8 IoT Business Models for Connected Product Strategy

An effective IoT business model delivers added value to customers and allows seamless product monetization.

12 May, 2022

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Pixabay

Over the past few years, thousands of IoT products have been introduced to the market. An overwhelming 61% of the IoT Analytics survey participants claim to have achieved a clear competitive advantage with their IoT solutions. 

Yet, when it comes to connected product development, many companies find it challenging to build an achievable roadmap for their product commercialization. Choosing the wrong business model for IoT product strategy can result in lost revenues, undermine brand loyalty and cause other implications for the connected product scalability and future evolution.

An effective IoT business model delivers added value to customers and allows seamless product monetization. 

This article will explore the top IoT business models that will continue to gain momentum during 2022.

What's an IoT Business Model?

Before diving in, let’s take a moment to define the IoT business model.

According to DanielElizalde.com, “a business model describes the rationale for how an organization creates, delivers, and captures value.”

This definition illustrates the responsibility that product managers have to deliver value-driven products. In the IoT world, it’s common to see products that simply add sensors to an existing product, display data on a dashboard, and call it “the value.” In fact, adding some IoT features to mainstream tech products provides users with short-term benefits but doesn’t help generate actual value in the long run.

As such, an IoT business model can be defined as one that focuses on capturing and delivering long-term innovative and differentiated value while leveraging the unique characteristic of IoT solutions, including complex third-party integrations, mobility, and automation, data collection, processing, and analytics, Cloud-neutral architectures, etc.

IoT product development and monetization

The IoT business model is closely intertwined with two related areas: product development and product commercialization. Therefore, we will divide our analysis into three parts:

  • IoT product development (e.g., feature development and time to market);
  • IoT business model development ( market positioning, value chain, and revenue model);
  • IoT product commercialization (e.g., the right price level determination, incentive measures for adoption, and key performance indicators to measure success)

IoT product development

Insights from the IoT Analytics survey

The average connected IoT product takes 23 months to go from an idea to the first paying customer. However, there is a big difference in the average total time it takes from start to first paying customers. The fastest implementations usually happen eight months after the project kickoff, while the longest can take up to 76 months.

Several factors make it difficult to bring smart connected IoT products to market. In particular, larger companies must spend more time aligning multiple departments and processes. According to the analysis by IoT Analytics, a typical IoT product implementation “mainly affects” 6 departments (primarily IT and R&D but also HR/Recruitment, Finance, Procurement, and more).

IT and R&D efforts are driven by the many software features and services that companies build into their IoT-enabled products. The average IoT product has 12 new features. The vast majority of companies – 91% – offer interactive dashboards alongside their IoT solutions for their customers. Inventory management and workflow optimization are two popular features.

IoT business model development

Insights from the IoT Analytics survey

Nearly three-quarters of the survey respondents said they developed a completely new or significantly revised product that did not previously exist in the same form.

The survey also found that 52% of IoT business models are created for “diversification” purposes while only 11% – are for “market penetration”. 

IoT equipment is monetized today in more than 95% of all cases. However, in most cases, equipment is only part of the many elements of monetization. Most survey participants expect services (both traditional and digital) and data to become significantly more important in the next two years. While hardware monetization loses traction these days, IoT business models based on time, usage, and success are expected to become increasingly important.

IoT product commercialization

Insights from the IoT Analytics survey

Successful commercialization of an IoT solution begins long before a product launch.

Our rinf.tech’s internal analysis shows huge differences in customer adoption rates across regions, with some features being clearly more popular with customers than others. The two features that are in the top quartile in terms of customer adoption are “Health Monitoring” and “Predictive Maintenance,” – an observation that aligns well with the findings of the IoT Analytics survey.

The three biggest challenges/hurdles reported by customers when implementing new IoT-based digital services and software include but aren’t limited to:

  • IT/data security issues, 
  • Unclear solution benefits, and
  • Challenges of product integration into legacy systems.

 It is not surprising that many participants in the study emphasized the importance of training their in-house and/or dedicated offshore/nearshore teams, especially front-line staff.

IoT Business Models 

SaaS/Subscription-based model

Since IoT products are continuously connected to your internal or external customers, you can use this opportunity to develop a business model with a steady income. Instead of a one-time sale, you can offer a subscription model where your customers pay a commission in exchange for lasting value.

The subscription model allows your IoT product to realize many of the benefits that are only available to software products. Essentially, you envision an “as a service” business model for a system that includes both software and hardware.

Using SaaS models as a benchmark for your IoT business model, you can explore creative ways to monetize your product with a monthly subscription and provide paid upgrades or even freemium if your product monetization strategy supports it. 

Another advantage of this IoT business model is that it allows your company to develop an active relationship with your customer. Previously, hardware manufacturers “threw their products over the wall,” meaning they rarely interacted with their customers again once a sale was completed.

IoT products break down this barrier. As your device collects more data about your customer’s environment, you will be able to learn more about your customer, generate insights, and provide more valuable features tailored to their specific needs.

Typical IoT applications that use a subscription-based model include Monitoring-as-a-Service (MaaS) and Preventive-Maintenance-as-a-Service (PMaaS).

An excellent example of an innovative IoT solution that’s ideally suited for both the MaaS and PMaaS models is an AR-based digital twin that can enable remote monitoring of any physical object and real-time data transfer to the Cloud.

Outcome-based model

The idea is that customers pay for the result (or benefit) that the product provides, not for the product itself.

For example, think of a manufacturer of water pumps. In the past, they sold water pumps and measured success by hitting a quota of a certain number of pump sales per quarter.

But let’s be realistic. Customers don’t want to buy a pump for the sake of having a pump. They seek to move water from point A to point B to cool something down, water plants, or power a generator. Moving water from one place to another is a real need for water pump manufacturer customers.

Imagine a sophisticated pump manufacturer building a next-generation pump that controls the amount of water it pumps. Now the manufacturer can speak to the customer in the common language: the amount of water pumped instead of the number of pumps sold. In this case, the customer does not buy the pump. Instead, they pay a monthly variable fee for the amount of water they receive. They pay for the outcome, which is the source of water.

Your company can get creative when implementing the outcome-driven IoT business model. For instance, the manufacturer can decide whether to rent or sell pumps. If the client is interested in the result (water source), they may not want to have a depreciating asset (pump) on their balance sheet. Therefore, if they pay for the water source rather than the pump itself, this may reduce the customer’s objection to purchasing expensive equipment.

Razorblade model

Your IoT product may complement the sale of other products. In this model, the goal is to get the product into the customer’s hands as soon as possible to sell other products. This business model is sometimes referred to as the “razorblade” model, where the goal is to sell more and more disposable products.

This business model can be very profitable for IoT products whose consumables need to be constantly replaced. The customer must never run out of consumables for these types of products. Otherwise, the product loses its value.

The problem with manufacturers of these products is that there can be a gap between the time the supplies run out and the time the customer reorders them. Sometimes this gap becomes permanent and the customer never buys again. But what if the product itself could reorder consumables whenever it needed them?

This would provide value for the customer AND the supplier. So the goal of this IoT business model is to turn a “regular” product into an IoT product to automatically reorder its consumables before they run out.

Here are some examples of products using this IoT business model:

  • Connected HP Printers automatically reorder ink cartridges when they’re short of them.
  • Amazon Dash buttons are preconfigured to order a specific product, such as detergent or toilet paper. When you press the button, it reorders the item from Amazon, and it sends it automatically to your door within a few days.

Amazon’s goal is to provide “contextual shopping,” which means you can reorder an item exactly when you need it. With this smart connected product, Amazon lowers the barriers to reordering any product you need. 

In this case, the Amazon Dash is not a source of income; it is simply a means to sell other products in the Amazon catalog.

While every example above is for a consumer product, the razorblade IoT business model is also valuable for enterprise or industrial products. 

Essentially, any IoT product that’s meant to reorder parts is a candidate for this IoT business model. Whether you sell industrial hoses or tires, this IoT business model can reduce the friction your customers have when purchasing your product and allow you to improve your customer experience, ultimately differentiating your offering.

Pay-Per-Usage Model

Fitting your IoT devices with active sensors means you can regularly monitor your customers’ environment to see how often they use your product or service. This allows you to use a pay-as-you-go model where you charge them for the time they actively interact with your product.

Many car insurance companies turn to this model by offering customers a mileage-based insurance plan. People don’t pay for an IoT device installed in their car that tracks their mileage and driving habits; they pay for lower rates based on the data they generate on the device.

Rolls-Royce has been doing this for years with its TotalCare program, where airlines charge a flat fee per flight hour to use the engines on their aircraft. The car-making giant retains ownership of the engines and actively extends them with IoT sensors that send real-time telemetry to their monitoring sensors.

Asset Sharing Model

The big problem when buying expensive equipment and hardware is whether the customer will be able to use the equipment on a full scale. This is where the idea of asset sharing comes into play.

We already see this IoT business model in the car- or bike-sharing companies. Think about it this way: why should I pay the total price for a vehicle if it is parked outside my house 90% of the time? Can I just pay for the number of cars I use?

The Internet of Things can solve this problem, and we have already started to see IoT solutions embedded in autonomous vehicles, shared drones, virtual power plants, etc.

This IoT business model is based on selling your extra capacity back to the market. The goal is to maximize the use of your IoT product by multiple clients. This way, each customer pays a reduced price and you can get to market faster than having one customer pay for your entire product.

One of our clients uses this IoT business model when deploying smart batteries for commercial buildings. The batteries provide energy to the building, and in case of extra capacity, the energy is sold back to the electric grid.

In this particular case, the batteries are a shared asset between the building and the electric grid. 

Asset tracking model

Connected devices in the supply chain help businesses identify, control, and track assets in real-time. This helps them protect field assets from loss or theft while monitoring for maintenance purposes. With the data generated by connected devices, businesses can regularly check their status and know when to fix or replace assets before they fail. This business model can also track the supply chain to identify inefficiencies, streamline workflows, and improve usage transparency.

One of our clients – a global manufacturer of smart and rugged devices – turned to rinf.tech for building an IoT device solution and a tablet application to identify water leakage in water pipe areas of the fields.

Using our custom-built IoT solution, a technician can walk along the water pipes with the tablet pointed to the ground to gather data automatically pushed to the cloud infrastructure and aggregated into a detailed report. The app uses thermal sensors to analyze the ground temperature and record all temperature deviations to find a water leakage area.

This thermal vision solution has eventually helped the client reduce 50% of costs due to the proper and timely water leakage areas detection.

Compliance Model

Compliance monitoring is vital to many industries and requires a lot of time, effort, and money. Significant audits may be required for safety, environmental, or legal reasons depending on the industry. Deploying IoT devices in the field can help reduce compliance costs by allowing your business to respond faster to changes before they become a problem.

The IBM Vegetation Management platform combines weather, satellite, and IoT data to help utilities make better decisions. Vegetation-related failures are some of the leading causes of failures worldwide, which affect customer satisfaction and system reliability. Compliance is critical in such a highly regulated industry. The IBM platform helps utilities track assets in real-time and offers up-to-date information to help with

  • work planning,
  • budget allocation,  
  • hazard reporting, regulatory reporting, and so on.

Data-Driven Model

The popular IoT business model is a data-driven model based on data generated by your devices. You create an IoT product that provides value to customers and collects data that you can use for other products or sell to a third party. This model works well if you have a lot of data collection devices and as long as you have notified customers that you are using their data.

There are many ways to use this business model beyond the classic online shopping model, where consumers get product suggestions based on their browsing or purchase history. For example, in office buildings, energy-efficient devices can track energy consumption and be used by homeowners to control HVAC systems and energy use throughout the day. This data can also be sold to utilities for forecasting purposes as they manage the local power grid.

The value of the Internet of Things consists in the insights you can generate from the data you collect. The question is, who benefits from these insights?

Think about companies like Facebook or LinkedIn. They collect a huge amount of data from all of us, often for free. While they provide us, the user, with value for providing this data, the real value is provided to advertisers and other third-party companies who use the data to promote their products and services.

In this case, LinkedIn or Facebook are data collection tools to help advertisers streamline and improve their digital campaigns. 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 collect valuable data that can then be sold to a third party. With this approach, you can offer your IoT device for free to eliminate for users the hassle of purchasing it. The goal is to deploy as many data collection devices as possible. You want to create a network effect. The more devices you have, the more attractive your data value proposition will become to third parties.

There are many examples of products using this IoT business model. Think about energy-efficient devices installed in buildings to control their energy consumption. The building manager benefits from this data, as well as utilities or other aggregators that can pay a hefty sum to get aggregated data from thousands of buildings.

The same is true for devices that monitor your driving habits. They give you some interesting insights, but insurance companies get the most value because they can understand the driving patterns of thousands of people.

This model can be a linear extension of your core business, meaning you can start by meeting your end user’s needs and monetizing their data afterward.

In conclusion, there are many ways to incorporate IoT into your existing business model. A lot of businesses creatively combine the two or more models to diversify their revenue streams and maximize opportunities.

12 May, 2022

More about rinf.tech

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rinf.tech is a technology solutions company that draws on the Engineering Excellence principle, knowledge-based capabilities, and robust R&D to future-proof emerging technologies.

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