The 75% IoT project failure rate leaves you wondering how you could join the lucky 25% club.
One way to accomplish the goal is to devise a clear-cut IoT monetization strategy from day one — and tweak it as your business grows.
Companies tapping into IoT solutions development seldom realize that traditional approaches and business models poorly suit cyber-physical systems, where each component, be it hardware, mobile apps, or sensor data, has its own revenue-generation potential.
Here’s what you need to know to monetize IoT products like a pro.
Table of Contents
IoT Monetization Strategy Explained
Distinguishing Between IoT Business Models and Monetizing Strategies
Key IoT Monetization Strategies
#1 Perpetual Model
#2 Subscription Model
#3 Outcome-Based Model
#4 Razor-Blade Model
#5 Pay-per-Usage Model
#6 Service Model
Hybrid Monetization Models
Leveraging IoT Data Monetization
IoT Data Selling Challenges
A Guide to Successful IoT Product Monetization
IoT Monetization Challenges
Every business, however technologically advanced it can be, starts from the strategy and ends quickly if the chosen model doesn’t fit.
The Internet of Things presents a pool of monetization opportunities that scares and tempts company owners at the same time since only a tiny percent of them manage to leverage its potential with skill and sufficient expertise.
The way to selecting the right IoT monetization strategy for your IoT business starts from the understanding that every element here can be used as an independent source of profit and that you should look beyond conventional selling strategies.
Dipping into the topic of IoT revenue-generation strategies, it’s important to see the difference between IoT business models and IoT monetization models, since these terms are often used interchangeably.
The term “business model” refers to the whole set of elements that describe the way a company operates in order to make money. According to the Business Model Canvas developed by Alex Osterwalder, it comprises nine blocks, such as partners, activities, resources, value proposition, customer segments and relationships, cost structure, and distribution channels. The ninth block is called “revenue streams,” and it is what we know under another name of “monetization strategy”. It deals with particular ways of long-term revenue generation by following one or more product monetization approaches.
Ultimately, an IoT monetization strategy is the last, but not the least important, building block of your startup’s business model
No matter how promising the Internet of Things can be, your business won’t take off on its own without your clear understanding of how to monetize your IoT solution. The right choice of a strong IoT monetization strategy is a prerequisite for joining that small percentage of IoT startups that survive.
The strategy implies selling a product in its traditional meaning by getting paid just once and not leveraging other revenue-generating options. A perpetual IoT monetization strategy is the simplest way of generating stable revenue if demand is continuous and the product has no competitors.
The approach allows to calculate future profits easily since the prices are not flexible.
This model focuses on a single monetization stream, overlooking an array of additional revenue-generating opportunities, and often fails in the short term because one-time purchases don't cover current business operating costs and further product development expenses.
Perpetual model best suits companies that sell physical devices, gateways, and IoT software — say, smart home appliances or connected workout equipment. But there’s a catch. If your devices stay connected to the cloud 24/7, eventually, the cloud computing services will consume the lion’s share of your earnings — unless there’s a continuous flow of new customers to cover the growing infrastructure expenses.
By providing a paid subscription to your product or service, you ensure the continuous flow of profit, increasing customer retention since you build a certain relationship with your client base and keep it up while the subscription is active.
The strategy opens up extra ways of IoT monetization because, apart from the subscription fees, you can introduce advanced features such as device/software upgrades or a premium account model.
The cost of the subscription should be affordable to ensure the ongoing customer flow and, at the same time, there should be enough subscribers to cover the company's expenses and bring profit.
The model will benefit both software and hardware IoT products and services, such as surveillance systems or predictive maintenance platforms.
If you’re looking to monetize IoT products that provide measurable value to the customer, an outcome-based monetization strategy allows you to charge customers based on the benefit they get from using your device or service.
This approach allows for cutting manufacturing costs by producing fewer products and gaining continuous revenue from its successful functioning. Apart from that, it ensures transparent cost formation, since it is based on the amount of work done for the benefit of a customer.
To exceed the profit you would’ve generated with the perpetual model, you must ensure that clients will use your product frequently.
This IoT monetization strategy is a perfect fit for expensive equipment that is hardly affordable to many customers, but its service is in demand. Smart water pumps, cement mixers, or other heavy and pricy industrial equipment belong to this category.
The model is based not on the IoT solution itself, but on the additional value it brings to the main product by identifying when a customer needs the replacement of its disposable parts. In this scheme, IoT is the “handle” that remains the same, while the “razor” is the part that generates revenue.
This strategy minimizes customer churn as it doesn’t allow the main product to be left unused due to the absence of consumable parts. Besides, it induces people to go for your offering since it’s more advanced and convenient.
The cost of disposable items should be either included in the initial price of the main product or provided at a cost lower than the market one.
The model fits any hardware product that contains regularly replaceable parts, like ink for connected printers or cartridges for IoT-enabled dishwashers.
Similar to the outcome-based strategy, the model allows customers not to pay for the product but for the time or amount of its usage.
The model offers flexible options for product and service pricing based on data derived from IoT sensors. The customizability of your offer is going to attract a wider scope of clients than a rigid proposition.
The pay-per-use model will be profitable if the product is used quite often by a large number of consumers.
It can be applicable to expensive services and products that make it possible to calculate the frequency and duration of usage — for example, car or scooter sharing.
By incorporating this monetization model, you can use IoT as a means of inducing people to buy your service. You can collect and share data with potential customers to make use of your offering.
The strategy ensures the improvement of any business that focuses on service provision and allows it to get extra value from further data licensing and selling.
You’ll need to establish cooperation with an array of potential clients to be allowed to collect their data.
The model will be a great fit for any type of service, such as smart home, factory, or car predictive maintenance.
As you can see, there are endless possibilities of how you can use IoT products to gather data, and then provide a service using the insights you collected. Keep in mind that you can combine this IoT business model with some of the previous ones to increase your profits. For example, you can sell the hardware, monetize the data, and then offer a service based on insights.
The choice of an IoT monetization strategy is not about picking a single model and sticking to it until the end. The agility of the technology implies following the same approach when making decisions about revenue streams. Thus, don’t limit yourself to one strategy if your product can benefit from two or three at once. Combine them, listen to your customer needs, analyze data, and adjust monetization options to bring maximum value to your business.
For instance, if your IoT startup manufactures smart air conditioning units, you can combine the perpetual, razor-blade, and service models by selling the equipment and disposable components and performing regular maintenance. The revenue generated with such an approach would cover the development and infrastructure expenses for years to come.
In the era when data is considered the most useful business asset, industries that create, collect, and structurize it can be considered a true goldmine.
Apart from meeting end-users’ needs and bringing revenue streams to the producing company, IoT devices capture zettabytes of data that can’t be extracted any other way. This data presents exceptional value for third-party companies and industries that want to acquire first-hand information and use it to improve their own products and services. In such a way, IoT businesses can additionally capitalize on selling facts, figures, trends, and insights provided by smart devices.
According to BCG, there are three ways companies could capitalize on IoT data: by adding IoT features to existing products, by developing IoT products from the ground up, and by creating complete ecosystems around their IoT solutions
To effectively monetize IoT data, it’s essential to understand that information is not a by-product but a full-scale in-demand resource that has to meet certain requirements and be managed appropriately. Here are a few pitfalls to watch out for when generating revenue from your data:
- Data privacy and security regulations. From GDPR in Europe to the CPRA changes to CCPA in California, new data privacy and security regulations are coming into effect in different parts of the world. As an IoT startup, you must grant your customers the power to know when and how your gadgets gather personal data — and prohibit its unauthorized usage. Besides ensuring secure data collection, transmission, and storage, you must think of a way to monetize IoT data without violating the laws in your target markets. For instance, you could repackage sensor data from smart meters into comprehensive energy consumption reports and sell it to power grid companies. And if your robot vacuum cleaner creates maps of users’ homes based on sensor and camera data, there should be a possibility for customers to opt out of your IoT data collection and monetization program.
- Poor data quality. If you want to sell data (or, rather, insights!) as a product, mind that its quality should be appropriate. Device-gathered data has to be complete, precise, and raw to present value to those willing to buy and use it.
- Rigid data type. IoT is all about flexibility, so the data collected by smart devices also has to be convertible and supplemented by specific insights to meet diverse customer needs.
- Inadequate product management. Although information doesn’t look like a typical product we buy and sell, it doesn’t mean you can omit preparatory stages like designing, packaging, and advertising.
To devise a viable IoT monetization strategy, your startup needs to conduct extensive market research, identify your target customers, and pinpoint IoT solution components with a high monetization potential
The Internet of Things market value will jump from $389 billion in 2020 to $1 trillion in 2030, more than doubling the industry’s worldwide revenue in just a decade, with an annual growth of no less than $50 billion.
These promising figures stand side by side with the fact that one-third of all the launched IoT projects fail, unable to meet the expected bottom lines. The development of strong IoT business models is key to bridging the gap between the two adverse trends. Here are the steps to follow:
- Carry out an in-depth market research. Any IoT monetization strategy starts from a profound look into the competitive environment that surrounds your IoT product. Analyze your competitors and identify their strengths, weaknesses, value propositions, and monetization tactics. Scan the market to determine scarcely occupied niches and work out solutions that can help you fill them. Invest in the extension of your market state knowledge to ensure the efficiency of the IoT monetization model.
- Find your target audience. Even the greatest IoT product will stay unprofitable if you don’t identify the key customer base. This is not only crucial for stable future revenue generation, but for the whole cycle of product development and selling strategy improvement. Without understanding your target audience, it’s impossible to implement a customer-focused approach, set adequate prices, or choose effective marketing tactics. IoT products, agile in their nature, allow expanding consumer coverage by providing customized solutions to additional segments of clients.
- Work on pricing models. IoT-augmented goods and services are complicated to price since the value generated through the technology can vary significantly for different customers. The standard one-fits-all approach with unclear and rigid price-forming formulae is not applicable to innovative products. Instead, you’ll have to find a golden mean between the price and value your offering brings to specific customer groups. Smart IoT monetization implies introducing flexible and transparent cost-building options tailored according to individual consumer needs.
- Ensure effective advertising. IoT product promotion is not as simple as it seems. Innovative goods require a more expert and targeted approach to their marketing. Dip into the available sales channel options to see if they fit the product and how you can adjust them for a better result. Leverage AdTech to ensure the efficiency of your marketing strategy implementation. Besides, invest in your sales team to be sure they can provide in-depth product presentations and expand your customer base. Try to offer a set of interconnected IoT items to solidify retention. For example, by selling a set of smart home solutions, you make sure that the client is unlikely to turn to an alternative produced by a competitor.
IoT is a relatively new concept that still has several internal issues that need to be taken into account and understood before you turn to an IoT software development service provider. Here are a few of them:
- Lack of integrity. The Internet of Things is a highly composite system where each business adds up to its complexity by building separate platforms, generating its own data, and having almost no access to the information collected by other companies. IoT communication protocols are programmed to share the data from device sensors within their native ecosystem, preventing other IoT players from seeing a full-scale picture and making them rely on a portion of individually extracted data.
- Standalone ecosystems. Following the above-described IoT development barrier, lack of integrity results in the development of standalone gadgets and devices that, apart from enclosing data they gain, also present some considerable monetization challenges. Building IoT products within an ecosystem that are already incorporated into consumer electronics and major industrial systems is much easier and more profitable since you can avoid compatibility issues.
- Control retention. The development of IoT products is interconnected with delegating control to customers who might not be able to ensure security and counteraction against breaches or cyberattacks. That’s why IoT devices and software providers should retain a bigger share of controlling functions to avoid inappropriate data use and prevent system hacking.
Diving into IoT, it’s easy to get lost in the pool of opportunities it can bring if monetized smartly. Apart from exploring IoT product development guides, answer the question of how to monetize IoT. The key thing here is to approach the revenue-generation from a new angle that would not constrain you to a single IoT monetization strategy, but broaden the ways of delivering value to your customers.
And here's where Expanice can help! Drop us a line, and we'll help you with devise an optimum IoT modentization strategy based on your product's technical characteristics, target audience, and adoption expectations.