IoT and Changing Business Models

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As the Internet of Things (IoT) spreads, the implications for business model innovation are huge. Filling out well-known frameworks and streamlining established business models won’t be enough. To take advantage of new, cloud-based opportunities, today’s companies will need to fundamentally rethink their orthodoxies about value creation and value capture.

Historical Business Models :

While there are all kinds of different businesses, we tend to see a foundational set of business models that get stamped out over and over again. If you doubt this, consider when you last heard some company describe themselves as the Uber of whatever industry.

Now, those models might vary. Some companies will directly monetize a product or service (this is basically every company you know). Other companies monetize distribution (think: anything streaming). Some companies monetize a brand (franchises, for example). And of course, a lot of companies monetize their users (social media or anything related to advertising).

But with the emergence of all of this data, we will certainly see more companies who choose to monetize the data. And IoT will only fuel these possibilities.

It’s no surprise that exciting new technologies are generating startling insights from big data, but very few come from the B2B sector.

It can be difficult for industrial executives whose performance is measured in dollars and cents to become excited about bits and bytes, especially when they have been fairly dismissive of big data to date, labelling it a B2C phenomenon.

That mindset, however, changes with the Internet of Things (IoT), where companies that cannot deliver optimal performance through analytics will not be able to compete.

The new reality is that ubiquitous sensor data means companies must disrupt or be disrupted, and the challenge to business leaders is to answer two fundamental questions. Firstly, what new business models must I deploy in order to compete? And secondly, how can I build organisational structures that can execute those models, bridging internal divisions between corporate functions and business units?

Internet of Things, one of today’s most popular technologies is slowly but surely changing our daily lives, inevitably affecting and business.

As the Internet of Things become more profitable financially and easy to use, it will lead to fundamental changes in the business models.

In order to monetize the Internet of Things data, companies need a clear understanding of its features and applications strategy – with the participation and sponsorship business leaders

Not surprisingly, the analysis of large amounts of data through spectacular new technology leads to a stunning conclusion, but only a small part of them belongs to the B2B-sector.

        Industrial managers, whose effectiveness is measured in dollars and cents, it may be difficult to admire the bits and bytes, especially considering that until recently they were quite inconsiderate to large data volumes, hanging on their label B2C phenomenon.

However, this attitude is changing with the advent of the Internet of Things (Internet of Things, IoT): from now on the company is not able to pay the analyst in their favor in order to achieve optimal performance, lose competitiveness.

In the new reality dictated by the ubiquitous sensor data, the company itself must either change the usual course, or it will “help” in this and the first priority of business executives to answer two fundamental questions.

Firstly, what new business models I have to implement in order to remain competitive?

And secondly, how can I build organizational structures capable of implementing these models, combining corporate functions and business structures by internal divisions?

As you can see, none of these issues has anything to do with technology. Why don’t we talk about how many millions of devices will be connected in the coming years, as a lot of space to store all of these sensory data we need and how quickly we can hire specialists in data processing and analysis?

Consider the three most important changes in our industrial history. Of course, this is the history of technological breakthroughs, but to an even greater extent, this history of the realization of opportunities.

In the middle of the XX century, computers have made possible the scientific and technological revolution, creating a tycoon selling affordable services on a large scale. And on the threshold of XXI century, the Internet has made possible online trade and has created, along with the network moguls social networks prevalent in today’s business landscape and selling of data on a large scale.

What does all of this mean?

In order to monetize the Internet of Things data, companies need a clear understanding of its features and applications strategy – involving sponsorship and business leaders.

Remember that the complexity of these ecosystems and the information may require cooperation with an experienced team to provide analytical services to support new, emerging model market.

Internet of Things is an ever-growing world of sensors and devices, creating a flow of “granular” data about our world. “Things” include all – of the environment sensors that monitor temperature or power consumption to “smart” household appliances, remote control of machines and production lines. Devices of all types manageable online and connected to the network.

Advantages of using IoT in systems and processes

For equipment manufacturers, there are several advantages of integrating IoT into their machines.

  • Get access to data even when the machine is at the customer site. Once sensors send data into a cloud system, manufacturer can get access to a customer’s machine performance data even if the equipment is at the customer’s factory. In fact, a New Jersey manufacturer can get access to data even if the equipment is being used in Enugu, Nigeria. Such access to data overcomes a major hurdle when it comes to providing customer satisfaction and continuous improvement.
  • Monitor performance and offer suggestions to improve performance. Once you can access data, you can monitor performance. Even better, you can provide your customers advice regarding fine tuning machines and optimal machine performance given by your best engineers regardless of where they are located.
  • Predict failure or recommend a maintenance schedule. Predict parts failure in time to take corrective action by observing the deviation of the performance from the normal trend line. Alternatively, use the performance data to fine tune the maintenance schedule.
  • Monetize service level agreements. Many manufacturers already monetize maintenance through service agreements. With performance data, manufacturers can now be confident about machine performance and monetize this confidence by guaranteeing service level (such as uptime), which may be a competitive advantage.
  • Use data to improve parts performance. Manufacturers routinely use statistical analysis of parts performance to improve the quality of various components. With real time monitoring, such analysis can be done much faster. It can also be more accurate with sample sizes being larger, since data can be measured frequently and stored easily.
  • Provide recommendations. Form a community and lasting customer relationships. With connectivity, manufacturers are encouraging communities around their products. Customers interact with each other, answer questions and share experiences. Tighter relationships means that it is less likely the customer will go to a competitor for the next purchase.
Exploring new business models :

Performance monitoring can lead to incremental service revenue, higher customer satisfaction, less downtime, and eventual improvement in quality. The greatest impact of IoT, however, could be in changing the revenue model to a usage-based pricing model – i.e. selling a product as a service rather than just a product.

Consider the typical pricing dilemma a manufacturer faces. Let’s consider a large air compressor manufacturer. Per microeconomics, a company maximizes profits as long as marginal revenue from selling a unit is greater than the marginal cost of the unit. Airlines, for example, routinely sell similar seats at different prices to maximize profits. Manufacturers often try to do the same with a system of different features in machines, or rebates and discounts. However, there may be a more elegant way of measuring value derived by a customer and pricing accordingly.

Let’s consider a simple example of a compressor manufacturer whose marginal cost of manufacturing and selling a compressor unit is $30,000. Furthermore, let’s say 20 large customers derive $100,000 or more of value from a unit and 30 smaller customers derive $50,000 of value. Profit from only selling to large customers would be $70,000/unit * 20 units = $1.4 million. If the manufacturer wants to sell to everyone, then the price per unit has to be decreased to $50,000. Overall, profits then become $20,000/unit * 50 units = $1.0 million. Clearly, it is in the manufacturer’s interests to keep prices higher and sell only to the large customer. However, money is left on the table.

Now consider a scenario where pricing was based on usage, say quantity of air compressed, time the machine is run or some other relevant measure. Prices of this unit could be set in such a way where the revenue from the large customers is still $100,000 and from the small customers is $50,000. This time, though, the manufacturer can have all 50 customers. Profits would be large customers ($70,000/unit * 20 units = $1.4 million), PLUS smaller customers ($20,000/unit * 30 units = $600,000), or an aggregate of $2.0 million.

Pricing the product as a service leads to a recurring, and therefore more predictable, sources of revenue. Certain technology companies have moved or are in the process of shifting to usage-based pricing. Salesforce, Amazon AWS, Adobe and Microsoft are prime examples. For instance, Amazon AWS’s server farms are used not only by large corporations like Netflix but also by startups who would rather outsource specialized skills of cloud management. Amazon AWS’s usage-based pricing makes it affordable for large and small corporations.

I believe there are three key ways in which the Internet of Things will change every business:

  1. It will allow companies to make smarter products.

It used to be that we only expected our phones to be able to make phone calls.  Today, most consumers expect a lot more from the device they carry in their pocket.  So, while it might seem strange or unnecessary at first glance to have a smart tennis racket, an internet-enabled frying pan, or a smart yoga mat, these are just the first forays into the world of the Internet of Things.

Only time will tell which will stick and which will go the way of pet rocks, but the point is that businesses will have the opportunity — and eventually, the imperative — to make “smarter,” more useful, more connected products.

  1. Enable smarter business operations and smarter decisions.

A big part of the Internet of Things isn’t so much about smart devices, but about sensors. These tiny innovations can be attached to everything from yogurt cups to the cement in bridges and then record and send data back into the cloud.  This will allow businesses to collect more and more specific feedback on how products or equipment are used, when they break, and even what users might want in the future.

Rolls Royce aircraft engines contain sensors that send real-time data on the engine’s function back to monitoring stations on the ground. This information can be used to detect malfunctions before they become catastrophic, and possibly to investigate — and hopefully prevent — the causes of aircraft disasters. Microsoft MSFT +1.24% uses software that constantly collects data on what features are being used for its products, so it can strip away the least popular ones and focus on the most popular.

  1. Change in business model

Above and beyond all this, I believe the Internet of Things will also signal the possibility of a change in business model for some businesses.

Other similar business models will no doubt emerge.  Fitness trackers like FitBit and Jawbone already aggregate data about our fitness habits and health stats and share these their strategic partners.  There are certainly plenty of organizations that would love to get their hands on that kind of data for marketing and other purposes.

The most important thing to do when considering how the Internet of Things will affect your business is to think bigger — much bigger. It’s not just about what kind of products you can make “smart,” or how information could impact your business efficiencies, or how you might sell that data to customers and partners.

The Internet of Things represents a fundamental tilt in the lens through which we view the world.  The same way most of us would never want to go back to a phone that’s just a phone, soon we won’t be able to imagine going back to a world without smart cars, smart roads, smart infrastructure, etc.  In other words: The Internet of Things could change everything and every business needs to consider its implications.

MeenaG Staff

Internet of Things Enthusiast

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