I recently attended a very popular IoT conference in Silicon Valley. During a presentation, the keynote speaker asked the audience, “Who here is building a connected product?” About two-thirds of the audience raised their hand. Then he asked, “Who is making money with IoT today?” No hands went up.
This little engagement trick reinforced the fact that many companies are jumping into building IoT products without a business plan. They are able to build the product from a technology perspective, but they are not able to make money. And as you know, that’s simply not sustainable.
What is an IoT Business Model, Anyway?
Before diving in, let’s take a moment to define an IoT business model. In his book “Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers” Alexander Osterwalder defines a business model as:
“A business model describes the rationale of how an organization creates, delivers, and captures value.”
This definition illustrates the responsibility Product Managers have to deliver products that focus on value. In the IoT world, it’s very common to see products that simply add sensors to an existing product, display the data on a dashboard, and call it “value.” That should explain why companies are not getting traction in the market. The value is not really there.
I define an IoT business model as having two parts:
An IoT business model:
- Focuses on capturing and delivering value.
- Leverages the unique characteristic of IoT products of having 24/7 connectivity to your customer’s environment to produce innovative and differentiated value.
Now that we have a definition, let’s look at seven of the top IoT business models (in no particular order).
IoT Business Model #1: Subscription Model
Since IoT products have 24/7 connection to your customer, you can leverage that connectivity to develop a recurring-revenue business model. Now instead of having a one-time sale, you can offer a subscription model in which your customer pays a fee in return for continuous value.
A subscription model enables your IoT product to implement many of the benefits available to software-only products. Basically, you are introducing an “as a Service” business model for a system that includes both software and hardware.
By using SaaS models as a reference for your IoT business model, you can explore creative ways to monetize your product, not only with a monthly subscription, but also by providing paid upgrades or even implementing a “freemium” model, if your strategy supports it.
Another benefit of this IoT business model is that it empowers your company to foster an active relationship with your customer. In the past, hardware manufacturers used to “throw their products over a wall”, meaning that once they completed the sale, they rarely interacted with their customer again.
IoT products break down that barrier. As your device gathers more data in your customer’s surroundings, you will be able to learn more about your customer and provide more valuable features tailored to their specific needs.
Some common IoT applications using the subscription model include “monitoring as a service” and “predictive maintenance as a service”.
Featured article: A Product Manager’s Framework for the Internet of Things
IoT Business Model #2: Outcome-Based Model
The outcome-based IoT business model is an example of an innovative approach enabled by IoT products. The idea is for customers to pay for the outcome (or benefit) the product provides, as opposed to the product itself.
Remember the saying, “People don’t buy drills, they buy holes?” Well, the outcome-based model works in the same way. Customers pay for the “holes,” as opposed to paying for the drill.
For example, think of a water pump manufacturer. In the past, their business revolved around selling pumps, and they measured success by meeting quota on a certain number of pumps per quarter.
But let’s be real. Customers are not looking to buy a pump. They are looking to move water from point A to point B for some purpose. They need water to cool another system, to water plants, or to power a generator. Moving water from point A to point B is the real need of this customer.
Imagine a sophisticated pump manufacturer who creates a next-generation pump that monitors the amount of water it pumps. The manufacturer can now talk to the customer in the language they care about: the amount of water pumped (similar to “holes drilled”). In this case, the customer is not buying a pump. Instead, they are paying a variable fee per month for the amount of water they source. They are paying for the outcome, which is water sourced.
Your company can be creative when implementing an outcome-based IoT business model. For example, you (the manufacturer) can decide whether you’ll lease or sell the pumps. If the customer is interested in the outcome (water sourced), then they might not want to have a depreciating asset (the pump) on their balance sheet. Therefore, having them pay for the water sourced, as opposed to paying for the pump itself can reduce the customer’s objection to buying expensive equipment.
Recommended article: What is an IoT Platform?
IoT Business Model #3: Asset-Sharing Model
A big concern when buying expensive equipment is whether the customer will be able to utilize the equipment to its maximum capacity. This is where the idea of sharing assets comes into play.
We are starting to see this IoT business model already with car-sharing or bike-sharing companies. Think about it like this: why do I need to pay for the full price of a car if it’s going to be parked outside my house 90% of the time. Could I just pay for the amount of car I use?
IoT has the potential to solve this problem, and we are already starting to see solutions with self-driving cars, virtual power plants, shared drones, etc.
This IoT business model revolves around selling your extra capacity back into the market. The goal is to maximize the utilization of your IoT product across multiple customers. That way, each customer pays a reduced price and you are able to get faster market penetration, compared to when a single customer has to pay for your complete product.
I had the opportunity to work within this model, deploying smart batteries for commercial buildings at Stem, Inc. The batteries provided energy to the building, and if there was extra capacity, we sold that energy back to the Grid.
In this IoT business model, the batteries are a shared asset between the building and the Electric Grid. This approach allowed our customers to get our systems at a reduced price since they didn’t have to carry the burden of paying for the whole system, whether they use the extra capacity or not.
You might be thinking, “Why not just install a smaller battery?” That’s a fair question. Sometimes, they don’t make smaller batteries (or smaller pumps, or turbines, etc.). Most of these systems are very complex, so you can’t get custom sizes. You can either throw away that extra capacity or figure out a way to monetize it. That’s where the intelligence built into IoT products can help you.
To learn more about this innovative IoT business case, I highly recommend listening to my interview with Stem’s CTO, Larsh Johnson.
IoT Business Model #4: The “Razor Blade” Model
Your IoT product can be designed for selling other products. In this model, you might sell the IoT product at cost or even at a loss since the goal is to get the product in the customer’s hands, so you can start selling your other products. This business model is sometimes called the “Razor Blade” model, where the goal is to sell more and more disposable razors, and therefore, the razor handle is usually sold at cost or even given away for free.
This business model can be very lucrative for products that have consumables needing constant replacement. For these types of products, it is very important that the customer never run out of the consumable. Otherwise, the product loses its value proposition.
You see, the challenge for manufacturers of these products is that there might be a gap between when the consumable runs out and when the customer reorders it. Sometimes that gap becomes permanent, and the customer never buys again. But what if the product itself could reorder its consumables whenever it needs them?
That would provide value for the customer AND for the vendor. Therefore, the goal of this IoT business model is to turn a “normal” product into an IoT product to automatically reorder its consumable before it runs out.
Here are two examples of products using this IoT business model:
- Brita’s Infinity Water Pitcher: Automatically reorders its filters so you can continue using the pitcher.
- HP connected printers: Automatically reorder ink cartridges.
Amazon also uses this model with their Amazon Dash Buttons. These “connected buttons” come pre-configured to order a specific product, say detergent or toilet paper. When you press the button, it re-orders that item from Amazon and it arrives at your door within a few days.
Amazon’s goal is to provide “contextual shopping”, meaning the ability to reorder a product right when you need it. By introducing this clever connected product, Amazon is reducing the barriers for you to re-order any product you need. In this case, the Amazon Dash Button is not a revenue maker in itself, it is just a vehicle to sell other products in Amazon’s catalog.
Although each example above is a consumer product, the “razor blade” IoT business model is also valuable for enterprise or industrial products. Basically, any product that needs to reorder parts is a candidate for this IoT business model. Whether you sell industrial hoses, bearings, tires, etc., this IoT business model can reduce your customer’s friction when buying your product and can enable you to provide a better experience to your customers, ultimately differentiating your offer.
IoT Business Model #5: Monetize Your IoT Data
The value of the Internet of Things is in the insights you can derive from the data you collect. The question is, who benefits from those insights?
Think about companies like LinkedIn or Facebook. They collect a huge amount of data from all of us (often for free) and although they provide us (the user) with value for providing that data, the real value is provided to advertisers and other third party companies that use the data to promote their products and services.
In this case, LinkedIn or Facebook are tools for collecting data to offer it to advertisers. That’s how they make money.
The same business model works in IoT. You can build your product to provide value to the end user and also to collect valuable data you can then sell to a third party. In this approach, you can offer your IoT device at no cost to eliminate the buying friction for the end user. 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 out there, the more attractive your data proposition will become to third parties.
There are many examples of products leveraging this IoT business model. Think of energy efficiency devices installed in buildings to monitor their energy consumption. The building manager benefits from this data, but utilities or other aggregators can pay a hefty sum to receive aggregated data from thousands of buildings.
The same is true with devices that monitor your driving habits. They provide you with some interesting insights, but insurance companies get the most value, as they are able to understand driving patterns for thousands of people.
This model can be a line extension of your core business, meaning you can start by solving the needs of your end user, and later you can decide to branch out into monetizing their data. These two models don’t conflict with each other as long as you make your customers aware of how their data will be used and make sure to safeguard their privacy.
Keep in mind that sharing aggregated data with other companies is not just an add-on to your existing IoT solution. It’s a full product that requires understanding your third party users, assessing the impact on your infrastructure, etc. I recommend using the IoT Decision Framework to see how this new functionality will impact your existing product.
By the way, if you plan to open APIs for your customers to access data, then it’s important that you think of that API as its own product and ensure you’ll provide a good developer experience.
IoT Business Model #6: Pay-Per-Usage
Having sensors on your hardware device means you can monitor your customer’s environment and how much they use your product. This opens the door to an innovative IoT business model where you charge your customer for the amount of time they are actively interacting 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 produced by the IoT device to track usage.
Here’s a good example of this IoT business model: Metromile—Pay-per-mile insurance
Metromile is a San Francisco-based insurance company. Their goal was to create an innovative pricing structure for their car insurance product while solving the challenge of San Francisco residents who don’t use their car very often. The solution was to create an IoT product that tracks how much people use their car.
Using this data, they can calculate risk and therefore provide a per-mile price for the insurance. Notice that in this example, the customer is not paying for the usage of the IoT product itself (an ODBC adapter). Instead, customers pay for the usage of the device monitored by the IoT product (the car).
IoT Business Model #7: Offer a Service
You can use an IoT product to offer a new service (or enhance an existing service) to your customers. In this case, I’m not talking about an “as a service” type model. Here, I explicitly mean providing a service, with real people involved.
In this IoT business model, the IoT product can be an enabler and differentiator for your company to sell a service. Here are a few examples of this IoT business model:
- Use an IoT product to monitor machinery, predict maintenance, and then sell a maintenance contract.
- Install IoT devices in a smart building to measure energy consumption. Then sell an energy audit and energy optimization services.
- Implement IoT devices in a manufacturing floor to measure efficiency and throughput. Sell consulting services to optimize your customer’s process.
As you can see, there are endless possibilities of how you can use IoT products to gather data, and then provide a service using the insights you collected. Keep in mind that you can combine this IoT business model with some of the previous ones to increase your profits. For example, you can sell the hardware, monetize the data, and then offer a service based on insights.
To learn more about the benefits and pitfalls of this approach, I recommend listening to my podcast interview with Cesar Games, Global Head of Integration Services at National Instruments.
A word of caution for product companies who are new at providing services: running a services operation is very different from a product operation. Make sure your company has the right resources, know-how, and willingness to expand into a services offering. You need to go at it with eyes wide open.
How to Get Started
Designing a new IoT business model can be exciting, but as Product Leaders, we need to balance the opportunity with the risks. Remember that a business model impacts every part of your organization, including Sales, Marketing, Finance, Supply Chain, Engineering, etc. Therefore, you should start small and only roll your new business model out once you know it has potential.
Your IoT business model initiative will have higher chances of success if you start with research. Make sure you understand your customer’s pains, and the friction they experience when buying your product today. Implementing a new IoT business model is not an end in itself. It should be a way to address your customer’s purchasing concerns to make it easier for them to adopt your product and for you to become more profitable.
You can start by creating a hypothesis of your customer’s biggest roadblocks when adopting your product. Then determine whether any of these seven IoT business models can help you remove those roadblocks.
Creating that hypothesis implies you already know your customers and their pain across the IoT Technology Stack. If you need help getting started with that part, I recommend reviewing my IoT Decision Framework.
You’ll need to start by completing the UX and Data Decision Areas since the information you gather there will inform your decisions in the Business Decision Area (where you’ll create your IoT business model).
Remember, this is an iterative process of discovery. As with anything else in Product Management, you’ll need to work closely with customers to understand their pains, so you can design products and business models that best fit their needs.
The Bottom Line
As a Product Manager, it is important to understand how your product adds value to your customer and to your company. You must have a clear strategy for how to monetize your product. The good news is that IoT products provide many new and innovative business models for monetization and adoption of your product.