition to an existing device or IoT system. The aim here is to establish more loyal communication with the current user base instead of attracting new customers.
According to a report prepared by IoT Analytics, it takes an average of 23 months for an IoT product to go from internal project kick-off to the first paying customer.
Such a long average term is understandable: unlike “normal” tech products, IoT developers need to make all the layers of a complex IoT tech stack work together: device hardware, software, communication protocols, a cloud platform, and cloud applications.
Will you focus solely on the primary goal of your IoT solution — or offer valuable add-ons? An average IoT product comes with 12 supplementary features.
For example, nearly all companies (91%) offer visualization and monitoring dashboards for their customers. Other popular features include: inventory management solutions, and workflow optimization tools.
To help IoT newcomers answer this question, IoT Analytics prepared a detailed guide covering:
What to monetize. In IoT, it can be a standalone device; the service it is offering; the data it is collecting; or something else.
How to design the revenue stream. From a one-off purchase to a year-long subscription plan, IoT product owners figure out the regularity and frequency of consumers’ payments.
Which sales channel to use. Sales channels facilitate communication between a company and its clients—either directly or indirectly.
In the IoT world, the relationship between the product owner and the buyer is transforming from offering a product, i.e. a “feature buy”, to a much more complicated and prolonged “product-plus-the-ongoing-services” approach.
If a company sells a smart health device, it is not a standalone product that customers buy from them, but additional services: health monitoring, emergency services, and so on. That’s why the device is not a one-off purchase. Most likely, it will be sold with an ongoing subscription. Or, the device itself is given away for free, but comes “bundled” with a subscription plan.
Choosing a pricing model depends on the value provided by the product. In the example above, it means answering the questions: does the device simply monitor certain conditions — or does it accumulate data and provide predictive analysis before something goes wrong? Does it send alerts to the customer and instruct them on which action to take?
The most popular pricing models in IoT include:
- Wearables sold at a flat-rate and come with multiple apps
- Monitoring consumption and charging per use
- Combining flat-rate charges with distance measures
- Subscription pricing with service add-ons
The three biggest issues that customers report when adopting new IoT-based digital services and software include:
IT/data security concerns. An IoT product can have vulnerabilities at any layer, from the device itself to data communication between the gateway and the cloud. That’s why in the IoT context, the principle “the system is as secure as its most vulnerable part” is particularly relevant.
Unclear benefits of the solution. The problem can stem from the Project Management and Business Analysis level (“We know how to technically do it, but we don’t know why we should do it”). Another group of concerns comes from the Marketing level, i.e. insufficient or badly prepared promo campaigns. Misunderstanding also happens at the User level, when a customer has problems with installing and running the product.
Issues with integrating the product into legacy systems. Though companies see IoT as a major driver of innovation and business growth, they are limited by their existing infrastructures. Experienced IoT developers help merge the components of an IoT solution into a seamlessly functioning system. However, there is also a major cultural shift driven by the IoT revolution, which shouldn’t be neglected.
IoT products bring different unique benefits to users, from enhancing products that customers already use to unlocking new business opportunities. It's helpful to keep an eye on the following metrics when launching an IoT solution:
- Increased revenue
- Reduced downtime
- Lower operation costs
- A rise in productivity
- Streamlined business processes
- Shorter time to market for new products and services
- Better customer service response times
- Better understanding of equipment use
- Better understanding of new behaviour
The subscription model concept is based on the idea of monthly recurring revenue per device. It has gained momentum in the IoT world due to the low cost of physical hardware, which is useless without the service that backs it. Instead of “throwing their product over the wall” and completing a one-time sale, IoT companies learn more about their customers via their devices and offer more and more valuable features over time.
Real-time and historical data generated by IoT devices gives access to multiple services, like preventive maintenance, automated alerting, and predictive analytics.
The business model is used as a reference which can be modified: monthly updates can be replaced with paid upgrades, a “freemium” model, and so on.
Audi is one of the brands that successfully uses the subscription model: the company employs subscription-based Audi Connect, an integrated infotainment system, to convert its cars into wireless hotspots. The solution helps end users keep track of real-time traffic, fuel prices, parking availability and more with 4G and Wi-Fi connectivity and Google Earth navigation features.
This business model has laid the basis for today’s Uber-like sharing economy. When applied to IoT, it allows customers to get the most out of expensive equipment. End users become service providers who sell extra capacity back into the market.
A modern example of this is smart batteries used in commercial buildings. If batteries have an energy surplus, this energy, i.e. an “asset”, is sold back to the grid. Building owners with smart batteries effectively become micro-entrepreneurs, selling energy at a competitive rate, while optimizing the use of their underutilized assets.
So far, experts assume that this business model can dramatically reshape energy supply chains and the energy provisioning sector as a whole.
Within this model, a customer pays for the benefit the product provides, i.e., an “outcome”, and not for the product itself.
Here is how Theodore Levitt, marketing professor from Harvard, described this business model:
“People don't want to buy a quarter-inch drill. They want a quarter-inch hole”.
The model is getting traction in transportation services. For example, Rolls-Royce, an established car brand, offers jet engines equipped with connected sensors to commercial airlines. The company charges its clients with a fee per engine flying hour. Airlines don’t purchase an engine, but rent it and use it on an ongoing basis, while Rolls-Royce ensures engine uptime and preventive maintenance.
As its name suggests, the model aims to sell as many devices as possible at cost or even at a loss — and bundle it with more expensive products or services, as Gillette Safety Razor Company did at the beginning of the 20th century.
Selling a product at a zero or low upfront cost augments the user base and simplifies a customer’s entry into the brand’s ecosystem.
Some successful applications of this model in IoT are:
Brita’s Infinity Water Pitcher. The gadget automatically reorders its filters, and customers continue using the pitcher.
HP connected printers. The device automatically reorders ink cartridges.
Amazon’s Virtual Dash Buttons. The connected buttons come pre-configured to order a specific product, say detergent or toilet paper. When you press the button, the gadget re-orders that item from Amazon and it arrives at your door within a few days.
To stay ahead of the curve and increase ROI, companies which deliver IoT products have three steps to take:
- Understand their business pain points
- Decide whether it is better to update their current business model or identify a new one
- Carefully align their chosen business model with their objectives and technical capacities
This is not a simple journey. But the prospects of the IoT market expected to generate up to $11,1 trillion by 2025, definitely make these efforts worthwhile.