Three Things to Get Right When Monetizing IoT
IoT is exploding. The Economist Intelligence Unit just released its latest IoT Business Index, and it’s worth a look. They interviewed 825 business executives around the world about their IoT implementation strategies, and the title of this year’s report pretty much sums it up: “A Step Change in Adoption.”
The index started in 2013, and this is only its third edition, so it offers an interesting longitudinal measure of IoT adoption. Three years ago, most of the respondents were still in the planning stages. Today the average company in the study is “on the cusp of early implementation” of some kind of connected product or service.
But when I talk to IoT companies, a lot of them are still doing it wrong.
Here’s the good news. Most hardware and manufacturing companies have moved beyond thinking of subscriptions as “let the customer pay for the product over time.” They now realize that the more powerful ideas in IoT are about wrapping new digital services around their connected products in order to build lasting customer value. And so innovation is exploding.
The problem is that lots of these same companies still have a tendency to treat the new services as add-ons, bonus features or glorified iPhone apps. And so they’re simply plugging these new digital services into pre-existing organizational departments and back-office systems. Maybe there’s some money in this, the thinking goes. Let’s give it a shot. We’ll just treat it like a new menu item.
I think that’s a big mistake. I think that hardware enterprises should consider creating separate business units for their subscription-based services. Let me explain why from three perspectives: sales, product, and finance.
Sales. Conventional wisdom states the easiest way to get a sale of the new thing is to stick it on the order form as part of a large, multi-million dollar sale. And so a lot of companies sell their new connected services through existing sales channels. A $50K SaaS offering might not feel like much in terms of commissions next to a multi-million dollar technology sale, but these new IoT offerings will be nice extras for your field organization.
But here’s the problem: If a sales team just sees the new IoT service as just another line item on an order form, then they won’t appreciate the value of the service, and your customers definitely won’t. The end result is that these new IoT services sit unused, languishing, and a year later the customer simply cancels them. We’re all familiar with that dynamic.
What’s the alternative? Many successful IoT companies are instead creating a dedicated subscription sales team that’s commissioned on recurring revenue and service usage, instead of one-time sales. This team comes in after the hardware sale, and runs a new sales cycle. They are free to sell back into the install base. They’re way more efficient in terms of sales execution, and operate much more like consultants and strategists than set-it-and-forget-it sales folks, creating much more value for customers.
Systems. Conventional wisdom states that you’ve already invested a ton of time, money and resources into your back-office systems, so when you’re rolling out a new digital service your first instinct should be to take advantage of what you already have. You’ve used your ERP to roll out a new product before, so you can certainly use it to roll out a new service. How hard is it to simply tack a new SKU into the existing systems?
But here’s the problem: If you’re selling rigid and complicated pieces of equipment like CT scanners or jet engines, then your quote-to-cash and ERP systems are going to be equally rigid and complicated. Re-configuring all of your back-end systems for digital services is going to prove very difficult. On top of that, pricing & packaging models in digital services change quite often — companies find they are changing pricing for their IoT services two, three or four times a year.
What’s the alternative? The best IoT companies know that they need to be able to launch new services quickly, bundle them, package them for different markets. They need their own quoting, billing and revenue automation technology. Believe me, I’ve seen lots of DIY projects attempting to graft subscription capabilities onto product-oriented ERP systems, and they always end badly.
Finance. Conventional wisdom states that finance is about efficiency. There’s already a shared service for things like billing, collections, and revenue recognition that handles these operations for all the different business units. Wouldn’t it make sense to continue to use those functions?
But here’s the problem: The financial processes for a recurring revenue business looks very different. There’s a huge difference between one-time payments and recurring revenue.
For example, in some companies the cost to send out an invoice can cost $500 or more, when you add up all the various activities that have to take place. This is OK when the average invoice is for tens or hundreds of thousands of dollars. But some of these new IoT services involve monthly charges that are significantly less.
Or, if you’re in the collections department of a company that sells heavy equipment, and someone doesn’t pay you for that equipment, then you’re coming after them! But if someone is late on a subscription payment, there could be other issues involved: They’re unhappy with a new feature, there was some confusion about service tiers, etc. It requires a more customer success-oriented approach.
What’s the alternative? Many manufacturing companies actually set their IoT service group as a separate business unit, with its own controller that acts like a “mini-CFO” for that division. This group manages its own pricing, its own operations, is free to create a separate set of metrics that is more relevant for the business, and essentially operate as its own revenue subledger that is consolidated up to the corporate finance group as part of the monthly close process.
To sum it all up, if you’re a hardware company, then your IoT service shouldn’t be treated like just another drop-down option. You need to organize and incentivize yourself differently for your digital services to be successful. Give your IoT teams autonomy and flexibility. They (and your customers) will thank you.
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Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.