It’s been a long time since the manufacturing industry has seen something as powerfully transformative as the internet of things. According to Gartner, by 2020 there will be about 20.8 billion IoT devices in circulation. IoT is catching on fast and businesses all want a piece of the pie. However, manufacturers and IoT companies need to shift their business models in order to truly reap the benefits of the IoT craze. This involves adopting a more software-centric approach, which means manufacturers must redesign products from fixed-function, disconnected devices to flexible, seamlessly connected systems.
What is a software-centric business model?
When it comes down to it, simply selling more devices will not produce the profit spikes companies are looking for when entering the internet of things market. Manufacturers must start thinking and acting like software companies to drive significant growth. A software-centric business model is all about leveraging the software applications built into the products to reduce manufacturing costs, increase product innovation and capture new revenue streams. Device manufacturers should adopt licensing and entitlement management solutions to control the product functionality, features and capacities of these internet-connected devices.
For example, say a telecommunications company develops a connected video surveillance camera with 10 particular features. Using software licensing, the company only needs to manufacture one model. It can use software licensing to turn on features one, two and three and sell that as the basic model. Then, it can turn on features four, five and six and sell that model as the premium model, and so forth. Before, this would have required the company to have multiple manufacturing supply chains, but with IoT and software licensing, it can be reduced to a single supply chain.
This will help IoT companies better compete in new and current markets, while speeding up time to market for new products, feature combinations and product enhancements.
How does software monetization improve the bottom line?
Using automated licensing and entitlement management systems to monetize IoT devices can improve profits in a number of ways. For starters, it can reduce manufacturing and supply chain costs. As noted in the above example, companies cut down on the number of models they need to produce by controlling features, capacity, configurations and throughput via software licensing and entitlement management. This flexibility in manufacturing means producers, distributors and resellers need fewer inventories, further streamlining the supply chain.
Software monetization also lets device makers uncover new markets and revenue streams. Manufacturers can offer product enhancements through software updates and charge for the enhancement based on a software maintenance and update model. This opens up opportunities to charge for new levels of software support while also creating a better customer experience. Since software allows for product flexibility, IoT companies can easily and quickly package and price their devices to address new, emerging or niche markets that would have previously been impractical to target due to costs. IoT devices also have the ability to gather massive amounts of data, which can be analyzed and used to identify further opportunities.
Lastly, software monetization can extend product life. Since device functionality is managed and controlled using software, rather than being hard-coded into the device’s physical components, it’s easy to upgrade and enhance products using software commands via the internet. This allows customers to derive more value from devices over time with minimal disruption.
Business considerations when shifting models
When moving to a software-centric business model, IoT device manufacturers should take several factors into consideration. First and foremost, there needs to be business buy-in for the transformation. This needs to take place across the business, not just within engineering and product management. In order to get buy-in across the company, there should be an understanding of the traditional software licensing methodology and its proven approaches. Only then can employees envision how this can be leveraged in the IoT industry.
Companies must also take the steps to determine the appropriate software license compliance policies and enforcement mechanisms among the spectrum of available options and anticipate the flexibility needed to make changes as business conditions change. Additionally, there needs to be an understanding of the differences between delivering hardware and digital goods and the software value lifecycle. The software value lifecycle is vastly different than that of one-off hardware transactions as it’s an ongoing process and is increasingly subscription based.
IoT companies then need to create the business processes needed to support the value lifecycle. How can software be leveraged to continuously offer new and improved features and how can the business support continuous innovation? Companies should continuously fine-tune their strategies for product development, delivery and execution to optimize revenue and margins.
By leveraging software licensing and entitlement management, manufacturers can take advantage of opportunities for faster innovation, improved and more personalized offerings and new revenue streams. A software-centric business model allows for the flexibility and agility needed to thrive in the fast-moving IoT market.
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