The enablement of different business models
Joseph Turow, the Robert Lewis Shayon Professor of Communication at the Annenberg School for Communication at the University of Pennsylvania, said “Despite hacks and privacy issues, people will feel a need to keep connected, partly because companies will reward them for doing so (or make life difficult if they don’t)”.
This improved connectivity among Things and people has an immediate consequence on the evolution of the patterns of digital business models.
The following figure, from the whitepaper Business Models and the Internet of Things by the Bosch IoT Lab, shows the evolution of web technologies and what business models were enabled in the different phases:
Figure 1.2 – Evolution of web technologies
We are now fully in the Web 3.0 phase where the IoT requires a drastic shift of mindset in the creation and the capture of commercial value. The Business School of Harvard University spotted this change and highlighted a series of implications.
First of all, customers require their needs to be addressed in real time. The IoT even allows businesses to address emergent needs in a predictive manner.
The possibilities offered by the IoT change the product management processes during their life cycle. The obsolescence reduces and it happens over a longer time because new versions of a product are evaluated by considering aggregated information about usage, collected automatically from products themselves, and analyzed to identify the effective requirements. Furthermore, the proposed user experience is based expressly on the collaboration of the products with others, eventually manufactured by third parties.
This moves the value of the products in such a way that customers perceive more benefits in the personalization of the products and their features than in commodity advantages such as lower cost, higher quality, and immediate availability. Or, in the case of professional and industrial products, brand and ownership of the intellectual property.
The appreciation for the collaboration capabilities of IoT products also suggests manufacturers should invest resources in understanding how other ecosystems work and make money, with the aim of developing a certain level of compatibility, more so than making a big effort to leverage internal core competencies and existing resources and processes.
Once the features of the new version are identified and implemented, manufacturers can often update many products at the same time, and remotely over the air. This is one of the appealing services that can be offered as the intrinsic value of a product or a paid service for subscribers.
The increased possibility to offer additional services moves the path to profit in the business strategy. The new approach is the search for the optimal balance between immediate and recurrent revenues. Immediate revenues, related to the traditional core business, often require a lot of effort and large investments to scale the number of sold products. On the other hand, the activities required to establish and maintain a good service offering, based on IoT capabilities, guarantee recurrent revenues in time.
Business models enabled by the IoT
When you buy a mobile phone from one of the two or three main manufacturers, typically, you don’t pay the real value of the device itself, but the perceived value of the product. Many people are keen on spending more on a mobile that represents a status symbol, rather than on an anonymous model, even with the same features. The status symbol is a benefit perceived as product value.
In a similar way, we may calculate the price of an IoT solution on the benefits it provides, instead of its costs. For example, we may consider a smart building project for energy efficiency: the IoT system tracks and analyzes energy usage, automatically controls illumination in common areas, and allows the owner of a building to identify areas for improvement and reduce their energy costs.
According to this model, called outcome-based, a solution provider may propose the system for a percentage of the savings on the energy bills of the customer, plus the installation and removal costs. They maintain the property using their IoT hardware without selling it but, when they close the contract, they have created a source of recurrent revenue for a certain amount of time. At the end of the contract period, they remove and reuse the IoT products for another installation. In this way, the cost of the IoT hardware is an investment of the solution provider and, considering the product life cycle mentioned previously and the low level of wear of these devices, it can generate a good return.
Paying for the benefits provided doesn’t implicitly mean paying more than the value of the product, but it can still be convenient for both parties involved. This is the case with the pay-per-usage model. Going back to the smart irrigation example, farmers can then use the IoT application provided by the water company to water their crops, with charges based on the amount of water used. The goal is not to make money on the IoT device itself but to use the data produced by the nodes to track usage.
The asset-sharing model is a pay-per-usage model characterized by the fact that the asset monitored by the IoT nodes is shared among multiple customers. For example, in the last few years, many businesses have bought and rented electric scooters in many different cities in the world. The user enrolls on the provider’s platform and uses their mobile, connected to the internet, to start and stop the rental and enable the scooter accordingly. This is a very good example of an IoT application in the smart cities vertical: both the user’s mobile and the scooter are connected to, and interact through, the internet. In this case, the user pays for the benefit of riding in certain areas less than they would pay to buy their own scooter because they share the IoT product, the scooter, with the local community. The asset-sharing model is based on the concept of selling extra capacity to the market and solves the big concern that everyone has when buying expensive equipment: will I be able to utilize it to its maximum capacity?
When we talk about business models related to the sale of services, the subscription model is the most well known: the user doesn’t pay to own the solution, but they pay an amount regularly to use it. This model is usually adopted by companies offering smart home devices such as connected thermostats, security cameras, and smart locks. Customers pay a monthly or annual fee for access to the devices, as well as the ability to control and monitor them through a mobile app.
One type of IoT subscription business model with a growing trend in its adoption is asset tracking. The reduction in power consumption and dimensions, as well as the decreased dimensions and costs of IoT nodes, enable a progressive adoption to localize different assets they are attached to. In this case, the subscriber doesn’t pay for the IoT nodes but for regular access to the localization data and the movements of the assets.
The IoT supports the proposal of other kinds of services; for example, a predictive maintenance IoT solution enables the sales of a convenient maintenance service, where the contract is appealing to both the contractor and the customer. The contractor can keep their tariffs lower because they don’t need to schedule periodical visits to their customer: the system will inform them in advance to plan the intervention before it becomes urgent. At the same time, they can enlarge their customer base to justify the cost of the installed solutions.
A consultancy company can install an IoT solution to measure the performance of machinery in a production plant without stopping any machine because all data is collected by autonomous IoT nodes that don’t need interfaces to the existing plant. Data is used to measure the Overall Equipment Effectiveness (OEE) and suggest how to optimize the usage of the plant. In this case, the core business of the company is not the sale of IoT solutions, but the services deriving from the data collected by the IoT application.
The razor-blade business model in the IoT is similar to traditional models but with the added convenience and customization of IoT technology. The goal is to get the product in the customer’s hands, at cost or even less, to start selling your other products. The name comes from the company Gillette®, the inventor and first adopter: its main revenues come from the sale of the blades while razors are just the main source to bring about the sales of blades as one razor sold will generate multiple purchases of blades. In a similar way, HP® sells inkjet printers at a very low price with the aim of gaining revenues from the sale of the cartridges. The IoT can monitor the customer’s habits and suggest the optimal model for the consumable. It can also increase the probability of reordering because an order can be placed automatically by a device.
There are cases where businesses provide IoT applications with their hardware for free because its purpose is to monetize by collecting and reselling users’ data. This pertains to the situation involving driving habit monitoring devices. While these devices offer valuable insights to users, insurance companies derive significant benefits by analyzing driving patterns across a large number of individuals. Introducing this model can be seen as an expansion of your primary business, where you initially focus on addressing the needs of your end users and subsequently explore opportunities to generate revenue from their data. These two approaches can coexist harmoniously as long as you prioritize transparency with your customers regarding data usage and take necessary measures to safeguard their privacy.
In the preceding section, we have discussed what innovations and improvements end users benefit from due to smart products. The IoT has not only improved end users’ lifestyles but has also helped new business models to emerge, as well as helping industries to shift toward Industry 4.0, which helps industries run their production lines securely, quickly, and cost-effectively.
