How to Evaluate IoT Use Cases

You’ve identified one or more potential IoT use cases that you’re excited about, so what’s next? Whatever you do, do not start building until you’ve evaluated each of the IoT use cases you’ve identified. It is critical to remain disciplined at this stage. Too many companies jump into building an IoT use case without first evaluating whether the use case is a good one and waste significant time and resources. Too many companies jump into building an IoT use case without first evaluating whether the use case is a good one and waste significant time and resources. It isn’t possible to know all these factors with certainty, and companies can also go too far in the other direction and fall into analysis paralysis, never selecting any use case. However, the fact remains that a disciplined evaluation upfront will significantly increase your chances of success.

Evaluation Questions

#1: Do any competitive solutions already exist?

Ideally, no competitive solutions exist in the market. If there are already solutions for the use case, then you will have a much more difficult time because you will need to compete directly. It can still be possible to succeed, but if you do select a use case that already has an existing IoT solution, then you need to make sure that you have some advantage or some other reason that you believe will make you succeed over the incumbent.

#2: What strengths and/or advantages do you have?

Whether or not a competitive solution already exists in the market, it is important that you have some strength and/or advantage that gives you confidence that your company can execute on this use case. For example, you might have a regional advantage if the IoT solution hasn’t yet been deployed in your region, or you might believe that you can create a competitive solution that will win on quality or price. Potential sources of strength and/or competitive advantage include:

• Industry Insight: Do you see a problem that no one else sees? Do you have unique insight into the nature of the problem? For example, a telecommunication company has unique insight into the challenges of monitoring and maintaining cell towers and might be well-placed to address this use case. Often, good IoT use cases are those that solve an internal problem first and can then be productized to sell externally (called “dogfooding”). 
• Technology: IoT solutions are composed of several layers, and control of the technology at one of the layers may provide an advantage. For example, a device provider may have a device with better technical capabilities and lower cost than anything on the market, which would confer an advantage when pursuing any use cases that can use that device. 
• Existing customer base: It is easier to sell to existing customers than to win entirely new customers, so a large customer base within the same industry as the use case could be a big strength and advantage relative to competing solutions. This is a distribution advantage.
• Capital and willingness to invest: Throwing money at a problem won’t guarantee success, but money can certainly make a difference. Some IoT solutions only become viable with economies of scale. To achieve economies of scale, it might be necessary to make large upfront investments such as purchasing and/or manufacturing large quantities of devices to drive down the per-unit costs.
• Distributed physical presence: Deploying IoT solutions means touching the physical world. If you already have a workforce that’s responsible for doing customer installations and/or providing hands-on customer support, this can be a major strength. Many IoT solutions fail not because of the technology, but because of the operational complexity.

#3: What is the estimated value, in dollars, that would be produced by solving this use case for the customer?

To evaluate how much revenue you could earn from solving the IoT use cases, you need to understand how much customers would be willing to pay for an IoT solution that solves the use case. But how do you find out how much customers would be willing to pay? A helpful place to start when you’re trying to estimate how much customers would be willing to pay is to estimate the value that would be produced for the customer if you solved the use case for them.

For example, let’s say the customer spends $100,000 per year on replacing lost/stolen assets. You believe that you could reduce incidences of lost/stolen assets by 75 percent if you provided an IoT solution that enabled the customer to get alerted when their assets leave their property. Therefore, $100,000 x 75 percent = $75,000 per year in value provided to the customer if you’re able to solve this use case for them.

Not all value can be easily turned into a dollar amount like the example above. Recall in the previous section that the value of an IoT solution can include things like enabling better decision-making. How do you put a dollar amount on that value? At this stage in your process, you don’t need to be exact. What you need is to get a general idea of the value that your IoT solution would provide if it solved this use case so you can get a general idea of what customers would be willing to pay and then can evaluate whether the use case is worth trying to solve. Plus, thinking through this now will equip you for when you need to communicate the value to potential customers to sell them on the solution.

#4: What is the estimated cost, in dollars, to operate the IoT solution?

When evaluating IoT use cases, If the costs to operate the IoT solution are greater than what you can get customers to pay, then the use case is not financially viable. Question #2 helped you to understand what customers might be willing to pay, so now you need to estimate your costs. At this stage, don’t worry about the upfront costs to develop the IoT solution. Those costs do matter, but the first step is to evaluate the per-unit margin by comparing the per-unit price you can charge customers with the per-unit cost. IoT solutions are often billed as a monthly recurring fee per device since you will have monthly recurring costs that scale with the number of devices. If the per-unit costs don’t work out, then the upfront costs are irrelevant. The costs to operate the IoT solution loosely fall into four categories: devices, connectivity, compute/storage, and software license fees.

Devices are one of the largest cost drivers for the overall IoT solution. Look at the market for the cost of devices that would be necessary to solve your use case and estimate how many devices would be needed. For example, if the cost of a device is $50 and you’d need 2,000 devices for your customer, then that’s going to be a total of $100,000 just for the devices. In #2 above, we estimated the total dollar amount of value for the use case. If the value provided to the customer is $75,000, then the customer probably isn’t going to be willing to pay more for that for the IoT solution. So in this scenario, the device costs of $100,000 are much higher than your potential revenue which means you’d be losing a lot of money, and this is before you’ve even estimated other costs for developing and providing the IoT solution.

There are ways for you to reduce the per-device cost buying in bulk or manufacturing your own devices), so don’t worry if the numbers are at least close. Remember, at this stage in the process you don’t need to be exact. The point is to get a general idea of whether or not this use case is going to be financially viable. You may be able to get your customer to purchase the devices directly. This way, the device costs wouldn’t be on your books. If you can pull this off, great, but you still need to consider the costs relative to the value provided because the customer will be incurring the device costs in both scenarios.

Devices tend to be the largest cost driver, but connectivity costs, cloud costs (compute/storage), and software license fees can add up too. Connectivity and cloud (compute/storage) costs are typically driven by the number of devices, how frequently the devices are reporting, and how much data the devices are sending. Leverege has a proprietary cost calculator that we’ve created to help estimate these costs for customers of our IoT Stack.

#5: What is the size of the market if you build a solution for this case? How many customers and how many devices?

Let’s say you went through #1, #2, and #3 above and you’ve determined that there aren’t any competitive solutions and customers would probably be willing to pay more than it would cost you to operate. In fact, you think you can sell the IoT solution for $1.00 per device per month and it will only cost you $0.20 per device per month to support the overall IoT solution. Do you select this use case to build the IoT solution?

An 80 percent margin on the solution seems attractive ($1.00 minus $0.20 = $0.80 profit which is an 80 percent margin), so this use case looks attractive. But what if there’s only one customer who is willing to buy the solution and they only need 100 devices? That means you’re only making $100 per month in total revenue. That’s not an attractive use case. It is important to consider the marginal numbers and the absolute numbers. You want to find a use case where you can earn attractive margins with large revenues. Therefore, you need to consider the size of the market. How many potential customers are there? How many devices would all these customers require?

Next Steps

Over the past few articles in this series, you’ve learned about the value created by IoT solutions, how to identify potential IoT use cases, and how to evaluate the viability of those use cases. Nice work! Now what? Now it’s time to build and implement your IoT solution, but that’s a topic for another series!