This post was co-authored by Peter Cooper, Senior Product Marketing Manager, Azure IoT and Mark Pendergrast, Director of Product Marketing, Microsoft Azure.
It’s easy to talk about all the cool things your company might do to leverage the Internet of Things (IoT). Figuring out how you’re actually going to make them work for your business is a bit more challenging — particularly the part about how to monetize them.
IoT technologies have major potential to open new revenue streams. Capitalizing on them often requires out-of-the-box thinking and a willingness to take smart risks.
We’ve helped thousands of customers around the world profit from IoT. Over the course of these engagements, we’ve found that their monetization models tend to fall into four categories. Here are some options to consider as you build your approach — take a look:
1. The one-and-done: one-time purchasing
A one-time purchase is a common model. IoT connectivity is added as a feature, allowing products to be sold at a premium or to stand out from the competition. This approach works great for scenarios where repeating, revenue-generating services are not required, and your products don’t need ongoing support. For example, many wearable devices and connected home products are sold this way. Once the transaction is done, the customer owns the device outright.
That’s not the end of the story, however. The data you collect from these products can be extremely valuable. You can use it to improve products over time, get more bang for your marketing buck, and spot growth opportunities before your competitors do.
This is the easiest pricing model for manufacturers to adopt because it’s how things are generally sold today. The trick to making this model work is ensuring that continuing costs associated with connected products don’t erode your profits over time. For example, if you’re collecting and storing data or providing a dashboard to customers, these functions must be factored in.
2. Good, better, best: value-added product services
Keeping the revenue flowing after the product has been sold is a major growth opportunity for manufacturers. With connected products, you can offer subscriptions for value-added services. Food processing equipment leader Buhler, for example, is using a subscription-based model for its grain-sorting machines, charging based on which features customers enable.
In addition to boosting profits, subscriptions help you stay close to customers throughout the product lifecycle, not just when things break. Services can include anything from rich data and operational reporting to predictive maintenance alerts. Many companies take a tiered approach, offering a freemium option and charging for more advanced solutions. It’s a great way to crack open a new market — give customers a taste of the value of connected products and they’ll soon want more.
The subscription service model does depart significantly from the single-transaction approach, though. Persuading buyers to pay an ongoing premium requires you to present a clear value proposition and provide strong customer support. Customers will expect regular improvements and a robust, reliable experience.
3. Pay-as-you-go: turning products into services
IoT is overturning the traditional ownership experience, allowing customers to pay only for what they use. Product-as-a-service models are familiar to anyone who has used a bike- or car-sharing service, where vehicles are tracked by GPS and rented by the hour or minute. The buyer avoids capital and maintenance expenses and always has the latest technology, while the vendor gets an ongoing revenue stream that can provide more profit and stability over the long term.
This model can work even for very complex and expensive products. For example, Rolls-Royce now sells flight hours instead of airplane engines. Data collected from IoT sensors lets the company know exactly how long the engines have been used — and gives it the data it needs to keep them in top condition. Using advanced analytics, the company can predict and resolve mechanical issues before something breaks.
4. We’re in this together: revenue-sharing
Confident your IoT solution will deliver improved results to customers? Consider a revenue-sharing model. Instead of selling products or services, you’ll be selling outcomes. In fact, another name for this approach is “outcomes as a service.” One example is Itron, whose Total Outcomes service provides IoT services to cities, charging customers based on cost savings and performance targets. Because it requires your company to take on some of the business risk, this model can be very attractive to customers. It’s also the furthest from traditional manufacturing revenue models, and likely to require the most innovative thinking and pricing strategies.
Which model is right for your business?
Plan to invest some time and resources to figure out how you’ll monetize IoT. Successful initiatives often start with a pilot project involving a few good customers. Beyond the IoT solution itself, systems, people, and processes will need to adapt to new ways of doing business. Get a roadmap for how you can start profiting from connected products in our white paper, Navigating the path to new IoT business opportunities through connected products. It walks you through building a unique value proposition, monetization strategies, ways to address common roadblocks, a new technology approach, and how to manage organizational change.