“The Internet of Things will transform your industry.” This may sound like a familiar refrain because everybody from CISCO to Intel to startups like Resin is talking about it. And everybody is talking about it for good reason. But why? And how? What does it mean for IoT to really transform industries and business models? How does the Internet of Things help make money? These are logical questions to ask, particularly if you have been following this series where we first explored IoT market sizing, IoT’s strategic importance, how to design for the IOT and IoT networks. In this blog you will read about a model to help you think about what your product really is. It might even challenge you to ask what your company really does. It will show that each layer in the value hierarchy of business models reflects a shift of responsibilities from the end-user to the manufacturer in order to provide higher and higher value services in addition to a physical thing.
Before diving into the model, keep in mind that just because you might enable a product with sensors and connect it to the Internet of Things does not mean that all of a sudden your business or product is transformed. It matters what you do with the data that is generated. In this case, we will explore how you can take on increasing responsibilities that accelerate the transition to a service based business model and capture an ever greater portion of the value created.
The figure above portrays the increasing sophistication that OEMs can deliver with greater sensor network & service offering maturity. Moving up the Service Added Value Curve provides greater share of wallet to the OEM. But what does each step along the way look like?
Sell a Product
This is the transactional model with which most of the world is familiar. A customer goes to a dealer, buys a car. It’s her responsibility, her depreciation, her…headache.
Rent a Product
Renting or leasing machinery means something quite different. In its most basic form one no longer needs to perform general maintenance on the machine—it’s not yours and you have no real incentive to ensure the longevity of the machine. With a typical rental transaction, the asset is generally not held long enough to bump up against some of the next service models we explore. But, if it is a long term rental, the rental contract will most likely embed one or more of the following models.
After Market Services
Many businesses are already at this point along the curve. You most likely have this type of arrangement with your suppliers today. Think repairs and upgrades; spare parts and technical support. In 2006, the Aberdeen Group estimated that 8% of the US GDP was spent on after market services—that’s over a trillion dollars! In years past, analysts estimated that after market services on average account for nearly half of a firm’s profit, yet only a quarter of its revenue. Now consider that most of these services are provided in a “dumb” fashion today; that is without the intelligence associated with real time monitoring that is capable with the Internet of Things.
Predictive Service Delivery
With the intelligence capable via IoT-enabled assets, higher value and more cost effective solutions can be created and delivered. Predictive Service Delivery represents the first major service transformation possible leveraging IoT. As an example, on-road truck delivery networks may need to understand the speed, engine load from weight or elevation changes, and ambient temperature of the truck operating conditions to understand wear and tear on consumables such as oil and tires in order to optimize planned maintenance. Knowing the route of the truck enables planning for refueling at locations consistent with purchase agreements as well as planned maintenance at locations with service agreements on the road eliminating the need for the truck to return to a centralized or regional location periodically for maintenance.
Service Level Guarantees
Equipment providers are selling their products and including any required maintenance, which is efficiently monitored remotely and creating additional value for the customer by guaranteeing the performance of the equipment. This increases the pressure on the equipment provider to deliver high quality and well-designed products since they have the financial responsibility for the entire life cycle of the product. This can involve complex monitoring in a consultative engagement with the customer. In petroleum refining, process units designed to separate and convert unrefined crude oil from the ground into a range of finished products such as gasoline involve a complex combination of original design of the chemical reaction to perform this conversion, the design of the custom-built reactors, and controlling operating conditions and even the design of other chemical catalysts to help facilitate the reaction. Companies who provide the intellectual property of the design of the underlying process technology traditionally sold the design only. Custom fabricators built the physical equipment and the end user was left with selection and use of catalyst and other operating guidelines. Now the company which designed the original process is guaranteeing the performance of their design. They are using remote monitoring to ensure compliance with operating guidelines by the customer and also providing on-going consultative operational guidance on catalyst evaluation and recommendations on process parameters. This transfers considerable risk of a 30 year capital investment from the end user to the original process designer who should have more expertise. It enables an on-going and new revenue stream for a company who originally only monetized the intellectual property in the process design in a one-time licensing agreement.
Product as a Service
Other manufacturers are providing the same level of comprehensive equipment design and service, but actually changing the terms of the business arrangement. Instead of selling the products and services with a guaranteed performance criteria, they are bundling the consumable materials as well and pricing the product in the context of its final use. Companies making large printing presses are providing the printers, paper, ink, and on-going maintenance and the customer is paying a cost per unit actually printed. The risk and opportunity of the intent of the product is transferred to the manufacturer along with the additional revenue potential. Another example is an aircraft engine manufacturer. Now, instead of buying the engine, airline companies have the option of buying flight time enabled by the engine. This is possible because the company taps into a plethora of sensors that are constantly monitoring the engine which allows the company to know immediately what needs to be fine tuned before the plane even lands. This is even being extended to the airframes of the planes based upon number of takeoffs and landings. With superior knowledge and control of the product itself, the equipment provider can guarantee the desired end-use of the product providing value to the customer while more efficiently delivering the maintenance and consumables for the product compared to what a traditional maintenance model can provide. This is a win-win for the provider and customer and is changing the actual business model definition of the manufacturer.
Performance Based Outsourcing
The pinnacle of this model, performance based outsourcing, focuses on delivering outcomes versus the means to achieve an outcome. The two most common examples of this model are third party logistics where providers sell on time delivery and facility management where usable space is sold (without the hassle of heating, cooling, lighting, security, construction, maintenance, etc). However, this model can be applied to other industries such as coordinated design, maintenance and built-to-order heavy machinery for mining.
What this all boils down to is the ability to leverage new streams of data to provide ever greater value and service to the customer. While this model works well for thinking about how to move up the value chain and capture greater share of a customer’s wallet, it is not completely exhaustive. There are other ways to monetize the IoT. Take, for example, a mining company that has IoT-enabled their mining operations to feed real time production data to commodity traders who then base procurement hedging strategies on these insights. This mining company could also consider selling the data stream to a data/news service company like Bloomberg. Efficiency and data insight opportunities abound.
That said, most companies will find this a helpful framework to think about what might be next. Keep in mind that the Service Added Value Curve will be different for different industries and this will ultimately dictate how far up the curve it makes sense for any given OEM to push. However, the further up the curve your company goes, the more valuable you become to your customers. More completely taking over responsibility for your area of expertise allows your customer to focus on their own core competencies. Thinking back to the airline example and engine flight time, perhaps airlines become customer service businesses at the end of the day…wouldn’t that be frightening?
Once again, collaboration credit goes to Chuck Pharris–many thanks for your help!.