dollarbreedersI recently attended a very popular IoT conference in Silicon Valley. During the presentation, the keynote speaker asked the audience, “Who here is building connected products?” About two-thirds of the audience raised their hands. Then he asked, “Who’s making money with IoT today?” And no one raised their hand.
This little engagement trick reinforced the fact that many companies are building IoT products without a business plan. They can build products from a technical perspective, but they can’t make money. As you know, this is simply unsustainable.
What is an IoT business model?
Before we dive in, let’s take a moment to define an IoT business model, which Alexander Osterwalder defines in his book Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers as “IoT describes the fundamentals of how organizations create, deliver, and capture value. ”
This definition illustrates the responsibility that product managers must deliver value-focused products. In the IoT world, it is common for products to simply add sensors to existing products, display data on a dashboard, and call it “value. This should explain why companies are not gaining traction in the marketplace. Value doesn’t exist. Now that we have a definition, let’s look at the seven top IoT business models.
IoT Business Model #1: Subscription Model
Because IoT products have 24/7 connectivity to your customers, you can leverage that connectivity to develop recurring revenue business models. Instead of a one-time sale, you can now offer a subscription model where your customers pay a fee in exchange for ongoing value.
The subscription model allows your IoT offering to realize many of the benefits available with a pure software product. Essentially, you are introducing an “as-a-service” business model for a system that includes software and hardware.
By using the SaaS model as a reference for your IoT, you can explore creative ways to monetize your product, not only with monthly subscriptions, but also by offering paid upgrades or even implementing a “freemium” model.
Another benefit of this IoT business model is that it allows your company to build positive relationships with your customers. In the past, hardware manufacturers were used to “throwing products over the wall,” which meant that once the sale was made, they rarely interacted with customers again.
IoT products break this barrier. As your devices collect more data about your customers, you’ll be able to learn more about your customers and provide more valuable features to meet their specific needs. Some common IoT applications that use subscription models include Monitoring as a Service and Predictive Maintenance as a Service.
IoT Business Model #2: Outcome-Based Model
An example of an innovative approach to IoT product support is the outcome-based IoT business model. The idea is to have customers pay for the results (or benefits) that the product provides, rather than the product itself.
For example, think of a pump manufacturer. In the past, their business was selling pumps, and they measured success by selling a quota of a certain number of pumps per quarter.
But let’s be realistic. Customers don’t intend to buy pumps. They want to move water from point A to point B for some purpose. They need the water to cool another system, to water plants, or to power a generator. Moving water from point A to point B is the customer’s real need.
Imagine an established pump manufacturer creates a next-generation pump to monitor the amount of water it pumps. The manufacturer can now talk to the customer in the language they care about: the amount of water being pumped. In this case, the customer is not buying a pump. Instead, they are paying a variable monthly fee for the amount of water they get. They are paying for the result: the water source.
Your company can get creative when implementing an outcome-based IoT business model. For example, you can decide whether to lease or sell the pump. If the customer is interested in the outcome (water source), then they may not want a depreciating asset on their balance sheet. Therefore, having them pay for the water source, rather than the pump itself, can reduce the customer’s apprehension about buying expensive equipment.
IoT Business Model #3: Asset Sharing Model
One of the big questions when buying expensive equipment is whether the customer will be able to get the most out of the equipment. This is where the idea of sharing assets comes into play.
We are already starting to see this IoT business model in car or bike sharing companies. Think of it this way: If the car is parked outside my house 90% of the time, why do I need to pay full price. Can I just pay for the number of times I use the car?
The IoT has the potential to solve this problem, and we are already starting to see solutions for self-driving cars, virtual power plants, shared drones, and more.
This IoT business model revolves around selling your extra capacity back to the market. The goal is to maximize the use of your IoT offering across multiple customers. This way, each customer pays a lower price and you are able to get to market faster than if a single customer had to pay for your complete product.
IoT Business Model #4: The “Razor Blade” Model
Your IoT product can be designed to sell other products. In this model, you may sell IoT products at cost or even at a loss because the goal is to get the product into the hands of your customers so you can start selling other products. This business model is sometimes referred to as the “razor” model, where the goal is to sell more and more disposable razors, so razor handles are often sold at cost or even given away for free.
This business model is very profitable for consumables that need to be constantly replaced. For these types of products, it is very important that customers never run out of consumables. Otherwise, the product will lose its value proposition.
You will see that the challenge for manufacturers of these products is that there can be an interval between when consumables run out and when customers reorder. Sometimes this interval becomes permanent and the customer will never buy again. But what if the product itself could be reordered with consumables when needed?
This would provide value for both the customer and the supplier. So the goal of this IoT business model is to turn “normal” products into IoT products that are automatically reordered before they run out of consumables.
IoT Business Model #5: Monetize IoT Data
The value of the IoT is the insights you can gain from the data you collect. The question is, who benefits from these insights?
Think of a company like LinkedIn. They collect a lot of data from all of us, and while they provide us (the users) with the value of providing that data, the real value is provided to advertisers and other third-party companies that use that data for promotional purposes.
In this case, LinkedIn is the vehicle that collects the data and makes it available to advertisers. That’s how they make money.
The same business model applies to the Internet of Things. You can build your product to provide value to end users and collect valuable data that you can then sell to third parties. With this approach, you can offer your IoT devices for free to eliminate the end user’s purchase concerns. The goal is to deploy as many devices as possible to collect data. You are looking to build a network effect. The more devices you have, the more attractive your data proposition will be to third parties.
IoT Business Model #6: Pay-per-use
Putting sensors on your hardware devices means you can monitor your customers’ environments and how much they use your products. This opens the door to an innovative IoT business model where you can charge your customers based on the amount of time they actively interact with your product. In this IoT business model, the goal is not to make money on the device itself. Instead, you are using the data generated by the IoT device to keep up with usage.
IoT Business Model #7: Offer Services
You can use IoT offerings to provide new services (or enhance existing services) to your customers. In this case, I’m not talking about an “as a service” type of model. Here, I explicitly mean providing a service, with the involvement of real people. In this IoT business model, the IoT product can be an enabler and differentiator for your company to sell services. Here are some examples of this IoT business model.
Use IoT products to monitor machines, predict maintenance, and then sell maintenance contracts.
Install IoT devices in smart buildings to measure energy consumption. Then sell energy audits and energy optimization services.
Implement IoT devices on manufacturing floors to measure efficiency and throughput. Sell consulting services to optimize your customers’ processes.
As you can see, there are endless possibilities for how you can use IoT products to collect data and then use the insights gathered to provide services. Remember, you can combine this IoT model with some of your previous business models to increase your profits. For example, you could sell hardware, monetize the data, and then offer services based on the insights.
One word of warning for companies just starting out with a service offering: services are very different from product operations. Make sure your company has the right resources, expertise, and willingness to scale to a service offering. You need to go into it with your eyes wide open.
dollarbreeders
