IoT Subscription Models - 6 Key Considerations

The emergence of Internet of Things (IoT) technologies have disrupted solution vendors across multiple industries, from financial services to technology to agricultural equipment. Solutions vendors are shifting from traditional products to digital (or smart) offerings and outcome based deliverables.

This shift in product mode, along with a simultaneous shift in the ownership model, the operations mode and the payment models, results in new IoT monetization opportunities. One common opportunity today is offering “IoT as a Service” in the form of a subscription model. This post discusses six key strategic considerations for managers planning IoT subscription models.

IoT monetization is a strategic decision

An IoT subscription model is attractive to many 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 quarter or every year.

However, offering a subscription service is a mindset shift for companies used to selling hardware, software and traditional services. New policies, processes, systems and skillsets are required, along with major investments in time, money, resources and management commitment.

The decision to launch an IoT subscription based product is a very strategic one. Managers must understand what it takes to enable a subscription business, and how to do it well, before they make the go/no go decision.

1. Is there value that can be monetized by an IoT subscription model?

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. Ask yourself the following questions:

1. What is being monetized beyond the traditional product (hardware and software) and services (installation, maintenance, support)? Depending on the specific nature of the solution, you can monetize data, digital services, connectivity, resources (processing, storage) and outcomes (uptimes, etc.).
2. What problems are you solving such that a customer feels justified paying the subscription fee over the time period? For example, customers with a self driving trucking fleet that want to minimize the risk of accidents find value in having continuous access to the latest AI algorithms and training scenarios.

2. Is your value aligned with the way your customer wants to consume it?

Not only must your IoT based solution have value as a subscription service, it must be aligned with how the customer expects to receive, consume and pay for the offering.

There are different ways customers can consume value:

1. Pay per use - customers pay to use it when the need arises. For example, sensors can sit idle in a field that is not in use, but once crops are planted, they are activated to collect moisture information.
2. Pay per outcome - customers pay to maintain a certain goal or until a certain goal is reached. For example, a certain machinery production rate, or a machinery uptime.
3. Pay per time period - customers pay to consume this value over a certain time period. When extended over a period of time, this is the subscription model.

IoT as a Service is successful when you align your offer with the way your customer expects to consume your value. If your customers expect to pay for your offer through a “pay per use” model and you launch a subscription model, market adoption of your service will be limited.

3. What is the role of the channel?

Most vendors go to market through a reseller and services channel. In order to be successful, IoT subscription offerings and solutions must be co-designed with the channel in mind. Ask yourself the following:

1. Who are the different stakeholders that touch your product, from the time it leaves your hands for delivery to the time it is retired from use?
2. What do they do and why does the customer buy from them? How do they make money?
3. What is the role of the channel if you launch a subscription model? How will they make money? How will this increase their revenue, their profitability and their ability to upsell, or sell other solutions?
4. How will the channel perceive and support you IoT subscription based solution? Is it consistent with the way they do business today?

4. How committed is the company?

Despite the many benefits of an IoT subscription model, offering such a model is taxing and risky to a company. It disrupts existing lines of business, jeopardizes near term profitability, and requires major investments and a different operating model.

Management commitment is the single most important factor in whether the subscription offering is successful or not. Unlike a company built from the ground up to support a subscription model business, transitioning to this model from a traditional model is complex and challenging. It requires significant changes and investments in people, processes, policies and infrastructure. There are a lot of unforeseen risks, and results usually take longer than planned.

Managers need to ask:

1. Do we understand all the challenges and risks involved? Do we have the resources, financial and human, to address these challenges?
2. How can we make the transition? How fast do we want to make the transition? Do we have the time and resources to make this transition? What risks are we willing to take to make this transition?
3. Can we afford to make this transition? Can we make a sustained commitment to make this happen? Are we willing to prioritize this transition over other current investments? How much are we willing to invest?

5. Do you have the right people with the right skills and mindsets?

Offering an IoT subscription based solution is different from offering a “one time sale” IoT product. One critical area of success is the people, organizational structure, and skill sets required. What skills do you have today and what skills are you willing to invest in?

1. Salespeople become sales consultants. They must have consultative selling skills as they become problem solvers selling outcomes and solutions.
2. Customer service representatives become customer owners. They have critical roles as customer experience managers, account managers, and consultants providing business and technical support as the two become intertwined.
3. IT becomes innovation enablers. They work alongside product managers to design and create innovative offerings that can be delivered in innovative ways. They must be skilled in the new emerging technologies while becoming more agile and business savvy.
4. Product managers become innovation catalysts. They must think beyond product innovation, and become service, business model and user experience innovators.
5. Marketers becomes growth hackers. Subscription based solutions need rapid scaling to become financially viable and sustainable. Marketing must combine innovative technologies and rapid growth techniques to scale the business.
6. Finance becomes profitability catalysts. They must look at the business through a new lens, focusing on the key metrics of monthly recurring revenue, customer churn, customer acquisition costs and lifetime value, and develop strategies that make the new business profitable and sustainable.

6. Do you have the proper operational infrastructure?

Creating and operating an IoT subscription based business requires an entirely different infrastructure than traditional models. These include policies, processes and infrastructure. Some examples include:

1. Accounting policies must be changed to recognize revenue differently. Whereas product revenue is recognized upon delivery to the customer, recurring revenues are recognized incrementally. For example, on a one year subscription, even if the customer pays for a full year, revenue is recognized on a monthly basis, when the service is “rendered”.
2. Compensation programs must be realigned to match the incremental incoming cash flow. It is not sustainable to pay the sales rep a full years commission upfront, while revenue comes in on a monthly basis.
3. New policies, processes, and systems are required to track, invoice, bill and collect on a recurring basis. In-house finance systems must be reconfigured for recurring billing, or be integrated with third party subscription management services (e.g. Chargify, Zuora, etc.).
4. CRM systems must be configured to track customer and channel entitlements of what levels of services are offered and to whom.
5. Management reporting systems must be reconfigured to measure the new metrics of success for IoT subscription models. These include churn, monthly recurring revenue, customer acquisition costs and lifetime value, at a minimum.