Despite forecasts from GE of over 10 trillion dollars by 2020, many organizations who have invested in an “IoT” project have yet to derive any significant revenue from their solution. Business models are changing from transactional to collaborative, transactions are evolving from simple one-off payments to complex variants of usage-based billing.
Organizations need to have a clear vision as to how they are going to generate revenue from their devices, services, data and more importantly their ecosystem.
My experience to date has shown IoT projects rely on 4 main monetization models for revenue:
- Premium Device Pricing
- Services Revenue
- Data Revenue
- Ecosystem/Partner Network
Premium Device Pricing
The simplest form of IoT monetization, most frequently seen in the consumer market is when device manufacturers charge a premium for their connected products (in comparison to their earlier “dumb” offering), we see this with household items such as washing machines, televisions, smartwatches, light bulbs, power sockets etc. The value is justified with the ability to remotely monitor, control, and is some cases automate the device.
We have seen first-hand the pitfalls of having a purely transactional relationship with the end customer, and relying on premium pricing for devices in an incredibly competitive consumer market, for example, GoPro. You can argue that failed products, a niche market with the ever-increasing capabilities of our smartphone cameras, and slowing consumer demand has had a big impact on stock pricing but by Nick Woodman’s own admission they can’t rely purely on hardware sales, they must have a vision for monetizing services, and the ecosystem that encapsulates their devices. Since his interview in August 2016, GoPro has launched a cloud service called “Plus”, for $6.99, user’s videos are automatically backed up to “Plus” with the ability to edit their footage with Quik and GoPro’s soundtrack library. Once Plus accumulates enough footage it aims to create a giant marketplace of user submitted videos which GoPro will sell on their users’ behalf.
Digital Services Revenue
ABI Research predicts that by 2018 there could be up to $120 billion in revenue generated worldwide from value added services sales within the IoT industry.
With the recurring revenue and enhanced relationship with the device digital services revenue is a journey many product manufacturers are beginning to undertake, and a big transition from their traditional services revenue that comes from consulting, integration, customizations, and maintenance etc. Many organizations embarking on an IoT project will find implementing revenue from digital services to be a challenging and complex task that requires significant financial investment. We often see these services are slow to launch for one of many reasons as many decisions with stakeholders from different departments within an organization have to be agreed upon: Can we support the infrastructure, payment gateways, billing, CRM/PRM integrations, and identity integrations – do we build or do we buy? Can we justify a slow growth in this new revenue stream? Are we agile enough to change our internal processes? Organization structure? And whether they have the right staff profile to make a success of it (selling, support and continuous service improvement)?
There are already quite a few successful examples of businesses that have explored digital services monetization. Let’s look at two notable examples:
Founded in 1874, ADT provides residential and small business properties with home security, fire protection, and monitoring services. They are a great example of an organization making a success of connected products and services with their “ADT Pulse” offering. If ADT Pulse was a standalone organization, it would be the second largest security provider in the U.S, only trailing ADT itself! ADT offers its customers the ability to monitor, control and automate heating and lighting in their home from $47.99/month, validating the market demand for additional purchasable software and the feasibility for niche businesses like security.
OnStar is a subsidiary of General Motors which provides its drivers a host of connected emergency, security, navigation, connectivity, and remote diagnostics services. GM embarked on their digital transformation journey around 12 years ago when the hardware onboard the vehicle started to become more capable of transmitting vehicle diagnostics. GM ingeniously began offering a monthly subscription to their owners which allowed them to get monthly email on how their vehicle was performing. This feature evolved over the years to take full advantage of the technology and data available to OnStar and broke out the evolution of the platform in two stages. Stage 2 allowed the driver to report a fault from their vehicle to an OnStar representative with the touch of a button and stage 3 was enabling OnStar to proactively report potential faults back to the driver before they became an issue.
OnStar has managed to successfully monetize features beyond just clever insights on the user’s vehicle. They have managed to increase their services revenue over the years by developing critical new features such as stolen vehicle assistance, concierge, and navigation assistance, to user experience refinements such as the ability to use your smartphone to control air conditioning remotely. They are also starting to utilize their ecosystem of partners to offer customers the ability to turn their vehicle into a 4G hotspot, which brings me onto my final topic, monetizing ecosystems.
Ecosystem monetization allows organizations to create a platform and marketplace where they can also create revenues from their end customers and partners. This relies on a highly collaborative relationship with the end customer, and the ability to enable a highly complex transactional model between partners, end customers, and the organization who owns the platform and marketplace.
Connected Car is an example of how relationships within an ecosystem are changing and how commercial agreements are being redefined. Traditionally, vehicle OEMs purchased managed feeds for weather updates from organizations such as The Weather Channel or Accuweather, in the new digital era, a fleet of vehicles now become a fleet of weather sensors which are giving real-time data from all over the world as driver’s go about their day. With the vehicle owner’s consent this live data becomes highly valuable, and can be brokered back to a host of weather forecasting organizations striving to supply their customers with accurate hour-by-hour updates in their particular area.
The need for working with an ecosystem to increase digital revenue is driving the need for organizations to take their IoT projects seriously, and to develop a platform and marketplace that is a scalable solution for onboarding, testing, deploying, selling, and controlling digital assets and hard goods.
Combining All Four Business Models to Achieve Digital Transformation
Analyzing all four business models showcases the strengths each offer businesses who deploy them. While deploying one or two will see a definitive increase in value for customers and revenue potential, the full benefits of digital transformation doesn’t happen till businesses incorporate all four models. The first and arguably most difficult step is deploying additional software and services for customers to buy for their hardware. Combining this with a full ecosystem that becomes the central channel for customers, partners, and developers to converge to buy, sell and define new software and services becomes the natural evolution of the business. Once this is established, customers will begin generating valuable data offering insight into every element of the hardware service. This data not only helps improve the hardware overtime with updates that meet customer expectations but also enables manufacturers to share and sell this data critical to developers and partners who are striving to be more successful on their platform. The accumulation of these combined models lead to a device that encompasses far more value in the eyes of customers, and the developers and partners that will sustain its growth. This value will translate into a connected device that is worth the premium pricing and ultimately ensure that hardware stays relevant in today’s software-as-a-service economy.