The Internet of Things: New Ways to Build Subscription Relationships

When the things you sell come with the ability to call you up and tell you about your customers, you have a new way to interact with those customers.

The traditional buyer-seller relationship for goods is on the edge of change, and it’s because we’re giving those goods the ability to talk.

Used to be, a customer walks into your store, you sell them a thing, and they walk out. That’s it, sale over, toaster sold, dishwasher delivered. The only communication you get later about the toaster or dishwasher would be a message, delivered by the irate customer if the darn thing broke.

That’s changing now. We’re giving things the ability to sense the world around them, and the capability to “phone home” to tell how their day went. Take a look at this graph forecasting sensor market size:

(Source: Gartner via Statista) Is it interesting that inertial sensors will have twice the market share of temperature sensors? Sure, I suppose, But what about the implication? Oh My Gosh! My stove can tell the temperature! And so can my fridge! And so can my shoes! And my stereo is taking pictures! And my fire alarm is recording all the chemicals in the air! And my car knows my weight! And can tell true north! And where we are!

I’m asking you, dear reader, to pause for a moment to consider all the senses we are giving our things. And here’s the kicker — we’re giving our things the ability to call out and report back on everything they have learned.

The ethical implications are staggering, and we’ll get to those in a bit. But for the ethical thing-maker, this is fantastic magic! You can tell how your products are doing out in the world. You can survey products and design improvements for the next product cycle. You can measure customer use of your products with real data, not the unreliable data that comes from customer polling or focus groups. Here are a few of the things that the Internet of Things (aka, “IoT”) will let us do:

But to get back to the buyer-seller relationship, when the things you sell can talk back to you from the customer’s home, then your relationship with the consumer has not ended just because a purchase has been made. Instead, you now have something to talk with the customer about. And if that conversation is valuable to the consumer, you can charge for it on a regular basis. In this way, the product-sale model will evolve into a subscription model.

THE SOARING INTERNET OF THINGS

Defined broadly, the global Internet of Things is already pushing 4 billion connected devices.

(Source: Berg Insight via Statista)

Four billion? Oh wait, maybe it is more than 20 billion devices:

(Source: IHS via Statista)

Well, it’s a lot, evidently. And there’s a lot of money at work here too:

(Source: Gartner via Statista)

That’s $1,690 billion in worldwide endpoint spending in 2017. That’s spending on the things themselves. And here’s another Gartner graphic:

(Source: Gartner via Statista)

This is worldwide services spending, which refers to the more subscription-oriented side of the Internet of Things. Of course, a lot of that is B-to-B subscriptions, that is, businesses selling IoT data to each other, or to and from governments. Let’s try to narrow down to consumer use of the IoT. This shows worldwide consumer spending on IoT at a 2015 level of $416 billion:

(Source: Avnet via Statista)

But another researcher, BGC, slices the market differently, with breakdowns for B-to-C, Healthcare, and Retail. If we aggregate those into a bigger Consumer category, BGC offers a total of just $12 billion in worldwide 2015 spending:

(Source: BCG via Statista)

Maybe there’s an apples-to-oranges thing going on here with what Avnet calls “consumer.” Still, $416 billion versus $12 billion? The upper range there seems high to me for total consumer IoT spending in 2015.

What about the U.S. market? Here’s Grand View Research saying that the total U.S. retail IoT market in 2015 was $2.53 billion.

(Source: Grand View Research via Statista)

Okay, that’s a lot of numbers, and here are even more in a must-read round-up of even more forecasts at Forbes last November. The wide variability in forecasts — and the universal optimism regarding prospects for future growth — suggest that no one is really sure how the Internet of Things will play out, but everyone is sure it will be huge. Will revenue double, triple, or quintuple over the next 10 years? Who can say? But everyone thinks it’s going up.

THE SUBSCRIPTION INTERNET OF THINGS

In 2015, my wife’s concerns about my snoring finally sent me to a sleep clinic, which hooked me up with a CPAP machine. That’s an uncomfortable device that pushes air down your windpipe and helps you breathe at night. Some people swear by them, but mine was too uncomfortable for me. Still, for about six months, I used the device, and while I had the thing, it called up my doctor at the clinic and reported data, like how much I used it, which nights, how long, and how much it helped my breathing. Through my insurance, I paid by the month. I was a subscriber to the Internet of Things.

That’s becoming more and more common. Here are a few more of the consumer health uses of similar technology, according to Sandeep Raut at CustomerThink:

Patients are using these connected medical products to capture ECG readings, record medication levels, sense fall detection and act as telehealth units.
Diabetes self-management includes all sorts of gadgets and devices, which control glucose levels and remind patients to take their insulin dose. The newest wearables are even capable of delivering insulin on their own, according to health condition indicators.
Remote patient monitoring is one of the most significant cost-reduction features of IoT in healthcare. Hospitals don’t have to worry about bed availability, and doctors or nurses can keep an eye on their patients remotely. At the same time, patients usually feel more relaxed at home and recover faster.

And the recurring service provider business model is not exclusive to healthcare. Here’s Ray Kingman at TechCrunch applying it to cars.

Rather than selling you a car, an automotive brand would be better off selling you a multi-year subscription to a service contract that includes the car, maintenance and scheduled upgrades to a new model.
Given the totality of IoT data coming from tomorrow’s cars, it would also make sense to include fuel and insurance in the subscription.
That’s an argument to how the IoT will help build brand power and loyalty. But what about the little purchases, like batteries and light bulbs? Kingman has a strategy for that as well:
My connections to the battery brand and the light bulb fades into the background, but, at the same time, their role in the marketing ecosystem takes on a new level of importance. The value of IoT data from the battery or light bulb enhances my experience at the point of sale with the service providers to which I subscribe.
It also collapses the cost structure for these products. In effect, the battery and light bulb brands of the world transform themselves into brokers of data and analytics. Astute marketers will quickly realize there are greater opportunities to be had by exploiting the vertical integration of the data and analytics with other brands and products.
In turn, the true value of IoT data will serve to drive down the logistical and marketing cost of deliverables, as many products will no longer need to incur these costs. Quite literally, analytics will become marketing, thanks to the IoT.

At IoT For All, Jared Porcenaluk has a much more negative take. He fears the day that dozens of tiny subscriptions become a real drag:

As we start to connect more and more real devices to the internet, a problem begins to emerge. Those over-the-air upgrades and cloud services are not free, not by a long shot.
But nickel-and-diming consumers, wrapping the weight of a new subscription around their ankles every time they add a new device to their network, is unsustainable if we want to see the Internet of Things proliferate in the way the regular ol’ Internet did.

Sean Kirk at Aria also has some caveats, but he also has some deep advice on how to market IoT subscription services intelligently:

To generate recurring revenue, a product or service must be consumable, measurable and repeatable. This is known as the CMR model, as described in Bob Harden’s No BS Guide to Recurring Revenue Success. In order to work, you need all three CMR components. This is as true for IoT-related offers as it is for anything people buy on a pay-as-you-go basis – with one crucial difference. With IoT, what gets consumed and measured on a repeating basis are not products, but data. That’s because IoT products are not disposable, like razors. Instead, they’re designed to last. Their value lies in the data they produce, and, more importantly, in the services that data enables.

Kirk has an example of a company doing IoT wrong:

So, why do certain IoT products fail to qualify as recurring revenue candidates? The main reason is they don’t offer anything beyond a product level. They may provide data, but it can’t be turned into a service that someone would pay for over and over. A perfect example is the HAPIfork. This battery-powered, sensor-enhanced eating utensil supposedly helps you eat more slowly. How? It vibrates when you take too many bites too quickly. For starters, its value is highly questionable. The $99 upfront cost is a lot to pay for something you can easily do by just setting any plain old metal fork down between bites. And from a recurring revenue standpoint, it’s a no go from the get go. The data it produces just isn’t very useful. Oh, it cranks out streams of info on how long you take between bites. But that’s it. It can’t tell you whether your forkfuls consist of green beans or pecan pie, a handy bit of data for anyone trying to slim down. The data service it provides is so meager, in fact, that it can’t be monetized on an ongoing basis.

And here’s his example of a company that gets it right:

With Farmobile, farmers can harvest rich data from their farm equipment to increase crop yields and profits. The data is valuable enough for them to pay the $1250 annual fee. So valuable in fact, that they can actually sell their data to farm equipment manufacturers that covet it.

THE SCARY INTERNET OF THINGS

As ludicrous as the Internet fork may be, at least it hasn’t killed anybody. However, there may come a day when the Internet of Things facilitates just that. Last month’s WannaCry ransomware attack took a toll on Britain’s National Healthcare Service, reports Rudy Ramos at EE Times:

Ideally, you want to make it easy for non-technical workers to add data-gathering nodes to a patient monitoring network in a hospital. On the other hand, you don’t want ease-of-use to be hijacked and held for ransom. Bringing down the computerized records of a hospital is damaging enough; imagining what hackers could do with kidnapped nodes on the Internet of Things is a terrifying prospect.

A plot point in the TV show “Homeland” included a threat to the vice president’s life — through his pacemaker. Security experts are taking that seriously.

Activist Cory Doctorow of the Electronic Frontier Foundation has been sounding the alarm for years.

As networked computers disappear into our bodies, working their way into hearing aids, pacemakers, and prostheses, information security has never been more urgent — or personal. A networked body needs its computers to work well and fail even better.
Graceful failure is the design goal of all critical systems. Nothing will ever work perfectly, so when things go wrong, you want to be sure that the damage is contained, and that the public has a chance to learn from past mistakes.
The problem is that IoT makers have a vested interest in not telling the public about failures — that’s bad PR! And with current copyright law, these companies can shut down researchers and whistleblowers. As Doctorow explains:
Increasingly, every machine and device has a computer inside it, from cars to thermostats to fancy new lightbulbs. Manufacturers realized that merely by shellacking the minimum plausible digital lock around these devices, they could use the DMCA to enforce the same high-profit restrictions that had been the purview of the entertainment industry until then.
First, it was phones that would only run software from the manufacturer’s app store. Then it was cars that could only be diagnosed and repaired by authorized service centers that only used the manufacturer’s official, high-priced replacement parts. Then it was everywhere: thermostats and lightbulbs, yes, and tractors and voting machines, too.

And, of course, medical devices.

Manufacturers who use digital locks to restrict the configurations of their devices get a lot of commercial benefit. They can force doctor’s offices to pay recurring license fees for the diagnostic software that works with these gadgets. They can restrict access to service and even consumables — why allow just anyone’s insulin to be installed on your pump when the inkjet printer people have demonstrated a way to charge vintage Champagne prices for something that costs pennies a gallon?
But a profit motive that might conflict with users’ best interests isn’t the worst problem. The great danger is safety.

Insider Take

The Internet of Things has incredible potential to deliver novel and useful experiences and products to users. The market is doubling and doubling again in the near future. The IoT offers an ongoing, subscription-based relationship that can benefit consumers and providers, especially providers seeking to build brand relationships. But there are deep, dangerous pitfalls to be avoided as well