Commercialization Series - Blog 2: Monetization, Pricing, & Billing
by Kevin Frisinger, on January 25, 2022
In blog one of our “Preparing to Commercialize a Connected Solution” blog series, we outlined key questions for you to consider as you look to automate the manufacturing, provisioning, and claiming of connected devices on a large scale. Here in blog two, we’ll discuss items that are near and dear to your accountant’s heart: how you will monetize, price, and bill for your connected solution.
Up to this point you’ve likely been focused on the technical aspects of your solution—what hardware you need, how everything will connect, and what you’ll do with the data you collect. Although it may not feel like it, that is often the easy part, as there are hard and fast answers around technical considerations.
In our experience, customers often struggle most with getting the monetary side of the house in order. Below, we’ll address considerations to help you determine the value your solution will provide, what you’ll charge customers for that value, how to structure subscription models, and how you’ll actually implement recurring billing.
Determining the Value
Monetization strategies for connected products are centered on creating value from the data that is collected. What that value is—and who will pay for it—varies dramatically based on your company, product, and users. Thinking this through will help you determine if you have a business case to generate a return on your investment or if a connected product is just a neat idea that isn’t financially sustainable on a large scale.
In order to identify the key value of a new connected solution—and the key stakeholders who will benefit from that value—consider the following questions:
- What are the current pain points with the product or process?
- What features of the solution will address those pain points?
- Who will benefit from those improvements?
- Can the solution streamline a specific task, allow you to anticipate potential issues, or allow you to do more with fewer resources?
- Will the solution improve safety, save time, or reduce physical visits/truck rolls?
- Can the solution enhance customer service or improve your ability to deliver on service commitments?
- Will the solution enable historical knowledge of a few key subject matter experts to be shared with a larger audience?
- Are those improvements valuable enough for someone to pay for?
- Are the costs of living without the solution high (e.g., is unexpected downtime catastrophic or do replacement parts have long lead times)?
- Can this solution serve new markets or provide an opportunity for new business models?
Tip: More data does not equal more value
Those pursuing the adoption of IoT point to its improved efficiency, cost savings and safety — as well as its better decision making and potential for new products and services as reasons to embrace it. A common pitfall that companies run into is to collect as many streams of data as possible and at high resolution from equipment without asking “Do we really need this?”.
Acquiring the data, sending the data and storing the data can not only be costly when cloud services are involved but can be overwhelming. IoT data generation can be multiplied quickly as it’s collected from many devices, 24 hours a day, 7 days a week. There is the potential to generate a gigantic amount of data, which will generate increasing costs for processing, delivery, and storage that will impact Total Cost of Ownership.
The vast majority of the data generated from most sensors is not important — but the tendency will be to move it all through a business process because it’s easier at the beginning. Planning early can reduce costs, complexity, and overall provide a better experience. Here are our recommendations:
- Data Architecture Review: Do a data architecture plan to map out all the data streams from your edge IoT device and how they will be used. Some streams may be able to be sent less often than others, some may only be sent with a state change.
- User Stories: Talk to users and customers about the tasks they need to perform and what would provide them with information they can take action on. Develop user stories to help understand these tasks and key information.
- IoT Edge Capabilities: Take advantage of IoT Edge filtering and analytics to reduce data generation.
Defining the Price
Based on your answers to the questions above, you should have a good understanding of why your organization is building a connected product, what value it provides, and whether it will primarily be a tool for your customers or an internal tool for your organization. As a result, you’ll be able to select a pricing model that more accurately aligns with the value-creation goals of your connected solution deployment, a decision that plays an integral role in its success.
If your connected product will primarily be used as an internal tool, there won’t be a “price” you charge, per say. But it’s time to put pen to paper to understand the true economic impact of the solution. Having real numbers around this value will help you gain internal buy-in and understand what your company can bear when it comes to the cost of your connected solution. For example:
- If the solution will help eliminate in-person visits to remote equipment, what will you save in resourcing costs?
- If the solution will help prevent unplanned downtime and schedule preventative maintenance during off-peak times, what will you save in monthly/yearly maintenance costs?
- If the solution will ensure equipment is running optimally or during non-peak energy times, what will you save in utility costs?
If your connected product will primarily provide value to your customers, it’s important to get early market feedback—typically during your proof-of-concept phase—to see what they are willing to pay for a solution like yours. From there, you generally have two options when it comes to pricing:
- Pricing based on usage. In this scenario, you take into account what the solution costs you and then charge a markup of that for your customers. We don’t generally recommend this monetization strategy, as it can get complicated fast. One of the biggest challenges is how to charge for variable fees—like report rates and data usage—that can vary dramatically from day to day or month to month. How to account for those variables and pass the costs on to your customers is not only difficult to figure out, but can also be difficult for your customers to accept.
- Pricing based on value. In this scenario, you forgo any variable fees and instead develop a price based on the value your overall solution provides (e.g., ability to limit downtime, ability to augment a maintenance plan). Again, it’s important to ensure you have developed a good understanding of the value customers see in your solution and the price the market will bear—this is typically gathered through in-depth market research or voice-of-customer feedback during the proof-of-concept phase. We typically recommend this monetization strategy, as it is much simpler and will set you up for greater success.
Choosing a Subscription Model
Once you determine what people will pay, it’s time to consider how you will enable customers to pay. One of the major benefits of adding a software component to hardware is the new opportunity to generate consistent, recurring revenue rather than a one-time hardware sale. Below are a few examples of the common subscription model patterns we see.
- Charge for a full solution with an additional monthly software subscription fee. Customers purchase your complete solution (typically including hardware and cellular connectivity) and then pay a recurring subscription fee to access the solution’s data.
- This is often a good fit for customers who are comfortable with recurring fees, but are hesitant to make a long-term commitment—they may be willing to pay more up front for the solution in order to secure monthly pricing for a shorter period of time (e.g.,12 months or even month-to-month).
- In this scenario, you will have the benefit of a new, recurring revenue stream; however, you will face the challenge of figuring out how to handle recurring billing if you have not done so before (see the Setting up Billing section below for more information). If distribution partners are typically involved in your sales, you may also have to decide if/how they get paid for a portion of the recurring software sale, support, etc.
- Include hardware with a flat-rate, long-term contract. The hardware portion of the solution is provided to customers for “free” in exchange for a long-term commitment from them (e.g., 3-5 years) for a non-variable fee to access the solution’s data.
- This is often a good fit for customers who may need to keep start-up costs low—they may not have the budget or the internal appetite for a large, up-front price tag for your solution.
- In this scenario, you have the benefit of guaranteed revenue for a longer period of time without having to manage recurring billing; however, there are two main challenges. First, your accounting team will have to recognize revenue over several years, which can be a bit of a headache. Second, this setup requires customers to actively “re-buy” the subscription at the end of their contract, giving them more of an opportunity to opt out.
- Build the cost into existing service contract pricing. If the solution will be used to augment existing service plans (e.g., to enable predictive maintenance or guarantee uptime), the software subscription is simply added on as a component of the existing plan.
- This is a good fit for customers who are already used to the mechanics of service contract pricing—the software component is simply a value-add line item that may be an easy sell if you can convey a clear value proposition.
- In this scenario, you have the benefit of it being the most frictionless upsell. However, you will also need to consider how changing legacy maintenance and support plans to include remote monitoring will impact any partnerships, Ts&Cs, legal obligations, etc.
Again, the key to selecting an appropriate subscription model is understanding your customers and developing payment options that easily fit with their organizational needs or expectations. If recurring fees for a solution are a new concept to your customers, you may need to offer flexible pricing and payment terms to encourage adoption as they get used to the idea.
Setting up Billing
Finally, once you’ve determined what customers will pay and which subscription model you will use, you must consider how you will actually bill customers. Although this may sound simple, it can be challenging for organizations who have not supported recurring billing before.
For most of our customers, their ERP systems are set up to accommodate one-time sales, not recurring fees. If your situation is similar, you’ll need to work with your accounting team (and potentially the technical support team for your ERP system) to understand the mechanics of recurring billing, what capabilities must be added within your ERP system, and how to handle the internal ramifications.
Monetization strategies, pricing, and billing all start with an understanding of value—what value your solution creates, who benefits from it, and what people are willing to pay for it. Our customers who have had the most success understanding the value of their solution (and subsequently using that knowledge to develop a monetization and pricing strategy that worked for them) had a solid roadmap:
- Start with a proof of concept to prove the technology works.
- Get feedback from a few early customers to validate assumptions, understand the value the solution actually provides, and see what people are willing to pay for it.
- Select a monetization, pricing, and billing strategy that fits your needs and your customers’ expectations.
- Work with your accounting team to get the tools in place to implement your strategy.
If this still feels a little overwhelming, we can help. Exosite’s team has supported hundreds of businesses as they built and deployed connected solutions that delivered value and provided real business results. Get more in-depth information in our Monetization Strategies white paper or learn about the business and technical support we offer to help you navigate this process.
Still in the early phases of your connectivity journey? Check out our blog on becoming a full solution company. You’ll find helpful tips about how to prepare your organization to add software to an existing hardware product, overcome challenges, and set yourself up for success.