How to Build a Recurring Revenue Service for IoT Products

The Internet of Things (IoT) has the potential to bring disruptive value to customers and transform organizations. These solutions, often built on a cloud-based infrastructure, create opportunities for new business models and value delivery methods. While many IoT solutions are sold as a “product”, many vendors are now beginning to offer IoT “as-a-service”.

Take the example of a sensor-based system that detects machine wear and proactively alerts the operator of the need for maintenance before a critical part wears out.

• It could be sold as a hardware and software product.
• It could also be sold “as a service” with subscription fees charged on a monthly or periodic basis over a period of time.
• The vendor can also offer the hardware and software as a product sale, but some features, such as monitoring or other key functionality enabled in the software, on a subscription basis.

Benefits of IoT Solutions “as-a-service”

For Vendors

You have a predictable and recurring revenue stream. Your customer is locked in for a certain time period. You can focus your sales resources on closing new accounts instead of trying to re-sell to your current customer-base every 2–3 years.

For Buyers

A solution “as-a-service” has several benefits. You don’t have to worry about the installation, maintenance and operation of the solution. You’re using their budget more efficiently by tapping into your “opex” (operating expense) budget instead of the more constrained “capex” (capital expenditure) budgets. Your return on investment (ROI) is better aligned with the value delivered.

Selling a Recurring Revenue IoT Solution is Not the Same as Selling an IoT Product

A common mistake many vendors make is to sell a subscription based solution in the same way as they would sell a “one time” sale product. A product is tangible. It can be held, seen and touched by a customer. It may sit on a factory floor, or it may reside on a server in the company’s data center.

When that same product is sold on a subscription basis — the customer is really buying a service, such as a predictive maintenance service, rather than hardware/software. This service isn’t as tangible even if the value delivered is tangible.

This is because the service is performed out of sight of the customer — it may be performed by the software algorithm, or it may be performed in the cloud. The buyer may see the hardware sitting on the factory floor, but they don’t see it “performing” its service.

Ironically, when the service is doing what it’s supposed to be doing, the customer won’t know. They may even begin to question whether the service is really delivering the value it promised. For example, if a predictive maintenance IoT solution is working, the machines will never break down, uptime is high and production levels are consistent. The customer may begin to wonder why they need your service if the machines never break down.

Monetizing a subscription based IoT solution is challenging, especially if the vendor primarily sells products or their customers are used to buying products. While there are many best practices to consider, I’ll highlight some of the major ones from a go-to-market perspective.

Key Best Practices - Building a Recurring Revenue Service for IoT Products

1) Understand What You’re Really Selling: An Outcome

Unlike products that customers can see, touch, and experience, a service is less visible to the customer. They may not see your product hardware. They may not see you performing your “service”.

So what is your customer really buying?

An outcome that results from solving their problem. While you can talk about the benefits of your solution, and maybe even quantify the benefits through financial analyses, those are simply justifications for the real customer need. Your sales and marketing efforts must focus on discovering this true need, and then building your proposals to address that need.

For a predictive maintenance service, the customer is buying a certain machine uptime rate. They don’t care what you do behind the scenes to get that uptime rate. In contrast, when you sell the same solution as a product, the customer is buying only hardware and software. They may focus on features and functions, technical support, maintenance, and licensing.

2) Build Consultative Selling Skills

Selling IoT-as-a-service requires consultative selling skills. You’re looking for problems to solve, and then backing into a solution that can solve those problems.

IoT solutions have value to multiple internal teams within a company, but each team may have a different problem that they need to solve.

A consultative approach starts with defining the customers’ problem areas and working collaboratively to understand their real needs and priorities. From there, you craft a solution that meets the needs of the various stakeholders and internal teams.

When building business development and sales teams, look for people that can work collaboratively. Invest in building and growing their consultative selling skills.

3) Justify the “Fit” for an “as-a-service” Offering

Not every IoT solution can or should be sold on a subscription or “as-a-service” basis. Sometimes the solution doesn’t offer justifiable value to the customer when packaged in the form of a subscription. One common mistake that vendors make is to sell the IoT solution as a subscription when it’s more appropriate to sell it as a product.

Another common mistake is to convert a product into an “as-a-service” offer as an alternative to a lease in order to increase the “affordability” of an expensive solution.

In doing so, the vendor is taking an unnecessary financial risk if the customer stops paying. Leases contain “hell or high water” clauses that legally obligate a customer to pay. A subscription contract does not. Leases also contain other language to protect the vendor’s business that subscription contracts don’t have. Finally, leases have specific tax advantages for customers that subscription offers don’t have.

When planning products or features and deciding what should be offered on a subscription basis, consider the following questions:

1. What’s the outcome that’s being provided when the solution is sold as a subscription service? Is there value being provided that a customer feels justifies paying the recurring fee?
2. Will you be updating the product or features over time to increase functionality and performance? Things, like enhancing stability or improving security, don’t count since the customer is expecting you to have a functional solution.
3. Does this feature or product require that you incur some significant cost to maintain? Is the feature that’s being maintained critical enough to the customers’ operations that it justifies charging a recurring fee?

4) An Integrated Selling Approach: Products and Services Together

Some IoT solutions consist of a product and an optional subscription service. Many vendors approach the sale as two parts — sell the products first, and then sell the subscription services after the fact.

The need to “re-sell” the customer a second time for subscription services yield a low success rate and a longer sales cycle.

A best practice is to offer both the products and the services together as one integrated solution upfront. By treating this as an overall solution, and bringing up the subscription services early in the sales cycle, your rate of success increases significantly.

5) Align Your Sales Compensation Structure

Product sales compensation structures are based on “one-time” transactional revenue collected whenever a product is sold. This model doesn’t work with a subscription-based model because the revenues are collected over a period of time.

Recurring revenue compensation structures based solely on the revenue collected per period will demotivate the salesperson from selling the service, and instead, have them focusing on selling products alone (where they can get the “instant gratification” compensation all at once).

Best practice compensation structures for recurring revenue offers should include a one-time upfront commission (based on a percentage of the Total Committed Service Contract Value — i.e., the total value of the service contract, including penalties and other guaranteed fees, over the committed period), and a monthly/quarterly commission (based on a portion of the recurring revenue collected over the measured period).

6) Demonstrate Your Value Continuously After the Sale

The selling process doesn’t stop once the customer signs the service contract. While the services you render may sometimes be in the background and be transparent to the customer, you must be proactive and keep the customer informed continuously.

Whether it be monthly reports, incident alerts and resolutions, status emails, or phone calls, regular and proactive communication is critical to the value that you provide to your customer. When you’ve made updates to the software behind the scenes with new features, inform them of that, and provide any of the training necessary.

When it comes time to renew their contracts, your customers will be certain — through your updates and communications — that you’ve provided a valuable service. Remind them of your value on a consistent basis.

7) Own the Relationship Throughout the Contractual Term

Unlike a product sale where you engage the customer once, your customer will engage with you many times over the contracted subscription period. How you engage with them will drive the customer relationship and whether you can retain them after the initial subscription term.

The user experience is manifested in several ways — how they interact with your solution, and how they interact with your solution support teams. When you plan your product, don’t just plan the product or the service, but think through the various customer touchpoints with your organization. Provide a unified experience between the product, the service you provide, and the engagement process.

Integrate your support team into the account management strategy. Your customer support team will have more interactions with the customer than your sales team. Through their many interactions, they’ll have deeper insights into the customers’ evolving needs, as well as understanding any issues they may have with your solution. Their interactions will play a large role in customer retention and upsell of future services.