The following is an excerpt from The Amazon Way on IoT by author John Rossman. This section from chapter seven describes the outcome-based business model.
Principle 7: The Outcome-Based Business Model
I've worked in the project-management business essentially my entire career, leading teams of people to accomplish focused, specific objectives driven by a business opportunity. Whether at Amazon or in my consulting practice, solving problems and launching new products or capabilities can be incredibly energizing.
Along the way, I've learned that my favorite word in the English language is "done." It's especially gratifying when it's preceded or followed by the word "well." "Well done" is a powerful phrase. Something is complete; it's packaged; it meets expectations; it's independent; and you get to move on to the next item. "Well done'" is what my clients hire me for.
But there is something even more important, and that is the intended result of "done" -- an outcome.
Outcome-based models transition companies from selling a product or service through a transaction to providing what the customer is truly seeking -- an outcome.
What exactly does that mean? If you're a music lover, you care less about the specifics of the machine playing your music than you do about its outcome -- an endless selection of high-quality music in your pocket.
If you need transportation, you care less about whether or not you own your specific vehicle than about the outcome of owning that vehicle -- that you have affordable, reliable transportation whenever you need it.
Lastly, if you're a small business owner, you probably don't feel particularly attached to the idea of owning a data center and all of the employees and infrastructure providing the technology infrastructure. You do want highly scalable computer power that you pay for only when you use it.
Welcome to the outcome-based economy.
The Amazon Way on IoT
Author: John Rossman
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Principle 7: Connected devices facilitate the creation of outcome-based businesses, an innovative model in which customers pay for the results a product or service provides rather than the product or service itself, shifting ownership, effectiveness, and maintenance responsibilities back to the provider and aligning customer and provider interests.
In this chapter, I'll explain how the Internet of Things facilitates outcome-based business models. We'll also explore the differences between the three types of outcome-based business models -- self-service monitoring products, subscription, and as-a-service. I'll also explain how the Internet of Things should be integrated with each and explore whether an outcome-based model might be right for you.
Outcome-based business models, also frequently referred to as "as-a-service" models, are a relatively recent addition to the business landscape. That's not because they're complicated or advanced (though they are. From an operational perspective, it's much more complicated to own and service a product than just to sell it). It's because it wasn't until the widespread arrival of the Internet that they became viable.
Careful observers of outcome-based models will notice several variations. There are self-monitoring services, which replenish themselves automatically; subscription models, which charge a regular, generally time-based fee; and as-a-service businesses, which provide services specially tailored to your individual and dynamic needs.
Being a provider of outcome-based capabilities can increase your profits, improve your relationships with your customers, and increase customer loyalty. But like a platform business, they're not for everybody. Making the switch to an outcome-based model is a complex transformation best suited to companies with specific goals and capabilities.
Outcome-Based Model 1: Self-Monitoring Products
"The moment of running out is a really bad moment for consumers," a spokesperson for Brita jabs in an ad promoting the company's automatically replenishing water filters. Brita is a great example of our first outcome-based model -- self-monitoring products. Earlier in the book, we talked about Brita's Infinity Smart Water Pitcher, which uses embedded sensors to automatically order fresh filters through Amazon's Dash Replenishment system.
Working with Amazon Dash Replenishment, companies like Brita, Clorox, and others are providing automatic replenishments, service reminders, and other event-driven product-to-company scenarios. For busy customers, this is a godsend: no more trying to remember when you last replaced your Brita filter or whether you were supposed to pick one up at the store. The product not only monitors the situation but takes the next steps in ordering the part or service.
If self-service business models allow customers to interact with you on their own terms, then self-monitoring products are the next generation. They transcend the need for a customer to manage or even interact at all. And they assure that the product -- whether that's a Brita filter or your car's oil filter -- is always fresh, working, and usable.
Replacing human memory or involvement with sensor-based measurement and reordering is one of the biggest opportunities that the Internet of Things creates for brands and manufacturers. But companies that choose to adopt this model will also face some sticky decisions.
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Let's say, for example, you're a washing-machine manufacturer, and you decide to add sensors into your product that automatically alert your company whenever the machine needs servicing. You, as the manufacturer, will automatically schedule and send an in-house repairperson to deal with any needed part replacements or machine failures. The customers, for their part, will automatically be charged for needed repairs.
That's great news for you -- you just picked up another source of revenue for your business. It's also great news for the customers -- they don't have to guess about what's wrong with their washing machine or deal with unforeseen outages.
But it's not great news for the network of preferred distributors and repair people that used to install and service your washing machines. How do you decide who owns the customer relationship and ongoing revenue opportunity in these cases? How do you make a transition to this model over time?
Businesses that choose to make the switch should be aware that disruption, breaking traditions, reorganization, and structural changes will be a part of the fun.
John Rossman is the author of The Amazon Way on IoT: 10 Principles from the World’s Leading Internet of Things Strategies and a managing director at Alvarez and Marsal, a global professional services firm. Mr. Rossman is an expert at crafting and assisting clients implement innovative and digital business models and capabilities. He is a sought after speaker on creating a culture of operational excellence and innovation. Prior to A&M, John was an executive at Amazon, where he launched the third-party selling platform and ran the merchant services business. Read Mr. Rossman’s blog or email him.