CMOs: Monetising your connected product
DevicePilot recently shared a white paper recommended for anyone considering, building, testing or deploying connected products. In the paper, Pilgrim discusses the benefits and business models of connecting a product, and explores how CXOs can plan and execute to reap the maximum benefits from doing so, which, at the bottom line, is all about effective monetisation of New Product Introduction.
The 1950-1980’s was perhaps the heyday of rampant consumerism with a predominantly product-oriented business model: Brands aspired to sell physical goods to consumers, who aspired to own them.
Since then the world has embarked upon a transformation sometimes known as “Servitization” – transitioning to a “service” business model where brands sell the utility of goods on an ongoing basis, rather than selling those goods outright … and the new breed of Millennial consumers doesn’t aspire to own things. The “X-as-a-Service” model is best known in regard to software, but is now being applied to almost everything technical, from jet engines to cars, streetlights to phones.
The potential benefits of Servitization are many: For suppliers it allows a closer relationship with the customer, which in turn enables all sorts of benefits
including faster iteration, opportunities for up-sell or cross-sell, bundling and mass customisation. For the customer the benefits include better use-of-cash, i.e. improved cash-flow, and not having to commit to and pay for idling resources.
Indeed there are also benefits for wider society as a whole, because offering something as-a-service aligns the interests of supplier and customer such that it is in the interests of the supplier to ensure efficient use of the resources required to deliver the service. For example, rather than buying energy to heat their factories, some companies now buy “temperature as-a-service”. The supplier is then free to do whatever they wish to reduce their costs of achieving that temperature, which includes installing energy-saving measures such as insulation or solar panels, and of course their economies of scale allow them to get very good at that optimisation. Thus Servitization aligns the interests of supplier, customer and indeed the wider world.
IoT is Servitization
It is interesting to note how intrinsic IoT is to Servitization, indeed the two are almost synonymous. It is hard to do Servitization without IoT, e.g. to sell your car-as-a-service you need a means to remotely unlock your car fleet and measure its use and availability. And in the other direction, as companies add connectivity to their products they find, sometimes to their apparent surprise, that doing so turns them into a service provider, because they must deliver the service which makes the connected product connected. Since this costs money, they therefore need an ongoing service business model, if only to cover those costs. It’s then a short leap to consider possible upsides of this ongoing connection which could make the service profitable in its own right.
Connected Device business models 101
While it is not the purpose of this paper to explore possible IoT business models in detail, a quick scamper through some obvious models helps to illustrate the wide range of options. These models are certainly not unique to IoT, though the application of some of them to physical products is quite novel.
- Product: The device is sold for a one-off fee. Any costs of ongoing service, e.g. connectivity and cloud service, must be bundled in that fee, accounting for the expected product lifetime.
- Service: The device is bought for a regular fee, perhaps with a contract lock-in to ensure recouping of the hardware cost. The big advantage for the customer is turning Cap-Ex into Op-Ex.
- Pay-as-you-go: Similar to service, but with an explicit understanding that service costs are paid as they are incurred, probably using a cost-plus model. It may be necessary to front-load some kind of product fee to ensure that the supplier isn’t out of pocket. Both PAYG and Service models can be offered with a “Freemium” policy, where a basic level of service is initially free, as a teaser, with access to advanced features requiring a PAYG/Service fee…
To view the full whitepaper, please click here.
DevicePilot will also be exhibiting at the IoT Tech Expo Global 2017, in London’s Olympia on the 23-24th January. The exhibition is free to attend, you simply need to register for a Free Expo Pass. Register for a free pass here.
(c) istockphoto/ Warchi