IDC predicts that Internet of Things (IoT) revenue is expected to surpass 1 trillion USD by 2022 with industrial IoT leading the pack including smart buildings, smart utilities, smart cities, smart manufacturing, smart retail and smart health. This creates an opportunity for manufacturers to introduce new revenue streams by bringing IoT-enabled business models to the market.

What is IoT?

IoT (Internet of Things) is a network of inter-related devices such as digital machines and computers with UIDs (unique identifiers) which can transfer data from one to another without requiring any human intervention.

IoT is a powerful economic driver that will herald the next wave of tech-led businesses. Investors are pouring in a lot of dollars in IoT-based start-ups, knowing its potential to proliferate over the next few years.

Here are three of the top IoT business models that are trending and have given fruitful returns to business owners.

1. Subscription Model

Since IoT products have 24/7 connection to their customers, organizations can leverage that connectivity to develop a recurring-revenue business model. Instead of having a one-time sale, organization can offer a subscription model in which the customer pays a fee in return for recurring value.

It empowers an organization to foster an active relationship with their customer. In the past, manufacturers used to care more about product sales and less about after-sale service. But times have changed, and customer would rather go to competitors that would give them more value over time.

IoT products help in generating that additional benefit to the customer. As your device gathers more data in your customer’s surroundings, you will be able to learn more about your customer and provide more valuable features tailored to their specific needs.

Some common IoT applications using the subscription model include “monitoring-as-a-service” and “predictive maintenance-as-a-service”.

“Michelin, popularly known for its tyre business, has another segment that purely focuses on corporate fleets. It gathers data from sensors embedded in the fleet vehicles. The data not only allows the company to provide corporate customers with preventive maintenance information for the fleet, but also provides Michelin a recurring revenue stream. Michelin packages insights from the sensor data, and customers “pay Michelin on a per-vehicle, per-year basis” for that information.”

– McKinsey

2. Outcome-Based Model

The outcome-based IoT business model is an example of an innovative approach enabled by IoT products. The idea is for customers to pay for the outcome (or benefit) the product provides, as opposed to the product itself.

“People don’t want a drill, they want a hole!”

Theodore Levitt, Harvard Business School

Customers also don’t pay for the drills, they pay for the holes. Well, the outcome-based model works in the same way.

Imagine a fitness tracker brand. Customers are not paying for the watch, they are paying for health monitoring and maintenance. In the past, their business revolved around selling watches, and they measured success by meeting quota on a certain number of watches per quarter.

But the customers are not looking to buying a watch. They are looking to monitor their health and track vitals on a periodic basis to stay healthy. That is the need of the customer. Not the product but the outcome.

The fitness brand can build a next-gen model of the smart-watch which will track more vital data and send it back to the manufacturer such as heart rate across the day, in different activities such as walking, sprinting, sitting, eating, sleeping, etc. This data of customer’s vitals can now be shared with the customer with some intelligence. For instance, going for a run in the afternoon involves more water breaks and exhaustion than going for a run in the morning. The morning ones have less breaks and covers longer distance which burns more calories and leads to better results. This shared data is more helpful to the customer over the long-run, and hence, a variable fee (outcome-based) model for the data will fetch more ROI to the brand against a fixed price for the watch.

Philips has been successful with IoT in health care, whose imaging division has created connected ultrasound and CT scan machines. Instead of just selling the machines to hospitals, the company has worked with hospitals to either buy the machine (one-time investment) or subscribe to pay-per-machine/year for data shared. The machine then captures data in an imaging room to figure out anomalies and eliminate inefficiencies, which is then shared with the customer to yield better ROI from the device.

3. The Peripheral ‘Razor Blade’ Model

There have been many instances where the primary product is sold for cheap but the mandatory peripheral products and services around it are sold at a higher price due to its demand. For Instance, a movie ticket is sold for 50% discount, but popcorn, drinks and sandwiches are sold at a higher cost due to its inevitable demand once the customer is inside the cinema hall.

Another classic example is razor blades. The goal is to sell more disposable razors, and therefore, the razor handle is usually sold at a lower cost or even given away for free.

This business model can be very lucrative for products that have consumables needing constant replacement. For these types of products, it is very important that the customer never run out of the consumable. Otherwise, the product loses its value proposition.

The challenge for manufacturers of these products is that there might be a gap between when the consumable runs out and when the customer reorders it. Sometimes that gap becomes permanent, and the customer never buys again. But what if the product itself could reorder its consumables whenever it needs them?

This is where IoT comes to the rescue. The data from the embedded IoT product gathers data and identifies patterns to automatically reorder its consumable before it runs out.

Brita, a German water filter company, uses IoT to its advantage. Their best-selling product, Infinity Water Pitcher, automatically reorders its filters so the customer can continue using the pitcher without having to worry about filter consumption. This takes away the most challenging task from the customer: Remembering to reorder. Most of the customers forget their maintenance dates, renewal dates, and IoT can help them with these reorders and renewals without their intervention.

Amazon also uses this model with their Amazon Dash Buttons. These “connected buttons” come pre-configured to order a specific product, say detergent or toilet paper. When you press the button, it re-orders that item from Amazon and it arrives at your door step within a few days without the long billing process.

Conclusion

IoT business model can reduce customer friction when buying a product and can enable an organization to provide a better experience to their customers, ultimately differentiating themselves. There are endless possibilities of how organizations can use IoT products to gather data, and provide services using those data and insights. Manufacturers should also be service providers, creating new opportunities with IoT-enabled products to create new paradigms in business and revenue models.