Internet of Things (IoT) Business Model Strategy

Internet of Things (IoT) Business Model Strategy

Helping you discover the strategy that accelerates growth. Navigating a new business strategy can be compared to ascending a mountain. With many unknowns and risks involved you need guidance to help you get to the top. We understand the difficulties of evolving your business to meet the needs of the connected world and moving into the Internet of Things (IoT). Our product innovation and product realization services for connected devices, from design, engineering, and manufacturing to our suite of embedded technology products, will help you meet your business objectives and create sustainable value. Whatever your needs are, we can help. Let s talk about the summit you d like to climb for your business.

Q: How do we make money in the Internet of Things? A: The relentless delivery of value to your customer. The more we think about the communication between things, the easier it is to forget the true value of a new age of connectivity the tangible improvement of people s lives. That s what your customers have always valued. So what s different about the Internet of Things (IoT)? New IoT business models will give you unparalleled flexibility to create lasting and deeper relationships with customers. That value will impact how you price your product (and service), the rate and volume of the product adoption curve, and also the costs involved to deliver that value. Without a deep understanding of all three, you are unlikely to generate the returns your business requires. To help, Logic PD has developed a structured agile approach an IoT business architecture and process based on the unique combination of technical and business complexity in this new market to walk you through the step-by-step process to design a revolutionary new type of business. Because ultimately, your success won t be determined by some piece of technology or a new cloud service. You win when you delight your customer. Let s get started. Logic PD s Adrenaline Series is a quick, low risk, step-by-step process to help you navigate the IoT ecosystem.

1 Customer Needs & Wants Start here and restart here as needed 5 2 Test & Meaningful Validate Use test results to re-engage with customers in an agile process loop The Internet of Things begins and ends with people. Use lean innovation methods - just enough information and educated guesses Segments Model concept will generate simulations to drive metrics Creative spark that aligns with customer needs by segment Financial Metrics IoT Business Model 4 3

Begin with the customer in mind. Effective segmentation is as much of an art as a science, but it starts with a very simple question: How do you segment customers based on their interaction with your offering and how can you reach them? The answer could come from any number of factors, but should make intuitive sense when you re done.

At this stage, it is helpful to consider your customer s experience with connected devices. In certain industries (e.g. telematics, shipping), Machine-to-Machine (M2M) is nothing new. The only change is the label we use. But for other markets, the concept of connectivity truly is transformative. Identifying a brownfield versus a greenfield opportunity will help you more quickly develop an effective plan. Brownfield opportunities might have faster adoption, but you ll need to deliver more value to differentiate. Greenfield opportunities, by contrast, may mean more work to educate your customer base, but the payoff is an offering that completely resets your competitive landscape. Elicitation Segmentation User Behavior Think about how your customer will interact with your product or service. What task are they trying to accomplish? To what benefit? To avoid what pain? At a very tactical level, we need to know when, where, and how most customers within a segment will act for example: On the road versus at their desk. Your customer habits will dramatically impact the overall solution you offer. Buying Patterns Buying patterns refer to when and how often customers purchase the initial product and when and how they update that purchase. This could be seasonally dependent, event driven, habitual, or none of the above. Connected products offer you the unique opportunity to more easily incorporate refill business models (e.g. razor and cartridge) because your connection allows you to maintain an ongoing customer relationship. Demographics & Psychographics A classic of segmentation, understanding the makeup of your customer segment - their age, gender, background, physical location, income, likes, wants, opinions, and dozens of other details - will help you hone in your offering. It s critical you understand these factors, but they are rarely sufficient. Competitive Frame Don t be so quick to think you know this one. You may have a clear vision of the competitors for your current product, but a connected product can open the door to alternatives you have never before considered. For example, your new connected sensor monitor might compete with a smartphone, dongle, and an app. Understanding the true set of alternatives will help you craft a business offering that is compelling and distinct. Channels to Market Put simply, this is the way your product gets from you to your customer and how the money changes hands along the way. For B2B transactions especially, that could mean one-step or two-step distribution models, independent representatives, or institutional buyers. But this can be just as complex for B2C products, including direct sales. To add another important wrinkle: How might this change with a combined product/ subscription business model? Is your channel to market capable of supporting the logistics involved? There is no right answer for proper segmentation. Your final decision can rest on any combination of elicitation results. In the end, however, you should be able to confidently answer the following questions: 1. Is each segment clearly distinct in some meaningful way? 2. Can you target and reach each segment efficiently with marketing efforts? 3. Can you size the potential market? 4. Does segmentation drive prioritization decisions internally? 5. Can you give each segment a name that helps align all efforts and keep them focused throughout the process? 6. Is there growth potential for this segment? To assist with the segmentation process, and to elicit customer needs and wants, Logic PD has developed a proprietary survey tool. This quantitative tool examines several aspects of your customer s interactions, including their buying patterns, habits, use, and interactions with other products and services. As we move forward, we can help you identify new opportunities and new possibilities for each segment.

A new type of business model. Choose a Model Hardware Focused Subscription Focused Often the easiest transition to a connected product, customers pay a one-time/ up-front fee and receive ongoing connectivity at no incremental cost. In this model, customers still incur a substantial percentage of the cost of hardware (if not the entire cost), but also pay an ongoing subscription fee. This approach attempts to blend the best of both worlds some investment up front with a modest recurring expense. Customers need to incur some expense up front, but it is usually modest, and nowhere close to total MSRP. It may even be below cost. A more common model in the age of smartphones, customers receive the product at no cost.

Add Value A new model isn t enough. You must deliver more. Hardware Platform Connect with Existing Hardware Ongoing Hardware Refresh Tiered Subscription Rate Plan Smartphone/Tablet App Customers purchase a dedicated hardware platform that is (largely) useless without additional investments in software or subscription services. Platform devices are often sold at a loss. New hardware is connected (via local area network radios or some other technical means) to an existing connected device most often an Android or ios powered device. Customers purchase a starter kit with the expectation that additional components will deliver additional value over time. Subscriptions are priced differently based on data needs and/or data usage. Apps are developed specific to hardware platforms (e.g. Android, ios, Windows) or as web apps. Most apps are available at no cost or low cost. Analytics Social Device Advertising Supported PAYG (Pay As You Go) Support Analytics services create information from data. The value of that data varies greatly depending on the application. Device data is captured and shared via opt-in social media (e.g. Facebook, LinkedIn, Twitter). User profiles and ongoing usage data provide opportunities to seek advertising rights or database access. Also called Freemium, this is a common model where basic access is free. Add-ons may be purchased in packages or a la carte. Innovative support options from telephone, to in-person, to online can provide a unique point of difference, especially for complex products and applications. ERP/CRM Add-On Remote Update Safety/Security Usage Tracking Device Identification These add-ons (often called modules) incorporate device data into an existing CRM or ERP system. By updating device software and firmware remotely, you can save your customers the trouble of returning a device for service as well as ensuring a consistent user experience. Security and privacy concerns are critical in regulated markets (e.g. medical/hippa), but an important concern for many other customers as well. Monitoring device usage can help you inform customers of needed maintenance or consumables purchases. Unique device identification provides complete traceability from source to receiver. This is an important value add for multistep distribution chains. Logic PD can help you make appropriate selections here. We have developed an in-depth survey instrument to discover broader customer wants, needs, and habits even if they don t interact with you that way today.

Setting the right price. These are the four pricing strategies you probably learned about in business school. You probably also learned that there is a relationship between the value you deliver to your customer and the flexibility you have with your pricing model. What probably wasn t as clear is how these models apply to an Internet of Things (IoT) offering. Although the competitive frame and market pressures may work to limit your options, the general rule still applies: More value = better options.

Strategies Cost-Plus Pricing Market Pricing Value Pricing Disruptive Pricing Cost-Plus pricing is exactly what you think it is: Figure out the cost to deliver your offering, multiply by an acceptable margin, and set a price. In a commodity market, this might work. For an IoT offering, it s almost never appropriate. The costs to deliver your offering are (and should be) completely disconnected from the value your customers perceive. Cost-Plus is a great check on a final business model to ensure your Internal Rate of Return (IRR) is acceptable, but should never be used to set an initial price as money is easily left on the table. Without adding significant value that differentiates your offering from the competition, prevailing market conditions will dictate your pricing. This isn t necessarily a bad thing: It will be easier for your customers to frame the offering in their minds. The differentiator here is usually the amount of marketing or sales dollars you have to invest in promotion. It s a valid strategy, but you will want to account for an increased cost of sale. A superior model (and where most business textbooks stop), value-based pricing allows you the flexibility to price your offering dependent on the value you deliver to your customers whether it is dollars saved, dollars earned, any combination of the two, or any intangible savings or benefit. IoT offerings are uniquely capable of delivering ongoing benefits to your customers which can grant you this flexibility but it also comes with the burden of clearly identifying and communicating this value. With a bill coming each month, your customers will continually re-evaluate the perceived value for the cost. This is a special case. True market disruption is not only rare, but it is exceedingly difficult to execute. Transformation of this type happens when your offering is so compelling and delivers so much unique value that it literally changes the way customers experience and purchase for the entire category. This might mean giving hardware away for free or charging on use rather than a fixed fee. The only rule is that it sufficiently shakes up the market. You might ask, if market disruption is so rare and so difficult, why include it? IoT offerings, by their nature of continued value delivery throughout their useful life, have a better chance of disrupting a market. It is still challenging, but this pricing model is legitimately on the table. There s not just one pricing decision here. But several if you include ongoing subscriptions and services. Logic PD can help you explore different pricing options.

Mapping the adoption curve. What you re seeing here is the familiar adoption of innovations curve, where the total number of customers increases as you move from innovators and early adopters, through a large majority, and finally to a laggard group. The curve is rarely this smooth, and some innovations never make it past the early adopter stage, but it is still a useful model to examine the two primary ways your Internet of Things (IoT) business model selections can influence adoption. Rate of Adoption Accelerating the rate of adoption not only helps to generate customer interest and speeds the learning/adjustment process, but also drives a faster Return on Investment (ROI). All things being equal (meaning the overall market adoption rate at the front of the curve) translates into significant tangible and intangible returns. Certain business models and value-added options (e.g. those that require less up-front customer investment) are helpful additions to accomplish this objective.

In real practice, adoption curves are never quite this smooth. Logic PD has developed a simulation modeling tool to help you explore multiple scenarios for each customer segment. Total Adoption Obviously, an increase in the overall addressable market directly impacts the profitability and scalability of any investment. However, for IoT initiatives, revenues and costs sometimes scale at different rates especially subscription services and certain value-adds. Certain business models and value-added options drive total adoption better than others, but it is important to keep a careful eye on business metrics by segment as adoption increases.

Understanding the cost to deliver your model. At each step of the Internet of Things (IoT) Data Journey, your product has the opportunity to incur costs depending on the business model option and value adders you choose. Logic PD can help you identify costs that will impact your overall ROI. Then using our M2M options matrix for each step, you can select the most cost effective option to deliver the value desired.

IoT System Architecture The IoT System Architecture is a simple and intuitive way to understand M2M technical architectures by following the flow of data through a complete system. By using this thought model, you won t miss an important step (and the costs associated to deliver that value to your customer). In this part of the business model creation process, we will help you understand the relative impact of cost implications at each step of the data journey for each business model and value add option. Devices Network Cloud Application Sensors and controls Optimize for size, cost, and performance Cellular networks Satellite networks LAN/PAN connectivity TCP/IP Data: communication and storage Administrative: billing and subscription management Security: authorization and authentication User and admin functions HTML, SMS, E-Mail, XMS Mobile, desktop ERP/MRP integration Analytics Developing a true connected product could mean a new series of costs. Logic PD has developed a structured approach to capture all associated costs for your business model to eliminate surprises.

Understanding the cost to deliver your added value. Devices Network Cloud Application Hardware Platform Developing a robust platform for future expansion is critical. Connectivity needs to be flexible and accommodate unforeseen changes. Cloud is easier to change at a later point. Analytics can evolve as device software evolves. Connect with Existing Hardware Smartphone hardware and operating systems evolve rapidly. OTS hardware often features builtin connectivity. Data inputs may be influenced or constrained by OS/platform. Hardware/OS provides some builtin expectations (and limitations). Ongoing Hardware Refresh Designing for consumable usage is a critical up-front decision. May be event-triggered versus continuous monitoring. Consumable rules must be in place so that data can be interpreted properly. Data must be translated to actionable information. Tiered Subscription Rate Plan Operation must vary based on user input. Architecture must be able to support the rate structure profitability. Billing service must be able to accommodate this complexity. Users must know how to manage their own usage effectively. Smartphone/ Tablet App Data structure and controls must align with OS requirements. Options must satisfy user expectations. Data management may be handled within the app itself. App design is critical for delivering value beyond the data itself. Analytics Device must be able to collect the data in a useful format. Protocol can t get in the way of delivering data as needed. Storage and processing power is important here. The value of analytics (and the investment) is delivered here. Social Device Easy social sharing tools required to promote action. Must deliver shared content on push, be available wherever the user is. Management of shared data becomes a significant storage challenge. Often built into the social media platform. Advertising Supported Device must support sponsored content. Connectivity must support content pushes at regular intervals. Managing ad content and reporting to advertisers is key to this model. Important to balance advertisers and consumers needs.

Scale Cost Potential: 1 5 (low) (high) Devices Network Cloud Application PAYG (Pay As You Go) Design for unconnected and connected operation. Architecture must be able to support the rate structure profitability. Billing service must be able to accommodate this complexity. Users must know how to manage their own usage effectively. Support Design for self-support critical to minimizing costs. Connectivity issues must be easy to diagnose. Some support may be automated for faster service. Support a variety of support interactions (online, phone, in person). ERP/CRM Add-On Data must be collected in a ERP/ CRM-ready format. Options must satisfy user expectations. Integration will vary widely based on platform. Value delivery is a combination of out-of-the-box and customized reporting. Remote Update Device must accommodate over the air updates. Must support larger bursts of data during updates. Software revision control is a critical feature. Consider automated versus manual updates. Safety/ Security Design for secure operation in the field. Implement security and protect data in transit. Secure data storage and processing. Often the weak-link - build in userlevel fail-safes. Usage Tracking Device must collect appropriately formatted use data. Polling frequency is important for network design, cost control and bandwidth requirements. Storage and processing power is important here. Users must know how to manage their own usage effectively. Device Identification Device must be designed to support unique identification. Must be able to identify unique devices. UDIDs must be stored and managed. Knowing exactly which device needs attention. Developing a true connected product could mean a new series of costs. Logic PD has developed a structured approach to capture all associated costs for your business model to eliminate surprises.

Path to profitability: Simulating critical business metrics. In addition to a basic profitability analysis, we can model projected sales and associated costs in order to calculate a series of business metrics. Basic ROI is a critical metric, of course, but Logic PD can also help you find your Break-Even (BE) point, determine Average Revenue Per User (ARPU), and optimize risk for multiple possible pricing and costing scenarios. units units T-90 Peak EAU D-50 frequency frequency Lower risk risk profile (lighter) Higher risk risk profile (darker) T-10 Adoption Simulation time Risk Profile result Ranges of estimations for four points on the adoption curve, along with pricing options and costing inputs, allows us to simulate a range of possible scenarios. For each business metric, the arithmetic mean provides the most likely result, while the standard deviation approximates the risk. A smaller standard deviation (less spread ) indicates lower risk, while a larger standard deviation will warn you of greater risk.

Outputs Return on Investment (ROI) Probably the most important measure of viability, Logic PD simulation models can incorporate many layers of cost and revenue variables (e.g. layering in associated SG&A expenses over the life of the offering) that will impact your decision. Segment Portfolio Management Think of your customer segments as part of an investment portfolio. We will help you understand the relative value of each segment as you make your decision. Break-Even (BE) In a complex Internet of Things (IoT) business model, calculating BE is not trivial. Our modeling tool will output a simulation of both break-even revenue as well as break-even time. Net Present Value (NPV) An important metric for comparing investment options over time, Logic PD will assist you in accounting for all future revenue streams (hardware, subscription, and others) to ensure you have the complete financial picture. Internal Rate of Return (IRR) This simulation incorporates your organization s discount rate and will allow you to compare multiple scenario options against each other. Average Revenue Per User (ARPU) ARPU is a core metric in the telecommunications industry that will now become part of your lexicon. Logic PD will help you understand monthly ARPU, profitability, and churn as part of your new offering. When you engage with Logic PD for a business model workshop, we will use our simulation tools to help you move from business creation to financial justification.

Coming full circle. It s time to put your plan to the test. We ve set up the Logic PD Adrenaline Series, a step-by-step solution for navigating the Internet of Things (IoT) ecosystem with a quick, low risk formalized process that allows customers to assess needs, pilot and test a solution and deliver a proof of concept of how to bring ongoing value to their customers. Now allow us to take you through the journey to help you create that next level in the customer relationship the subscriber. Adrenaline Workshop Adrenaline Prototype Adrenaline Pilot The Series begins with the Adrenaline Workshop, an intensive, one-day, one-on-one event that helps customers identify IoT critical success factors. Logic PD will help customers define user segments and drivers, evaluate technologies and system integration options, and finally explore pricing models and financial simulations. Once these critical success factors are established, customers move to the Adrenaline Prototype where Logic PD delivers proof of concept by connecting the client s existing sensor or device to the ready-to-deploy IoT platform. In 30 days or less, customers see live data from their device with a set of advanced visualization tools. Finally, Logic PD will assist in launching a viable IoT solution for limited deployment to a select set of customers in the Adrenaline Pilot. Clients are able to gather insights from customer interactions, technology, and financials to help define a successful full launch.

Success Story Tank Monitoring This classic remote monitoring application with a high up-front investment and small recurring subscription competes with human labor. Because of a lack of value delivered, the business is forced to use a Market Pricing approach essentially bound to what they can convince the customer to pay as an alternative to their own labor or costs. A lack of creativity in the business model leads directly to a high-risk profile and disappointing overall financial performance. Model Value Adders Segments Usage Tracking Device Identification A Farm Co-Ops monitoring grains and feed, both dry and liquid. B Individual farmers tracking chemical usage on their own property. C On-site tank monitoring for manufacturing users of industrial chemicals. Pricing Model - Market Pricing Likelihood 70% 60% 50% 40% 30% 20% 10% 0% -20% -10% 0% 10% 20% 30% 40% 50% 60% Total Likelihood over 100% 80% 60% 40% 20% 0% Units per Month Monthly Installs 35 Cummulative Installs 30 (includes churn) Add-ons 25 Cummulative Add-ons 20 15 10 5 0 1 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 Total Installed Units 120 1800 1600 1400 1200 1000 800 600 400 200 0 ROI Months from Launch ROI Adoption Financial Metrics ROI: 25.7% (Avg) 16.0% (Std Dev) Break-Even (Months): 47 (Avg) 3.4 (Std Dev) NPV: $89,942 (Avg) $55,846 (Std Dev) Break-Even (Units): 841 (Avg) 23.2 (Std Dev) IRR: 25.8% (Avg) 3.7% (Std Dev) ARPU: $106.81 (Avg)

Success Story HVAC Equipment Maintenance Service This is a monitoring system enhanced and reimagined as a pay-as-you-go subscription service. Instead of asking the customer to make an up-front hardware investment, the subscription allows the business to amortize those costs over time. The value is clear: By monitoring continuously, the business can schedule maintenance before it s needed versus when they get a break-fix call. The resulting financials show a far greater return and narrower risk profile. Model Value Adders Segments Usage Tracking Device Identification Analytics ERP/CRM Add-on Remote Update PAYG (Pay As You Go) Tiered Subscription Rate Plan Support A B Individual business owners responsible for their own HVAC equipment. Property managers responsible for multiple devices. Pricing Model - Value Pricing Likelihood 70% 60% 50% 40% 30% 20% 10% 0% 500% 1000% 1500% 2000% 2500% 3000% 3500% 4000% 4500% 5000% over Total Likelihood 100% 80% 60% 40% 20% 0% Units per Month Monthly Installs 35 Cummulative Installs 30 (includes churn) Add-ons 25 Cummulative Add-ons 20 15 10 5 0 1 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 Total Installed Units 120 1800 1600 1400 1200 1000 800 600 400 200 0 ROI Months from Launch ROI Adoption Financial Metrics ROI: 2,025% (Avg) 348% (Std Dev) Break-Even (Months): 38 (Avg) 3.8 (Std Dev) NPV: $7.1M (Avg) $1.2M (Std Dev) Break-Even (Units): 5069 (Avg) 601.9 (Std Dev) IRR: 101.8% (Avg) 9.4% (Std Dev) ARPU: $1395.12 (Avg)

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