IoT Startups Need To Consider Their Business Models Carefully

Editor’s note: Emanuele Angelidis is CEO of IoT incubator program Breed Reply, which covers the pros and cons of the various business models that IoT startups can adopt.

With forecasts projecting that billions of new devices will be connected to the Internet by 2020, device makers are rushing to release new products they hope will corner the Internet of Things market.

This much was evident at CES this year, when dozens of companies exhibited new connected hardware for the home, car, body, factory floor and more.

Whether it’s fitness tracking, plant moisture monitoring or connected lightbulbs, each of these markets will host individual battles among IoT segment contenders, all vying with a simple goal – to sell more boxes of hardware than competitors. But this traditional retail approach to the Internet of Things opportunity overlooks several alternative business-model variants that may be far more suitable in this emerging space.

Many companies in traditional business make a product, sell it on shelves and, hopefully, make a profit. Whether it is Philips’ Hue or Parrot’s Flower Power, one can understand why technology companies are choosing the same retail approach used by food, drink and clothes manufacturers. After all, for many digital companies, Internet Of Things devices represent the first physical embodiment in the real world, following a generation in which online, intangible development reigned supreme.

But connected devices are not cans of beans or sweaters, and device makers do not need to limit their products to a single, one-time purchase event more commonly associated by perishable items. Internet-connected hardware is always-on, updateable and extendable, offering far more opportunity.

To multiply their revenue potential, IoT startups should aim instead for long-term value creation. Rather than selling customers a single, self-contained product and letting their relationship end, this means offering them the chance to engage through multiple touch points throughout an ongoing engagement.

VCs by far prefer startups with recurring revenue streams over those with a one-time, drive-by sales model. Below, are models that budding IoT startups should consider today if they want to really take advantage of the new paradigm.

Product cost plus one-off premium service

The most straightforward way to wrestle additional income from a product you’re already selling is to offer an ancillary service worth paying for.

This is a model we are already seeing in the wearables space. Fitbit’s fitness trackers already come with an app offering an array of health and sleep analytics.

On top of this out-of-the-box experience, however, is Fitbit’s premium service — a fixed-rate plan that comes with a 12-week training program, deeper data, benchmarking against peers and data export capabilities.

Product cost plus recurring premium revenue

The business model your next investor really loves is one that treats an initial sale as a gateway to a monthly recurring subscription.

Consumers are already well used to paying monthly for services like mobile networks and digital music. IoT startups just have to find a point of additional value that can be achieved not just as a one-off but with frequent repetition.

The Internet security camera Dropcam and home monitor Canary work using this model, requiring payment after purchase to store recorded videos in the cloud.

Free product with ongoing revenue stream

Also known as subsidization, this will be familiar to anyone who has a Sky TV box or a mobile phone. Those operators eliminate or reduce the upfront cost of essential hardware to make a bigger buck from a long-term customer relationship.

While this may work well for satellite companies and telcos, many smaller tech startups won’t yet be in a position to pick this approach outright. This is because they have to face the issue of managing the required working capital at the beginning of the business and typically this business model approach is most often used when the product or service is more mature.

But this should not stop developers from considering the model early on. IoT entrepreneurs who may want to exit to larger consumer corporates like utilities, telcos or entertainment providers must understand the benefits these operators bring – namely, the scale required to make a loss on product cost in pursuit of a bigger payday.

No product cost, no service cost

Think B2B2C (business-to-business-to-consumer). With this magic combination, end users wouldn’t have to pay for a piece of hardware or for an associated service, but they would receive a benefit nonetheless.

Consider how Aviva Drive, the insurer’s GPS-free smartphone app, monitors customers’ driving habits, rewarding careful customers with relevant average savings.

IoT makers should not confine themselves to thinking only of end users as their customers. There is a world of opportunity if they can provide value to large businesses, too. So expect to see more of this.

In all of these revenue models, the key is identifying long-term relationships the keenest of users may want to have with your product. But makers must be sensitive to the value retail consumers expect a product to promise out of the box. Setting the subscription needle too soon risks disappointing customers; but striking the right balance of perceived and potential value sets the tone for a win-win future in IoT.