- How can companies actually make a profit with IoT innovations?
- Get ready for a dramatic transition
- Creating multiple revenue streams
Significant cost savings, unparalleled customer insight, minimal infrastructure requirements, and numerous other factors have made the Internet of Things (IoT) the next great paradigm shift. But technology advances do not necessarily translate into profits, as the dot com era clearly demonstrated.
There already are hundreds of IoT companies that have field for bankruptcy or gone out of business altogether. In fact, a survey by consultancy Capgemini found 70% of organizations don’t generate any service revenues from their IoT solutions — despite the fact that global management consultant McKinsey & Company estimates IoT, as an industry, will generate between $4 and $11 trillion by 2025.
The question thus becomes how can companies actually make a profit with IoT innovations?
This white paper will examine what monetization for IoT means, how companies must rethink their business models to compete in the interconnected era, and how Aeris can deliver a customized platform that turns every device and sensor into a profit center.
Note: For the purposes here, ‘monetization’ is defined as being the ability to generate profit versus simply extracting efficiencies from operations to enhance profit margins.
GET READY FOR A DRAMATIC TRANSITION
One of the reasons companies and organizations have not monetized their IoT investment is due to their focus on efficiencies, automating as many processes as possible in order to save money and enhance productivity.
This is a logical approach given shifting processes to IoT-enabled devices can save upwards of 60% in costs within the first year, and the results are both measurable and evident. But extracting operational efficiencies to enhance return on investment (ROI) can only go so far. The real value of IoT to organizations lies in how it can fundamentally change their interaction with customers, and that requires switching from a capital expenditure (CAPEX) to a primarily operating expense (OPEX) business model.
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Monetization based on OPEX starts by rethinking the fundamental corporate business model, regardless of industry. In the traditional way of doing business — selling unconnected products — the enterprise focused on features and benefits. In a connected, IoT-enabled world, managers will be more focused on the utilization of their products, as this is where they will generate the most revenue. Put simply, the products become the strategic assets. This rethink also is a psychological one — companies have to shift from the belief that customers must always buy a product to one in which ‘renting’ is the norm.
Take one of the most traditional old-line industries today — vehicle manufacturing. Why spend valuable CAPEX resources to design and build cars (on average, it costs more than $2 billion to develop a new vehicle) when you can convert the business model to OPEX and realize recurring revenue by charging for usage? General Motors, a traditional CAPEX-intensive company in this industry, invested $500 million in ride-sharing service Lyft for this reason. In addition, companies can charge subscriptions for infotainment, insurance, maintenance, and more, without ever having to build anything.
CREATING MULTIPLE REVENUE STREAMS
Companies and stakeholders, responsible for making quarterly financial goals, also need to realign how they actually are defining profit. IoT business models cannot be measured by the same metrics as consumer voice and data services. In fact, IoT typically appears as a horrible investment if viewed in a traditional manner.
For instance, the value of a single IoT enabled connection can vary anywhere from $50/month to a few dollars per year. Thus, the monthly average revenue per connection (ARPC) for IoT deployments is far lower than the average revenue per user (ARPU) for consumer services — and this can look devastating on a balance sheet.
IoT as a profit center needs to be judged separately and on its own merits. The good news is, due to their nature, IoT devices are not subject to the same constraints as is a manufactured product. While there is a definite limit to the number of people who can be sold a mobile phone, for example, there is no limit to the number of devices that can be manufactured and deployed when human interaction is not required for use. Even if the ARPC is low, revenue can be high due to the ubiquity of the devices. Thus, IoT as a profit center must be judged on scale and margins. The more cost-effective devices deployed, the better the balance sheet looks. And once the infrastructure is in place, there are unlimited opportunities for up-sells, dramatically improving ARPC.