This is the first of a series of articles on IoT business models stemming from Don Barnetson’s sabbatical. Input and comments are welcomed.
Contemporary IoT value propositions fall into three categories – hard savings (ROI), soft savings and revenue enhancement. 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.
Hard ROI Savings
Hard savings involve curtailing an external (ie, outsourced) expense with some piece of IoT technology. The simplest example is an energy retrofit of a building which deploys technology and capital to energy expense curtailing external spend on energy with utilities. These are straight forward sales engagements as they typically do not bridge multiple stakeholders within a customer.
There are four key items to understand in this space:
- The expense needs to be external – reducing the workload of an employee, such as a maintenance person, with a technology is generally not a credible savings unless the customer envisions a RIF to reduced overhead as a result of this product. If maintenance is outsourced, however, savings can be immediately realized and qualified
- Customers will focus on payback period not NPV – although we’re taught to use net present value (NPV) over a product’s lifespan to evaluate investments, customers comparing options will generally look at payback period (how many months to get their investment back) rather than NPV over the product’s lifespan. This incentivizes picking low hanging fruit rather than making more capital intensive investments. However, it creates value around financing and service offerings that vendors may provide resulting in immediate positive cash flow (more on this later).
- Hard savings need to happen automatically – IoT systems include sensors to read information and actuators to implement change. You solution must integrate both sensors AND actuators to close the loop and generate cost curtailment. Providing a customer with a dashboard making them aware of a problem does not generate a hard saving.
- External expenses can only be curtailed to zero – the scope for value creation is limited and typically under attack from multiple angles working to reduce cost. For example in the building space, energy codes have reduced building energy consumption by 45% over the past 40 years.
JLL developed an often cited metric called the 3/30/300 Rule – stating total outsourced utility spend of $3/ft/yr for a typical company. In general a vendor can expect to receive 10-20% of the customer savings they generate in revenue.
The key opportunity as well as challenge of a hard savings model is that its not likely to be transformational to a customer – for example no amount of hard savings could practically save Sears at this point so you generally won’t get senior executive attention in this type of product.
The opportunity is thus relatively low level, rapid decision making in the sales process and a sales cycle of only a few months.
The challenge is that it is transactional, meaning you need a sales & marketing engine capable of acquiring and closing large numbers of customers and a channel to execute on that otherwise you will run into scalability issues.
We’ll explore soft savings and revenue enhancement opportunities in the next blog post.
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.