Smart houses, smart cars, smart environment… IoT rapidly entered our life aiming to connect as good as everything to the Internet. But what about IoT monetization? Does the branch really allow to make money on the product? Cisco predicts that Internet of Things revenue will rise to about $19 trillion in a few years. Impossible? Not really. In this article we will describe how Internet of Things businesses manage to earn millions of dollars. Curious about IoT monetization models? Keep reading.
Who can capitalize on IoT products?
The first step to monetizing IoT is the understanding of where does the money come from? Three main entities taking advantages of Internet of Things are consumers, governments and businesses.
The main environments of the consumer domain that are already experiencing the benefits of Internet of Things are transport and connected homes. The number of connected cars estimated by 2020 is 220 million. As to connected homes, the manufacturers plan to connect most of the home devices to the internet by 2030.
According to the Business Insider’s report, governments will use 7.7 billion IoT devices by 2020. The biggest potential shows the defense system. For instance, the US government has allocated approximately $4.61 billion for drones purchase in 2017. Another big area implementing the IoT systems are the municipalities’ infrastructure: $36 billion were spent in 2014 and the expected spending for 2019 is $133 billion. Due to this investment, the economic value of the cities worldwide will increase by $421 billion. As for the third big environment in this category, healthcare, the estimation is for 646 million of connected healthcare devices by 2020.
Businesses are the biggest environment capitalizing on IoT monetization. In the branch of manufacturing 35% of organizations are already taking advantage of smart sensors. Other 18% are going to start using them this year or during the next three years. Other estimations for 2020 predict 310 million IoT devices used by food services companies, 75 million used in agriculture, 5.4 million used on oil extraction sites, and nearly 1 billion smart meters installed on energy utilities.
IoT monetization challenges
The number of IoT devices is high, but do the companies gain the benefit from this rich source? The answer to this question is: no, they don’t. The research conducted by Capgemini Consulting has shown that as much as 70% of organizations do not obtain service revenues from their IoT products. Why is it so? What are the key challenges of Internet of Things monetization? In fact, there are three of them:
- Security and Privacy Concerns
IoT raises a lot of privacy and information security concerns. Malefactors can attack the device as well as the network that is used to transfer the data, at various levels. IoT security challenges have become a question of highest concern. Applying security measures at all levels of IoT product development reduces the risk of these attacks.
- Lack of Standards
IoT solutions have more value when they are connected together. But the lack of generally accepted IoT standards limits the potential of this technology and prevents the organizations from connecting their products and services into a larger ecosystem and taking more advantage from IoT business. However, things are getting better: there are at least 20 initiatives trying to develop IoT standards.
- Need of Significant Investments
Successful IoT monetization requires important investments into new functionality. Quite often these are long-term investments, while businesses have short-term expectations for monetizing IoT. More than 50% expect to see ROI from their IoT products in less than one year! Do not get disappointed too soon: keep in mind that nearly 65% of IoT business are generating revenue. You just need to be patient enough.
IoT monetisation models
There are four models, how a business can monetize Internet of Things solutions. They focus on hardware, services, data or ecosystem building. So let’s find out, what are the benefits of each of them!
#1 Hardware Premium: Add connected features to product
Hardware Premium is the easiest way to monetize Internet of Things. This approach means adding the possibility to connect an existing or new product and offering a mobile app for its remote management. Adding extended features the IoT companies sell the product at a premium price and therefore multiply their revenue. The key driver here is the novelty aspect, which makes the product more attractive for customers.
How it works: In simple words, it means generating revenue from selling a connected product at a higher price. This approach is illustrated by the example of the Hardware Premium model is Sleep Number IT Bed by Select Comfort. Its mattress contains sensors that are tracking different biometric data. It accumulates the information about the heart rate, movements, sleep status and breathing of the user, allowing him to view these data in the “SleepIQ” mobile app. It also gives the possibility to adjust the desired firmness of the mattress and to find out more about their sleep quality.
The Sleep Number IT Bed interacts with other connected devices and cloud services. Therefore, it compares your sleeping data to the information obtained from your fitness tracker, temperature sensors and gives insights on how to improve your sleep. The prices start from $799 for a twin mattress – that is 8 times higher than an ordinary mattress of the same size. But people are willingly paying for the connected item and its features.
#2 Service subscription
Producing high profit services and selling them to the customers for a regular fee is a good way for IoT monetization. It creates a regular revenue stream and establishes strong customer relationship long after they have bought the device. The companies can offer service plans or additional features to the existing users to extend the device functionality.
How it works: for instance, Volkswagen offers to its customers “Car-Net” service with navigation, maintenance, entertainment and security features accessible via smartphone. The Guide & Inform Service gives you the important advices while driving. Due to this mobile online service, you can access parking info, charging stations, weather information, fuel info, online traffic information and many other useful data.
Security & Service Package includes emergency call service, online anti-theft alarm, service scheduling. It also sends automatic notifications to chosen contacts in case if the vehicle’s airbags have been deployed. The monthly fee is $17.99 and the year subscription costs $199.
#3 Data revenue
Another advantage of IoT devices is their ability to gather and store large amounts of data of any kinds. The data revolution caused by the arrival of IoT is not limited to enhancing business efficiency or improving service. It creates data flows that can be a precious and regular source of revenue for the businesses as well as for third parties.
Many organizations are ready to purchase data that will help them to understand their customers and boost their marketing effectiveness. Therefore, for many companies the possibility to collect, treat and sell data is a possible monetization model. When this information has been accumulated and anonymized, companies can offer it packaged or raw, or sell it through advertising.
How it works: think, for example, of Michelin Solutions unit. It collects data due to sensors installed inside the tires they sell. Manufacturing connected goods, the company gathers extremely precise data about how their products are used. This allows to improve manufacturing and service.
But not just one company can take advantage of such data. Anonymized and proceeded it can be used by many other companies, which are ready to pay for such information. Customers use this anonymized data for a large variety of purposes, such as carbon footprint or costs reduction. IoT monetization through selling data is mostly used in addition to other ways of earning money.
#4 Ecosystem building
The concept of IoT develops in an entire ecosystem of connected products. The value it produces increases with the expansion of the ecosystem. The focus is not a service or a product, but a platform shared by producers of hardware and software, service providers and other IoT businesses. In this model, the founder of the platform receives profit from platform users as well as from end customers. Besides the regular fee from platform users, the founder obtains a share in the profit from the product sold on it. Such a platform has numerous advantages for all its participants. For example, companies can use the APIs proposed by the platform founder to develop their IoT applications.
How it works: a good example of a company having adopted the ecosystem-building model to monetize Internet of Things is SmartThings. It is an IoT startup offering a centralized hub and a wide range of IoT products, both in-house as well as third party products. These include switches, alarms, locks, environment sensors, etc.
SmartThings provides a mobile app used to control the hub and the connected devices. Besides of that it supports the developers making IoT solutions for the platform and offers them detailed guides. The partners of SmartThings are Philips, Sonos and Belkin. The hub costs $99 and works on Android and iOS. In 2014, Samsung Electronics purchased SmartThings for about $200 million.
IoT pricing models
In addition to IoT monetization models there is a range of pricing models for products and services. Here are the most widely used:
- One-Time Charges
The customer pays one time, when buying the product or service. This model is widely applied – for instance, the fitness trackers manufacturer Jawbone who sells its connected devices for a one-time cost.
The customer pays only for the results obtained due to the IoT product. This is a value-based model and the user can see its effectiveness right away. IoT startup Enlighted has adopted this model. It produces devices detecting motion, light and heat and connects them to a software system, which controls heating, lighting and cooling relying on data collected by these sensors. The users do not pay beforehand: they only pay a percentage of the amount they have saved due to this product.
This model gives the users a possibility to try a free version of the product while they decide if they need an extended one. A very widespread model adopted by many Internet of Things businesses – among others, by Octoblu. This platform offers free basic options of IoT devices management and connections, whereas more advanced features are available upon usage-based subscription.
The users have the possibility to customize their options and the duration of service. For example, XFINITY Home offers the product for remote control of home energy and security with the monthly subscription.
The customer pays only when actually using the service. Metromile, pay-per-mile insurance, charges its customers in this way. The Metromile Pulse device measures mileage and transmits this information to servers. The driving app visualizes the data, which can be useful for drivers, such as car health information, street sweeping alerts, etc.
How to choose a model
As different companies differ in goals and requirements, the basic tips on how to choose the right IoT monetization model are:
- Hardware Premium Model is a good option for those who offer more than their competitors do. Implementing IoT benefits in the ordinary products is a good way for traditional manufacturers to get involved in the Internet of Things business. Connectivity features and sensors increase the value of traditional products to customers.
- Service Revenue Model fits best for the products that are in great demand, such as cars equipped with infotainment modules. Adopting this model in combination with “freemium” pricing model creates a regular revenue flow. It is also a good idea to propose different offers where price augments with the functionality. Therefore, the customers can choose the best proposition up to their needs.
- Data Revenue Model is an ideal choice for companies with the large customer base. Thus, it is not necessary to propose a product or a service to monetize IoT benefits. It is enough to add sensors collecting users’ data and then anonymize and package it.
- Ecosystem Building is the most complex IoT monetization model. It suits the organizations having a wide variety of products. By creating extensible IoT platforms, they give a possibility for other companies to apply their IoT monetization models, such as “hardware premium” and “service revenue”.
The Internet of Things is a rich source of profit for various businesses. Numerous start-ups, as well as many traditional organizations, are successfully exploiting the advantages of IoT. For some reasons the monetization of IoT solutions may face certain challenges. However, as soon as a company finds the IoT monetisation strategy and pricing model that meets its needs, the success will be not long in coming!