This article is the third in a six-part series about monetizing IoT.
As enterprises find themselves increasingly incentivized to provide IoT products and services, they also find themselves in search of monetization models more naturally congruent with their new IoT offerings. Many of these enterprises are established OEMs that have historically sold physical hardware products (or “things,” the T in IoT), but have now added software content and connectivity in pursuit of richer functionality. Thermostats are an example of a product type that has witnessed this transformation from pure hardware to incorporating IoT software and connectivity, and which has empowered manufacturers to make the shift from delivering devices to selling functions or capacity. At the same time, newer IoT enterprises may have launched with a recurring revenue model already in mind. The common question that enterprises offering IoT must answer is this: What is the most advantageous monetization model for my particular IoT product software?
There are three main areas to consider about your IoT monetization strategy: the underlying monetization revenue model, the metric and the product structure. In this article, I’ll focus on ways to develop healthy revenue models that capture new customers as well as have high renewal rates.
The monetization model you ought to choose will depend in large part on what you have to offer. The full IoT stack spans IoT devices, IoT gateways managing those devices, data collected in the cloud, and cloud analytics and control capabilities that orchestrate IoT systems and deliver insights. Each of these components represents an opportunity for monetization. Further, enterprises may be in the position of offering the entire stack as an end-to-end proposition.
Here are four popular monetization models, and how each may pertain to your own IoT offerings:
1. Perpetual model
This is the traditional model under which customers pay for a product once upfront, and then have a perpetual right to use the product (software), while assuming full responsibility for its upkeep. In an IoT context, this model could apply to the sale of physical devices or gateways, or IoT software that resides in any of those components. However, even in those areas, enterprises should be exploring available opportunities to create ongoing revenue streams. For example, enterprises can sell equipment using a perpetual model and increase their revenue by offering add-ons, such as additional software-enabled functions, maintenance or analytics, as additional purchases.
2. Subscription (‘as a service’) model
This is another familiar model, in which the customer buys a yearly or multiyear service subscription that includes the right to use the software, updates to new versions of software and support, rather than buying a perpetual right to use a product, along with the additional purchase of annual yearly maintenance. CFOs tend to like this model because it provides a predictable revenue stream that can be projected into the future. This revenue predictability has made the subscription model immensely popular in many markets outside IoT — countless businesses now offer subscriptions to services that periodically deliver a box of goods to your door, whether it’s prepared meals or razor blades or even underwear. Among IoT enterprises, the subscription model is most often used by providers of cloud analytics and control systems, as well as enterprises in position to provide the full IoT stack as a service. As mentioned above, this model is also useful to device and gateway manufacturers offering service-based add-ons.
3. Usage model
In this leading-edge monetization model, customers pay providers based on specified usage metrics and are invoiced periodically, e.g., annually, quarterly or monthly. The principle behind this model is that a customer pays for what they use. Similar to the subscription model, the usage model places the impetus to deliver value onto the producer. In order for this model to succeed, usage metrics must be carefully selected and should adhere to these principles: they must be simple, fair, scalable and measurable. The challenge is to determine metrics that fit this criteria and lead to relatively predictable revenue.
As an example of the usage monetization model in action, an IoT provider of data backup and cloud storage services charges customers based on the terabytes of storage they use each month. In another case, an IoT enterprise in the medical equipment field has achieved differentiation with a usage model that charges based on the number of tests performed monthly, rather than charging for provided medical devices themselves. To arrive at the correct metrics, enterprises will often begin exploring the usage model by experimenting with a small market segment, and prove out success before using this model on a wider basis.
4. Outcome model
The outcome-based monetization model is quite leading-edge and interesting — here providers aren’t selling products or services, they’re selling an outcome. Something like those law firm commercials that say, “We don’t get paid unless you see cash,” this model is about achieving a defined business result rather than delivering individual IoT components. The outcome model makes the most sense for enterprises offering the full IoT stack required to address specific business needs, so that the provider has the range of control necessary to take responsibility for the outcome.
For example, Rolls Royce offers jet engines via a program in which airliners pay not for the engines themselves, but for the number of hours their engines operate successfully. This allows airliner customers to avoid upfront costs and maintenance responsibilities, instead paying directly for what they actually need: working engines. At the same time, Rolls Royce’s jet engines are highly sophisticated IoT systems, equipped with arrays of sensors designed to drive effective preventative maintenance and optimize the product to meet outcome goals. In another example, Monsanto sells seeds and IoT sensors used to measure field conditions such as moisture, crop health and so forth. The company also offers outcome-based crop management, with success based on the percentage increase in crop yield achieved. In this situation, the more success Monsanto delivers for customers in the specific business result of crops produced, the more revenue it earns. These outcome-focused examples offer demonstrations of how enterprises are putting the entire IoT ecosystem to bear to solve business challenges in their entirety.
By comparing these monetization models and determining which is best suited to your specific IoT offerings, you can increase your revenue margins and introduce beneficial new products and features, while expanding customer relationships and delivering specific value that keeps your clients coming back for more.
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