Many connected industrial devices, like robots, motors, drives, controllers or medical devices, typically generate revenue through a traditional hardware-based revenue models. That means customers buy the device and might also sign up for a services or maintenance package. Yet, that model doesn’t offer many opportunities for growth over the lifecycle of the customer. And it doesn’t reflect where the true value is today — software, data and digital services. Hence, many traditional hardware companies are re-evaluating their monetization strategies. Software-based services enable IoT producers to bundle product offerings, services and feature sets in new and creative ways that generate incremental new revenue streams in the form of subscription or pay-per-use models.
‘Survey says: IoT producers rapidly embrace service revenue streams’
A recent IDC survey (registration required) reported that 38% of IoT producers currently derive half or more of their revenue from hardware, but that proportion will decrease to 33% within the next two years. In contrast, 32% of respondents derive half or more of their revenue from services, and that figure will increase to 38% within the next two years.
Interestingly, 32% of respondents currently use software to electronically turn features on and off based on one-time purchases or subscriptions. Among those not yet using software to activate features, 19% plan to do so within two years. Other IoT producers use software to utilize data from IoT device sensors to uncover new services opportunities (31% currently and 29% within two years) like repairs and sales opportunities (29% currently and 27% within two years). Respondents also indicated they’re making investments to be able to manage the licensing and entitlement of these services-based revenue models. Sixty percent use licensing and entitlement management systems to develop new offerings that bundle device, services and/or consulting, and 17% more plan on doing so within the next two years.
Subscription and usage-based models pose opportunities and challenges
Applications, features and services for IoT devices are commonly offered as a subscription or usage-based revenue model, and both have benefits and drawbacks. Subscription models work best for defined resource pools and steady workloads. They offer predictable revenue for producers and expenditures for customers. Pay-per-use models work best for elastic workload demands and for applications that need access to an unlimited resource pool. Revenue and expenditures are based on consumption, and can vary widely in each billing period.
For instance, PolySync — a company that offers a platform that manufacturers, researchers and suppliers use to test autonomous vehicle systems — monetizes via a subscription model. Prospects typically enter into a relationship with PolySync with a free, 30-day trial. When the trial is over, users can choose a basic, plus or pro subscription, and PolySync can turn special features on or off based on the level of the subscription. PolySync’s software-based system eliminates the need to upgrade the IoT hardware, which means the company can easily introduce new, premium features, as well as push out critical security patches and fixes.
Define metering standards for transparent pricing
Both subscription and pay-per-use revenue models utilize meters to authenticate registered users and track usage. While per-user models are prevalent for SaaS offerings, there’s no standard meter in IoT when it comes to monetizing devices and the software on them. Meters depend on the business model and can be based on devices, users, transactions or the actual usage, like miles driven, gigabytes stored, products produced (in a factory environment), energy saved (in a building automation environment) or magnetic resonance imaging scans (in a medical company).
As IoT companies define their digital business models, the best strategy for monetization is to measure multiple factors to define the best meters on which to create transparent pricing models so that customers can see on an automated, self-serve basis how much they are using. Innovative IoT producers are already evaluating many different meters as a basis to make future pricing decisions, or to monitor license compliance and usage.
Thinking IoT? You have to think SaaS.
Most people think about devices, connectivity and data coming from edge devices in the field when they think about IoT. Not everyone thinks about SaaS straight away, but the truth is that every true IoT system also includes a SaaS application. SaaS offerings are usually the key to data, analytics and remote monitoring. That’s where the value is in IoT.
However, the world of SaaS offerings, subscription and recurring revenue is somewhat new to many traditional hardware companies. The success of a SaaS application depends on the value customers get out of it. Hence it requires an ongoing customer relationship. Producers that fail to monitor customers’ success and adoption of their SaaS apps put their business at risk because it will become hard to predict renewals and fight churn.
For SaaS offerings, subscription and usage-based revenue models are the monetization standard. When IoT companies think about monetization models, they might include their SaaS offering into a bigger IoT subscription package that is comprised of the device, the SaaS offering and data-driven services, or they might monetize their SaaS offering independently from their hardware business — both options are seen on the market.
‘Everything as a service’ — IoT is transforming objects into services
In the first wave of IoT, device makers were fairly limited in terms of monetization options. Their primary revenue models derived from the sale of the hardware device and, perhaps, maintenance revenue associated with the purchase. The next big revenue opportunity lies in IoT services delivered via software, which makes devices capable of providing “everything as a service.” While few standards exist, there are many options to incorporate IoT meters that track usage, time, number of transactions, bytes transferred and other metrics that can monetize appified, task-based usage of software. In addition, IoT services can be monetized via subscription. IoT producers must choose whichever appropriate licensing model enables payment based on how the software is used in performing tasks deemed valuable by users.