This is the 3rd of a series of articles on IoT business models stemming from Don Barnetson’s sabbatical. Input and comments are welcomed. Prior articles on Hard Savings and Soft Savings.
Contemporary IoT value propositions fall into three categories – hard savings (ROI), soft savings and customer revenue growth. These categories require materially different go to market strategies and are difficult to package into a single vertical product thus it is critical that vendors identify their space clearly in advance.
REVENUE GROWTH
Companies have two kinds of problems: Not Enough Revenue and Everything else. -- anon
Creating an IoT product with the premise of boosting customer revenue is often considered the holy grail of product management for two key reasons:
- You can drive customer executive engagement and attention to your solution and sell from the top down
- You see an opportunity to price it on a share of revenue gains – to essentially take a commission on the revenue you create for a customer.
In this installment, we’ll examine three challenges you’ll run into on an IoT business model focused on customer revenue growth.
WHAT DOES YOUR SOLUTION COMPETE WITH?
Imagine you have an an IoT technology which decreases manufacturing cycles times, increasing inventory availability and customers’ marginal propensity to buy. At first look this seems to meet the bar of a customer revenue growth IoT application; but on closer inspection it does not.
The problem you’re solving is really inventory availability then you’re extrapolating that to revenue. There are other ways to solve availability that you compete with:
- Build buffer inventory – tie up cash and increase obsolescence risk
- Process re-engineering to reduce cycle time – NRE + risk
In this case, it would be better to think of your product providing hard cost savings vs alternate approaches to improving availability with one of the alternate approaches of the customer to “do nothing”.
Your product generally needs to be at the point of customer interaction to credibly support an argument that you’re directing increasing customer revenue – as IoT devices are physical this tends to push you into retail.
CAN YOU PROVE THE VALUE PROPOSITION DURING THE SALES PROCESS?
Lets say you have an IoT technology which increases the fidelity of a retailers on hand inventory making it more likely that when customers click “buy and pick up in store” that the item they bought is actually there.
In the past:
- % (A) of these customers came to the store to pick up their basket and were upset with the experience
- % (B) of those customers never used the service again
So % (A) are legit revenue improvements – but small potatoes and with the caveat that it competes with other methods of keep better track of on hand inventory like cycle counting – it could potentially be priced as basket delivery probability increased.
% (B) is the piece you want – but there is no credible way to prove the impactyou’re having to this piece of the pie, especially up front when you’re in the sales process so its practically off the revenue growth bucket into the Soft Savings bucket.
INTEGRATION CAN KILL YOU
As there literally is nothing more important to an IoT customer than revenue, they tend to have material investments in systems to manage the revenue process. Your product will need to be deeply integrated into these legacy systems to add value. This integration is messy and different for every customer – in the case of this product type it could involve ERP, CRM and/or various promotional toolsets.
If you plan to do this integration yourself, then you’re probably not building a traditional venture backed startup with an exit path. You’re building a lifestyle business– which is great…except for your investors. You’re going to spend most of your time on consulting projects completing the integration
If you plan you plan to have 3rd parties do this integration, then they are a key part of your company’s future – these partners can help you identify customers, sell and ensure customer success. Getting mindshare these partners is everything – your goal is to help these integrators make money — by making your product effective, simple and relevant.
Practically it is going to be very hard to get the attention of these systems integrators until you get to scale thus you’ll likely have to start doing it yourself and have a credible plan to get out of that as quickly as you can.
Imagine the integration required for our retail stock counting example above. Goods would need to be tagged with an RFID solution in the factory, readers would need to be installed throughout the distribution chain as well as in store and the reader outputs would need to get connected to the retailer ERP solution at every stage. Finally a new set of business processes would need to be built in order for the retailer to recognize inventory shrinkage in realtime rather than during cycle counts. The integration in this case is surely much larger and more expensive than the IoT product itself.
REACHING FOR THE HOLY GRAIL
"Let it go, Indy...."
If the beta of your startup’s success isn’t yet high enough, building a business model around customer revenue enhancement surely is a way to increase it. If you’re successful, it could be tremendous; but the number of risks you need to address and corral to get there are daunting.
Don Barnetson is a Technical, Product and Strategic Marketing Executive with a passion for business model clarity in the Internet of Things (IoT) space based in silicon valley
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