For the past 100 years or so companies have operated primarily from a product-centric model where the primal focus point was to sell more of the same. The number of units was the key result. Be it more radio’s, cars, shoes, and tablets.
(I’ve written about the developments in the automotive industry here)
This article is part of a series on Internet-of-Things and the subscription economy. It explains how data is driving innovation and opening up opportunities for new business models.
With industries closing in on zero marginal costs companies have tried several ways to add value and set themselves apart in the marketplace moving away from models of ownership towards more personalized, immediate, and flexible outcomes. Behind all the personalization talk it is risk mitigation that is driving this trend.
This risk-based model, dubbed the “Subscription Economy”, brings in a wide range of business models where products and services are wrapped around long-term customer relationships and can be priced based on the usage, consumption, and outcomes.
While this shift started with software, it is now spreading to other industries such as manufacturing, utilities, telcos, consumer goods, and transportation. Fueled by the exciting possibility offered by the Internet of Things businesses are moving away from product sales to service sales.
One example is using IoT data and connectivity to transform the sale of industrial machinery and other goods into a service. Where a sensor-based system detects machine wear and proactively alerts the operator of the need for maintenance before a critical part wears out. It could be sold as a hardware and software product. Or it could also be sold ‘as a service’ with subscription fees charged on a monthly or periodic basis over a period of time. The vendor can also offer the hardware and software as a product sale, but some features, such as monitoring or other key functionality enabled in the software, on a subscription basis. Now, these models are proliferating across industries and settings. Manufacturers of products such as coffee machines and laser printers with IoT capabilities are morphing into robust service businesses.
One such example is Kone Cranes. Which successfully implemented a pay per use model. The Finish company was getting beaten in the market by low priced Chinese competitors. But when they equipped their cranes with sensors and connection they were able to better schedule maintenance and service.
This led to a whole new business model. Customers do not need to invest in cranes anymore, instead, Kone offers a pay per load service with a price and service proposition that easily their low-priced competitors.
There are 3 layers of added value when gathering data with IoT. Tracking, combining and enriching:
- Track when and how physical assets are actually used allows providers to price and charge for use.
- Combine data from these connected assets to help supplier operate assets much more efficiently than a single customer could.
- Enrich IoT data with contextual data to enable context based pricing and business models.
This business-model shift will require production companies to raise their standards and to step up their service level. Product development, for instance, becomes service development, where the value is co-created with customers. It won’t be enough to focus on the product features customers will pay the most for. Developers will need to understand the business outcomes their customers seek and learn how to shape offerings to facilitate those outcomes most effectively.
In the next articles, we will take a deep dive into the 3 layers of adding value and explain how this impacts companies their business model. First by taking a look at the ways in which it is possible to gather data, second how this data can be combined and third how contextual data can create new and better ways of serving customers and adding value.
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