Back in May, I gave a presentation for PTC’s annual user conference about new business models enabled by the internet of things. I did a lot of reporting and research for the presentation, with an eye toward creating a series of articles on each business model that I could run during the summer when (I thought) the news would be slow but my life would be busy (I moved at the end of June).
Instead the news has been brisk and I haven’t been as busy as I thought I’d be because…well, there’s only so much you can do when you’re in lockdown. But I don’t want to wait any longer to share this great info with you, so it’s time to talk about business models that the IoT can enable. This week, I’m going to focus on the most obvious two models: selling your product as a service, and selling your product with an add-on service.
In the coming weeks, we’ll cover the pay-per-use model, how to think about licensing a digital twin, and if we’ll ever get to a business model that allows companies to share in the overall value creation.
Selling your product as a service and selling a hardware product and adding on a service are two of the oldest and best-established business models enabled by the IoT. Since 2012, I’ve been talking to companies that connect products and then use the data gleaned from those products to offer customers the option to buy a service on a monthly or annual basis instead of physical hardware.
I will note, however, that there is a fine line between selling your product as a service and selling your product on a pay-per-use basis. The pay-per-use model is more narrowly defined and good for standalone products that aren’t part of a larger system or complex process. More on that in another post. But in the meantime, it’s also worth pointing out that many of these business models are a continuum along which the vendor — and the client — will move as their relationship progresses.
Indeed, the most important thing to know about building connected products and then selling them is that your interaction with the customer will evolve from an initial transaction to an ongoing relationship. Companies that succeed in selling connected products will do so because they’ve established trust with their customers and collaborated with them accordingly.
But back to selling your product as a service. It is by far the most popular option out there and is becoming increasingly accepted. It’s an especially great choice for companies with hardware that will need to be refreshed every few years, as well as for those that have software deeply tied to that hardware.
The first stage of this relationship often starts by selling customers a connected product and then adding a service component on top of that. In the consumer world, the product might be a connected camera while the related service would be security. Or the product could be a smart oven and the service a package of recipes. In the enterprise world, it could be a connected access control system with a related set of director services. Y’all get the picture.
The key is that the customer must maintain the hardware. Not only does this make selling a service on top of hardware a good first step for buyers reluctant to go all-in on a connected service, but it also makes it a good option for critical services or safety services that can’t rely on the cloud. That’s according to Jason Urso, VP and CTO of Honeywell Process Solutions. Indeed, the cloud is an essential element of any as-a-service model. And as he notes, it’s also a good place to start for vendors that want to gather new data on an existing product in order to build other services, or just to see how customers use a particular product. Any new features the company decides to include can be added to existing hardware and then sold for additional fees.
Finally, this model gets customers, who may not be comfortable paying for a service instead of buying hardware, time to get used to the idea, and to trust the vendor. It can also prompt customers who are sick of paying to upgrade their physical hardware in order to get compelling new features to instead pay for a series of services and let the vendor manage the hardware. The flip side of this, of course, is that it’s also an easy way for a customer to decide your service isn’t all that valuable — and drop it while continuing to use the core hardware.
The shift from selling a service on top of hardware to selling services is increasingly prevalent in the office lighting market, where companies are swapping out the lighting infrastructure of buildings for LEDs that are packed with sensors. Most buyers don’t care about owning the LEDs. They want cheaper, adaptive lighting; occupancy sensing; location tracking; and other services that these companies are starting to provide.
Selling a product as a service also puts the onus on the vendor to ensure that the hardware associated with the service stays secure and up to date. Thus, selling hardware as a service is usually easier for customers than buying and maintaining their own hardware.
A variation on this model common in the industrial world is selling uptime on equipment. This is where a vendor offers customers a contract to provide, say, an aircraft engine or a centrifuge. Vendors rely on sensors combined with their own understanding of how machines fail and the work of their own service technicians to deliver uptime as a service. Maintenance contracts for elevators and HVAC systems are two other common use cases. Though as Urso points out, “You get paid to keep customers out of trouble, as opposed to helping them once they are in trouble.”
And as Stuart Harris, group president of digital transformation at Emerson Automation Solutions, says, going this route can be compelling, but it requires having a really good understanding of the data. He adds that ensuring uptime using connected sensors and analytics is usually something customers are willing to do on support equipment, but not critical equipment. For example, Emerson sells its steam valves as a service, ensuring that steam flows properly inside a factory, neither building up too much pressure nor releasing too much energy that could otherwise be harvested to run a process.
But as a vendor starts to gain more knowledge about its equipment, including how that equipment’s capabilities can be harnessed, it often starts eyeing other business models, such as licensing a digital twin or offering to share in the value created by its expertise. We’ll talk about those options in another post.