6 business models for connected device companies

In the early days of the internet of things, startups popped up by the dozens with everything from connected locks to wearables for babies. I could fill a shoebox just with connected trackers.

The money for these startups came from two places: crowdfunding sites and venture capitalists. The ideas came from everywhere. And the glut of cheap sensors, radios and low-cost computing meant that any idea for a connected device had a chance. Once Google paid $3.2 billion for Nest in 2014 every entrepreneur thought he or she had a payday coming their way.

But every year since 2014 seemed like THE year for the smart home to take off. Meanwhile, adoption has lagged at about 15% of North American homes (depending on the data you choose). While large corporations acquired a few businesses, such as Mattel buying Sproutling and Sears buying Wally Home, most companies found themselves quietly failing to ship their connected products or flaming out in a blaze of fraud or mystery.

A new reality is settling in for those companies that have survived. They have to generate revenue and profits over the long haul. This is the struggle that FitBit finds itself in as a public company and perhaps why it is trying to build an app store (a place where it can find some recurring revenue).

For a connected device, it’s not enough to consider the cost of making the product. A company also has to consider the cost of supporting it and keeping it running over the life of the product. This is unknown territory for companies used to putting out a physical product and forgetting about it. As software eats the world it’s eating the idea of shipping a complete product. A consumer may expect a new feature every few months, and they certainly expect that the servers hosting their product will remain up and running for the next three to 15 years depending on the product.

Not every company has considered this, which is why I’m rounding up some of the more popular and interesting ways to make money from a connected device:

Premium features: This can be summed up as “store more, pay more” in the case of video cloud storage from companies such as Nest and Ring. It can also be explained as “do more, pay more” for companies like Lowe’s which charges a service fee for customers who want to add more notifications or fancier rules to its Iris home hub.

Security: I’ll lump this in as a separate category in part because so many companies are thinking about offering some kind of paid home monitoring. Scout, Korner, SmartThings etc. are all startups that are taking this route, while Comcast, ADT, Vivint, Alarm.com  and giant service providers are building a blend of security and home automation features for which millions of subscribers are already paying a monthly fee.

Services: Want to let someone into your house and be able to keep an eye on them when you aren’t home? August has its Access program that it offers to repairmen and delivery services. The consumer doesn’t pay, but by opening up a new capability the connected device company can take a cut.

Custom Capabilities: This is a new one, but pretty interesting. Honeywell launched two new connected cameras at CES and plans to offer specially tuned algorithms on the indoor camera to listen for the sound of a baby’s cry and send a notification. But it may also create other algorithms such as the sound of glass breaking or the image of your pet getting on the couch to sell dedicated packages on top of the camera to meet a specific customer need. It is like buying an app to customize your camera. I’d buy this to add cool modes to my connected lights, for example.

Affiliate marketing (of a sort): I actually don’t know of companies doing this, but I think there are opportunities for firms to connect their products to the sale of other products for a revenue split or a fee. For example, a connected camera or baby monitor might link to a firm like Shutterfly to turn a saved or downloaded picture into a physical calendar or scrapbook. Making a Baby’s First Year scrapbook just got a lot easier. Another example might be a connected fridge camera offering coupons for specific products or recipe suggestions using certain products based on knowledge of what’s inside the fridge. I’m sure smart affiliate marketers who create guides on Hustle Life have had similar ideas about how to better utilize affiliate techniques for the benefit of both clients and consumers.

Consumables: Not every company wants to charge a monthly fee or get paid for add-ons. Many are going the consumables route, expecting customers to buy a replacement element of the product as part of a connected product’s life. It may be something like replacing a Tile tracker each year after the battery dies or tracking your health with a connected glucose monitoring device that requires customized replacement strips. Think of the razor/razor blade model.

Notice that I don’t have a spot here for selling device data. That’s because it’s difficult to create a business selling your data. Nest has an option to sell its data or create business models around its installed based because it has a relatively large installed base. Fitbit has a similar option. Smaller companies do not.

For the larger companies like Whirlpool or Bosch which are now releasing connected products, the extra cost to support a connected product may come in the form of consumables or services, but it can also provide insights to the R&D group or shave costs off maintenance that creates its own return. That’s tougher for small companies with only one product.

And of course, some firms will be able to charge such a premium for their hardware that it won’t matter, but that seems like a rarity.

If you have other business models in mind, I’d love to hear about them. For more analysis like this, subscribe to the Stacey Knows Things newsletter.