Pilgrim
2nd May 2017

In this paper we discuss the benefits and business models of connecting a product, and explore how Chief Marketing Officers can plan and execute to reap the maximum benefits from doing so, which, at the bottom line, is all about effective monetisation of New Product Introduction.

Servitization

The 1950-1980’s was perhaps the heyday of rampant consumerism with a predominantly product-oriented business model: Brands aspired to sell physical goods to consumers, who aspired to own them.

Since then the world has embarked upon a transformation sometimes known as “Servitization” – transitioning to a “service” business model where brands sell the utility of goods on an ongoing basis, rather than selling those goods outright … and the new breed of Millennial consumers doesn’t aspire to own things. The “X-as-a-Service” model is best known in regard to software, but is now being applied to almost everything technical, from jet engines to cars, streetlights to phones.

The potential benefits of Servitization are many: For suppliers it allows a closer relationship with the customer, which in turn enables all sorts of benefits including faster iteration, opportunities for up-sell or cross-sell, bundling and mass customisation. For the customer the benefits include better use-of-cash, i.e. improved cash-flow, and not having to commit to and pay for idling resources.

Indeed there are also benefits for wider society as a whole, because offering something as-a-service aligns the interests of supplier and customer such that it is in the interests of the supplier to ensure efficient use of the resources required to deliver the service. For example, rather than buying energy to heat their factories, some companies now buy “temperature as-a-service”. The supplier is then free to do whatever they wish to reduce their costs of achieving that temperature, which includes installing energy-saving measures such as insulation or solar panels, and of course their economies of scale allow them to get very good at that optimisation. Thus Servitization aligns the interests of supplier, customer and indeed the wider world.

IoT is Servitization

It is interesting to note how intrinsic IoT is to Servitization, indeed the two are almost synonymous. It is hard to do Servitization without IoT, e.g. to sell your car-as-a-service you need a means to remotely unlock your car fleet and measure its use and availability. And in the other direction, as companies add connectivity to their products they find, sometimes to their apparent surprise, that doing so turns them into a service provider, because they must deliver the service which makes the connected product connected. Since this costs money, they therefore need an ongoing service business model, if only to cover those costs. It’s then a short leap to consider possible upsides of this ongoing connection which could make the service profitable in its own right.

Connected Device business models 101

While it is not the purpose of this paper to explore possible IoT business models in detail, a quick scamper through some obvious models helps to illustrate the wide range of options. These models are certainly not unique to IoT, though the application of some of them to physical products is quite novel.

  • Product: The device is sold for a one-off fee. Any costs of ongoing service, e.g. connectivity and cloud service, must be bundled in that fee, accounting for the expected product lifetime.
  • Service: The device is bought for a regular fee, perhaps with a contract lock-in to ensure recouping of the hardware cost. The big advantage for the customer is turning Cap-Ex into Op-Ex.
  • Pay-as-you-go: Similar to service, but with an explicit understanding that service costs are paid as they are incurred, probably using a cost-plus model.  It may be necessary to front-load some kind of product fee to ensure that the supplier isn’t out of pocket. Both PAYG and Service models can be offered with a “Freemium” policy, where a basic level of service is initially free, as a teaser, with access to advanced features requiring a PAYG/Service fee.
  • Advertising: Common from the media worlds of Web and TV, it is yet to be seen whether this has a place in IoT, especially since many IoT devices must work in a subliminal way rather than claiming the users’ attention (many don’t even have screens).
  • Ecosystem: The most common example is the Apple App store. This model provides access by third-parties to a captive market, allowing the owner of the app store to charge a margin, and also making the ecosystem more attractive because of all the functionality and diversity that the third parties bring. Whether it’s an app store, a connected home or a new network, an ecosystem can be made “sticky” by allowing a customer to obtain multiple benefits from it – making it all the more painful and inconvenient for them to switch away.
  • “Free”: Deservedly in quotes, perhaps this should be called “apparently free”! Sometimes offerings are made for free because of the transformational effect on other parts of the relationship. For example, high-spending customers may be offered special features as a loyalty bonus. And sometimes offering customers things “free” allows the supplier to reap somewhat intangible rewards such as a boosted Net Promoter Score, i.e. brand reputation, which then allows the charging of a premium price.
  • Finally – and not a business model per se – it is worth mentioning that connected products sometimes offer signification opportunity for disintermediation, which can be an opportunity (if you do it) or a threat (if it’s done to you!). I can cite a couple of examples of customers of my previous company AlertMe. We won US retailer Lowes as a customer partly because Lowes recognised the threat that the increasing number of connected products not run by them represented to their core consumer relationship – the vendors were potentially disintermediating the retailer. Therefore it was important to create a service to claim that relationship as the intermediary.

Another AlertMe customer, British Gas (for what became “Hive”) was aware that a connected thermostat from another provider such as Google might start as an innocuous service but in time could allow that provider to become a utility, disintermediating the existing utility British Gas since it would have a far better grasp on how energy was being used, and would own the daily face-to-face customer relationship. In Web terminology, devices can be seen as “portals”.

IoT Data enables Customer Experience Management

That last comment highlights perhaps one of the least-appreciated but most-valuable effects of connecting a product – that it allows us to transform a dumb product into something that many CMO’s are much more used to optimising: the Web page.

On the Web we are used to tracking every click, analysing who is clicking what and why, and devising new strategies to improve clicks and conversions, and make our Web real estate easier to use. Now, with a connected product, it becomes possible to do the same thing with physical products.

With a connected product, you can see exactly how your customers are using the product – every button-press, every time the product is used in any way. This increases your insight into your customers, especially when it’s mashed-up with everything else you already know about them, leading to a closer relationship and perhaps transforming your Net Promoter Score. Here are some specific benefits you can consider grasping:

Segmentation and Mass customisation

IoT devices provide a rich seam of customer data which can go way beyond the rather crude profiling of classic marketing e.g. demographics. For example, if your product is an energy product, then it offers a detailed profile of how a household consumes energy, telling you a huge amount about the lifestyle of the household and its occupants, which can be used to segment customers in new ways, e.g. for targeting with messaging. But beyond this, as with Amazon recommendations, its now possible to tailor messaging that’s unique to every customer, based on data from their IoT devices – mass customisation.

Of course, this is the customer’s personal data and so you need permission to use it for this purpose, and the opportunity there is to deliver those per-customer insights to the customer, offering them insight of potential economic value to them.

Cross-sell and up-sell

The above allows you to deliver individual messages such as e.g. “Did you know, you are using 22% more energy than your neighbours in Acacia Avenue?”. This information can then be taken a step further and turned into actionable information by offering the customer ways to take advantage of the personalised information that you have just delivered. In the above example, perhaps they would like insulation, or a new boiler, or solar panels? This is the world of “cross-sell”.

Of course, if you offer a Freemium or Tiered model, perhaps with add-ons, then it’s also possible to up-sell customers to these.  Continuing the above example, perhaps you can offer an advanced heating algorithm that will improve comfort and reduce energy consumption.

Pre-empting churn

In some sectors suppliers joke about “time to kitchen drawer”: How long on average before the customer puts the product in a drawer and never looks at it again. Whilst slightly comedic, this metric can be the death-knell for new product introductions.

Connecting our product allows us a way to spot and prevent this. We can see, for every customer, on a day-by-day basis, how much they are using the product. If that use starts to tail off, we can use that as a prompt to send them a special offer to retain their engagement.

Proactive customer support

The live data from a connected product also allows you to anticipate problems. AlertMe developed a connected boiler (furnace) offering with Bosch and British Gas, allowing the diagnostics in the boiler to be brought into the Cloud and used to plan service visits efficiently. Unexpected problems can also be flagged and diagnosed often before the customer is even aware of a problem – imagine the customer receiving an email asking for a visit date, to fix a problem they weren’t even aware of – fantastic engagement. The same can be done with consumables, e.g. dispatching fresh batteries automatically.

Rapid Iteration

New Product Introduction is happening faster and faster. One possible advantage of a connected product is that is can be pushed into the market with minimum features and then updated and upgraded in-field.
Future physical hardware revisions can also be optimised based on live in-field feedback of how users are using the previous version.

Conclusion – winning at connected products

Hopefully this paper has given a taste of some of the techniques which can make the introduction of a new connected product a success for supplier and customer alike. The final point to make is that it is vital that a CMO is involved in the specification of the new product, not just to ensure that its form and function matches the company’s aspirations, but also to ensure that it is designed and implemented to collect sufficient marketing data to enable these approaches. It is sometimes necessary to counter-balance technology-led design, which will tend to optimise e.g. to minimise data throughput, and probably won’t be thinking of the product as a potential portal.

About DevicePilot

DevicePilot is the software of choice for locating, monitoring and managing connected devices at scale. DevicePilot is completely agnostic, allowing the user to connect any device across any platform, with simple and easy integration. The company draws on the significant experience of its founders who successfully scaled their previous connected-device businesses to 1 million+ end-customers in areas as diverse as mobile phones, IPTV set-top-boxes and the connected home. Contact us for further information: sales@devicepilot.com

 

 

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