IoT and the Business Models of the Future

a representation of business model

Business models make billionaires. When Bill Gates’ Microsoft suggested IBM purchase a non-exclusive license of their software instead of purchasing it outright, IBM accepted. IBM didn’t realize that new technology was shifting business models, so it thought the money was still to be made by selling hardware. Boy were they wrong.

Gates’ novel business model was only the beginning. Over the coming decades, software business models shifted even more dramatically. Even the “traditional” software business model that Gates participated in–selling software to mainstream customers, installed locally on their machines, for an up-front license fee–is now history.

Bill Gates

Salesforce became the fastest-growing enterprise software company largely due to its pioneering use of the Software-as-a-Service (SaaS) business model. This strategy gained prominence in the early/mid 2000s and led to the generalization from SaaS to the Everything-as-a-Service model, which BCG estimates will account for 72% of all software revenue growth between 2017 and 2021. As the Harvard Business Review puts it: “business models matter.

Shifting business models make big opportunities

As new technology kicks off new business models, billion-dollar companies are formed and billionaires are minted. Gates’ Microsoft is a canonical example, but what about McDonalds, which developed the franchise model that conceptualized fast food, American Express, with its invention of the traveler’s check, or the subscription consumer consumables model, which is currently exploding with growth and has already minted multiple billion-dollar companies?

First McDonald's

Whenever a large technological shift allows for new business models, those who ride the wave become financial outliers.

Relevance & Current Trends

IoT technology places the world on the precipice of what technologists and philosophers have dubbed “The 4th industrial revolution.” Just as the first industrial revolution allowed for railroad tycoons to be some of the richest men in history, those who will effectively capture value in this new technology could land among the richest people of all time. The flywheel has already started going, with some companies already amassing large value through implementing IoT in their businesses:

Apple – The Apple Watch

Picture of the Apple Watch

The Apple Watch is the world’s most successful wearable. It’s single-handedly dominating the smartwatch market and Apple saw its category experience 70% YoY growth from 2017 to 2018. Some are even predicting the Apple Watch will be more successful than the iPod. What makes the Apple Watch special? What does it do that normal timepieces don’t? In short: It’s IoT–it connects elements to the internet that had been previously disconnected.

While heart rate monitors aren’t new, the Apple Watch’s heart rate monitor can be easily used for exercise optimization, as it automatically syncs with many exercise tracking apps. It can also be used to save its users’ lives, as the watch both notifies its users when it detects an abnormal heart rate and has the capability to call 911. While the technology isn’t novel, the implementations are, and are only possible because the Apple Watch is IoT.

Bird – The Bird Scooter

Bird Scooter

In under 15 months of existence, Bird has become a multi-billion-dollar company. The key to its success lies in Bird’s pay-for-use business model of its IoT scooters.

Bird’s users can locate a rentable scooter via the app on their mobile device, and pay exclusively for the time they use it. The scooters are spread (some locals would say “littered”) around big cities and constantly monitored by Bird for recharging and repair. Since consumers can pay exclusively for the time they need the scooter, they enjoy the convenience of use-without-ownership at a low marginal price-per-ride.

IoT scooter sharing has proved so successful that it’s spawned multiple billion-dollar companies.

Coca-Cola – The Coca-Cola Freestyle Vending Machine

Coca-Cola Machine

Coca-Cola’s 50,000+ IoT soda fountains have seen an 8% increase in beverage servings and a 9% decrease in calories-per-serving, but the success doesn’t end there.

As Coca-Cola’s VP of Engineering and Innovation for the “Freestyle” machines describes, “For Coca-Cola, Freestyle is sort of the ultimate sampling program. We can introduce new brands and flavors – and, in fact, whole categories – to the system through the Freestyle machine and learn what consumers like.”

This new model of market research has seen results, even leading the company to release new types of bottled sodas. Coca-Cola’s IoT foray with the Freestyle has been so successful they’re developing new IoT applications, like ordering a Coke with an app.

Why are business models changing?

In a word: money. IoT can improve a company’s profit-and-loss sheet on every dimension.

Higher revenue

Just as Coca-Cola has used IoT to improve its products, other companies are following suit. Previously inaccessible consumer insights are now easy, in some cases even trivial to gather. Previous methods of gathering consumer insights–focus groups and two-way mirrors, for instance—are crushed by IoT’s ability to monitor use in real time.

The famous story of Febreeze’s successful use of customer research boils down to information about the timing of the product’s use: Febreeze’s most profitable customers sprayed the product not while they were cleaning a room, but at the end.

Febreeze

If Febreeze and other cleaning products—a vacuum and other household cleaning sprays, for instance–had been IoT, the company could have discovered this behavioral preference through simple cost-effective data analytics instead of implementing an expensive and labor-intensive market-research campaign. Additionally, this timing knowledge is only one simple conclusion. How many other conclusions about consumer behavior are locked behind the wall of expensive market-research campaigns, made trivial by IoT?

More stable revenue

Companies typically prefer recurring revenue to lump upfront payments. When a company has a direct link to their customer, they can can effectively keep selling the product “as a service,” even after the initial sale. Six-year-old, $4 billion Peloton is a successful implementation of this model: while their competitors sell exercise bikes for one-time revenue, Peloton sells subscription classes streamed to its users home, turning a stationary bike into a subscription service that brings in recurring revenue.

Peleton Bike

Higher profit (through disintermediation)

Since each middleman takes a cut and retailers are the ones who ultimately develop relationships with consumers, companies with direct line-of-sight have historically enjoyed higher profit margins. IoT allows for this line-of-sight, even when a product is sold through a retailer.

In consumer appliances, for instance, manufacturers typically lack a direct connection. Customers generally think of retailers as the relationship between themselves and their appliances. Then, when an appliance needs service, they frequently don’t use authorized servicepeople.

IoT devices can easily install a direct method of connection right on the device. Imagine the technology of an Amazon Dash button–push it and receive what you need–specialized for customer support, installed directly on an appliance. This connection could even come with a speaker for direct support without needing to pick up the phone. This technology already exists–companies simply need to implement it.

Amazon Dash

Higher bottom-line (through product consolidation)

IoT will allow a novel type of customization, where a single product can contain various feature-sets. The same product could be sold at different price points depending on what software features are unlocked, much like how customers pay different amounts for different software on their computers or mobile devices.

This sort of product consolidation is a win-win: consumers benefit from receiving a more specific solution to their needs and companies enjoy increased control over pricing and features. Additionally, since these “different” products all use the same software and hardware, companies can treat them as a single product (one SKU), thereby requiring less operational and manufacturing cost.

New ways of thinking about the “product”

People don’t pay for products–they pay for the way a product impacts their life. With IoT, that life-impacting effect could come from a product, a service, or data, leading to a new business conceptualization: The product is not necessarily the product anymore.

The product is the product

Fisher Price Smart Toy

Even in IoT, some products will still be the product, meaning a customer receives value from having the item, not a service it performs or insights it generates. Many physical products that are enjoyed for their physical nature—toys and clothes, for instance—fall into this category. As they become IoT, customers are likely to continue paying for these products themselves, not for information on their toy-playing habits, nor for the service of being clothed. For some IoT devices, mainly those closest to their traditional, non-connected counterparts, the product is likely to remain the product.

The product is the service

In this case, consumers pay for a process they receive. Like Peloton’s subscription bike classes, communication technology is also an industry where the product is the service: consumers own a phone, but are really interested in the service of communicating with friends and family.

Nest Thermostat

For IoT devices tasked with taking their users through a specific experience, the product will increasingly become the service. For example, if consumers could achieve proper home temperature seamlessly from their phone, who would own a physical thermostat? As internet-connected home heating systems become more common, you can even imagine thermostats disappearing altogether, replaced by the service of creating the proper temperature.

The product is the data

When the product is the data, users aren’t interested in the item, nor a process it provides, but value the insights from its data.

Fitbit Versa

Fitbit exercise trackers are extremely successful, and comprise only a part of the large and growing exercise-tracking industry. A disconnected Fitbit is relatively non-functional: without data analysis, all it can do is tell time. When the data that it records is tracked and analyzed, however, a user can know their number of steps taken and calories burned, prompting them to alter their exercise habits accordingly.

IoT’s most common new types of business models

While IoT is still in its early stages and growing, it’s already increasing the prevalence of these 5 new business models:

Hardware Subscription (HaaS)

In the Hardware-as a-Service (HaaS) model, a customer rents or leases the use of hardware instead of owning it. In HaaS, companies can reap recurring revenue while controlling the whole product’s lifecycle, and since since customers don’t own the device, they aren’t responsible for costly and annoying hardware maintenance.

Citibike and other similar bike-sharing companies have already shown success with the HaaS model. Similarly, Vivint’s line of home security HaaS has grown to 1 million customers and $650 million in annual revenue by providing its customers thermostats, smart locks, and security sensors, including installation, servicing and customer support, all for a monthly fee.

Vivint Home Security

As an IoT Business model, HaaS is expected to be extremely impactful.

Consumables

When a consumable runs low, shouldn’t it reorder itself? The consumer enjoys having one less item on their shopping list while the company receives recurring revenue and dramatically increased brand loyalty.

Amazon Dash Buttons are a clear, direct example of success in the consumable industry: a user pushes a simple button to reorder a specific household need. Dash Buttons are among Amazon’s fastest growing services, but are just the beginning. With a Dash Button, a user must click to have the item reordered–taking that idea a step further, what if the object simply reordered itself?

IoT products like Obe’s pet-food bowls are already doing just that. They monitor food quantity, log pet feeding habits, and even reorder when the food supply is getting low. Similar consumables in other areas could see similar success–from self-reordering groceries to a restaurant that needs a constantly topped-up supply of propane. This category is even seeing its own new terminology, having been dubbed “just in time consumables.”

Obe Pro bowl

Hardware + separate software

Since IoT devices are internet-connected, software companies could provide software for all sorts of hardware, even those made by different manufacturers.

Microsoft has released its Microsoft Surface family of products as a service, humorously named, “Surface-as-a Service.” While the Surface Book, Microsoft’s first laptop, does come with some installed software—Microsoft Office 365, for instance—it’s still a normal laptop, meaning many users will install other software on it.

Microsoft Surface Book

Looking forward, IoT device manufacturers will be able to specialize more specifically in their area of expertise. Consumers can already install a different operating system on their computers, such as open-source Linux. It stands to reason that other internet-connected devices will have a similar possibilities: if software manufacturers can create a better smartfridge software than the one made by the manufacturer, there’s value to be captured by a partnership or third-party release.

Pay-for-use

Canadian construction equipment company Dozr allows its customers to rent otherwise-idle heavy equipment. This sort of sharing model has proved valuable for construction’s high-cost assets, with many heavy equipment companies, including industry giant Caterpillar, adopting the model.

Dozr

The pay-for-use model has been shown to work for items that cost from hundreds of dollars (a Bird scooter) to hundreds-of-thousands (a bulldozer). It seems reasonable to believe it would still function for items with costs ranging between the two, but what about less-expensive consumer items?

Most American homes contain a handheld electric drill, yet how many non-construction-related homeowners use their drill for more than 15 minutes in a year? 5%? 10%? And even those heaviest-usage homes almost certainly used their drill for less than 20 hours. That means even the average high frequency drill owner only enjoys 0.2% usage. How many Americans would pay a few dollars purely for the time they need a drill instead of upwards of $50 for ownership, which includes the obligation to store the drill and charge it before use?

Recently, makerspaces–locations that share tools and space, much like a shop or home ec class–have seen a dramatic rise, with no shortage of demand for more. As IoT tracking allows for more real-time monitoring of devices, the same technology Dozr uses can be taken to the consumer level. Tool manufacturers could establish a tool rental-and-delivery service where consumers see available options and request the ones they want, paying by the use. And, if the manufacturers aren’t willing to adopt this model themselves–perhaps because their current business model requires selling the equipment–that sounds a lot like the unwillingness to update business models that caused Kodak’s demise.

Kodak Demise

Pay-for-outcome

IoT allows the orchestrating of multiple products together to achieve a desired outcome, a coherence fundamentally different from single-use products.

For example, let’s say you’re leaving the gym. An IoT connection enables your heart rate monitor and mobile phone’s GPS to communicate, confirming your location and destination. If these connected with an actuator and thermostat at home, your bath could begin running, constantly adjusting its temperature so it’s precisely the temperature you like when you arrive.

Historically, consumers have paid for each of these actions separately–heart rate monitor, GPS, thermostat, and remote actuator. Devices are only desired, however, for the outcomes they provide. If that outcome can be more precisely pinpointed both in function and in price, companies can be more exact in reaping their financial rewards and consumers can receive higher-quality products, since multiple pieces moving in tandem reduces friction and lag-time.

What are the side-effects of these new business models?

In addition to creating a slough of new millionaires and billionaires, IoT’s new business models are poised to transform the entire business ecosystem. BCG describes the change as an overhaul. Here are some specific effects to expect:

More ecosystem alignment

IoT’s new business models should increase both the number of partnerships and the amount of collaboration between organizations.

IoT interoperability

To achieve an orchestrated outcome, for instance, multiple devices must communicate with each other. To communicate, their manufacturers must make them interoperable. There are currently multiple standards for this sort of inter-device communication, which really means there’s no standard. To solve this, companies will have to recognize the benefits of working together: There’s more money to be made through collaboration.

This ecosystem alignment is already coming into being, exemplified by Nike’s recent partnership with Apple, wherein Nike couples their running expertise with Apple’s Apple Watch exercise tracker. Together, using Nike on an Apple Watch forms an all-in-one running coach.

As the ecosystem becomes more aligned, companies that formerly flowed through each other will now need to collaborate in partnership. BCG believes that, in addition to the relationships revamping, the directionality and flow of information will also update:

New Sales channels and sales organization structure

Most hardware companies are familiar with the experience of selling a product as the culmination of their consumer interaction. They call this “throwing the product over a wall,” but IoT’s new capabilities will change the model. Once a device is sold, the manufacturer can still remain in contact, allowing for additional sales channels to take shape.

Additionally, sales organizations will have to recognize the new requirements of selling IoT products. B2B hardware sales will require an increased understanding of the device’s software, since salespeople will need to persuade purchasers of the value the device as a whole, not just it’s hardware.

New customer support

Nike Apple Watch

With “the product” growing in size and scope comes a need for a new structure of customer support. Just as the product is now no longer simply the product—it’s the service or the data or the outcome—solving customer support needs may require solving additional needs.

Apple and Nike have advertised their partnership significantly, even creating a Nike-branded version of the Apple Watch. If a consumer calls Apple with a question about the Nike Run Club app (which is developed by Nike, not Apple), Apple needs, at a minimum, an intelligent response and seamless handoff. At best, Apple needs the ability to solve the customer support problem.

As these integrated partnerships become more common–not just in consumer devices, but in B2B applications as well–these sort of integrated customer support solutions will be more and more necessary. In a world where customer experience is a key differentiator, successful companies will adopt new, improved customer support structures and strategies to solve for the interconnectedness.

Increased analytics and IT needs, integrated across the company

Just as every company is in the customer service business, every company making an IoT device will be in the data business.

Currently, 60% of organizations lack the analytics capabilities to take advantage of their IoT data. In one case study of an IoT oil rig, McKinsey estimates over 99% of the data was unused or lost.

Additionally, since IoT devices can gather all sorts of data at little cost, the integration of data will link into many facets of a company. Salespeople, for instance, will receive more data on the specific uses of a product, allowing them to better communicate their solution to customers. This improvement is, however, only possible if they can turn the data into actionable conclusions.

IoT Data Analysis

This same increased need of analytics applies to other company departments as well. Marketing and R&D, for instance, have clear analogies to sales. While the total impact of IoT’s data remains to be seen, the data analytics needs will only increase with IoT.

As departments work increasingly with data, their technical requirements will also increase, leading to a desire for more sophisticated tools and greater IT functionality and support. This increase is so large that some experts are calling for “a Chief Data Officer, reporting directly to the CEO” to become standard practice in companies.

Conclusion

As IoT gains prevalence, it’s kickstarting a rapid shift to new business models. The companies that adopt these new IoT business models will achieve larger and more stable revenues while increasing understanding of their customers.

In the next few years, expect to see more:

  • Subscription models, such as Hardware-as-a-Service, where consumers increasingly choose leasing over ownership.
  • Auto-reordering, such as consumables practicing just-in-time replenishment.
  • Disaggregated hardware from software, which permits different companies to specialize in their expertise, integrating their tools after product development.
  • Pay-for-use, where customers choose small payments to use a product for a short period of time instead of leasing for a longer term or owning outright.
  • Pay-for-outcome, where a benefit is achieved through coordination of multiple products and customers pay for the desired outcome instead of any one action.

IoT is transforming business models whether companies keep up or not. As Bruce Sinclair, IoT expert and host of the IoT Business Show, puts it: “If your company uses the internet, you’ll be using the Internet of Things.” If you use the internet of things, you’ll need to adjust to IoT business models.

For a complete summary of the history and stats of IoT, check out this cool infographic for even more details!