Surprise! People are shelling out for IoT subscriptions

IFTTT, which lets users link connected devices and web services to other connected devices and web services, has achieved $6 million in annual recurring revenue from 150,000 subscribers two years after it announced a subscription plan. Linden Tibbets, the CEO and co-founder of IFTTT, told me the company has reached break even on its revenue and that, going forward, it plans to focus solely on paid subscriptions from users.

This is good news for a company whose service I have been using since its founding in 2010, albeit maybe not exactly the service that venture investors who put $63 million into IFTTT had in mind. But it’s also a sign that it’s possible to get customers to pay a subscription for services.

When IFTTT launched its plan to charge a monthly subscription to users who wanted to use more than three applets and lower latencies, I was skeptical. But I also signed up. And since users could pay whatever they wanted, I chose to pay $4 a month based on the number of recipes/applets I used.

At the time, Tibbets hoped he could get users to pay $10 a month by offering $10 of value. That didn’t happen. Today IFTTT has three plans: free (for five applets), $2.50 a month for a professional (or “Pro”) plan that provides 20 applets that execute at faster speeds than with the free plan, and $5 a month for a Pro Plus plan, which provides for more complex applets and an unlimited number of them.

At some point, my $4 plan/month was apparently downgraded to the Pro plan. Since I didn’t notice, this was probably the right option for me. Pro Plus is a relatively new option. Prior to the subscription plan, IFTTT charged businesses that wanted to create services on IFTTT. For example, iRobot paid it to create triggers and results that let IFTTT link iRobot devices to other services.

Now the idea is that enterprises that want to create their own services will pay for the Pro Plus plan, which will enable them to publish their applets and services at will. And because some current IFTTT customers have deeper integrations, such as embedding IFTTT applets into their own applications, IFTTT still plans on some of their enterprise customers paying more.

But going forward, the focus is on subscriptions. “I think this is still a $100 million-a-year business,” said Tibbets. He told me the company gets thousands of new users every day, and said the last two years of experimentation with subscription plans has taught him that many users are happy to subscribe. “It’s a slow-moving wave,” he said. “People on the internet are now willing to pay for stuff.”

Putting aside for a moment the inevitable cries of protest that erupt whenever a formerly free product adds a subscription, Tibbets is onto something. Zuora, a company that helps enterprise customers mange their subscriptions, notes that in 2021, IoT companies in its annual subscription economy index demonstrated revenue growth of 13.3% on average.

Even companies behind devices that have had to retroactively adopt subscription plans after realizing that if they didn’t they would go under have found some success. For example, Mellow, a connected sous vide cooker, launched a subscription plan around the same time IFTTT did. The company was facing some $4,000 in monthly costs associated with the device back then, and the more people that used it, the higher those costs ran.

Today, about a quarter of Mellow’s users pay a subscription, which keeps the device connected to the cloud. But the owner of Mellow, who didn’t want to be named, said the company is still struggling to pay developers to keep the app up and running, especially since he doesn’t have access to the original code after taking on the assets in a fire sale.

“We really haven’t done much on the getting people to subscribe front,” he told me via email. “All we did was change the app from allowing customers to access the recipe features to forcing them to subscribe to use it.”

The subscription keeps a pricey device operational, but Mellow isn’t really a success story since it’s still a lean operation that’s struggling to keep its app working. Internet-connected camera maker Arlo, on the other hand, is learning firsthand that subscriptions can pay off. When reporting its second-quarter results recently, Arlo noted that it had almost 1.5 million paid subscriptions, up 113% from the same period a year before.

When it launched its new subscription-focused business model in the first quarter of 2020, it had 255,000 subscriptions. And the services revenue associated with subscriptions is especially valuable, not only because it helps offset the ongoing cost of keeping a connected device operational, but because it’s also a source of higher-margin sales. Arlo reported 65.2% profit margins on its services revenue and 28.4% profit margins overall in the second quarter of 2022.

For other companies that offer a subscription that wraps the cost of device hardware into the cost of a monthly subscription, the margins allow them to replace the hardware for free after a few years. This is true for activity trackers, dog collars, and maybe even exercise bikes. Which is why even if as consumers we aren’t excited about subscriptions, going forward we’re going to be offered a lot more of them.