How the Internet of Things Changes Business Models

Jennifer Fraser | June 2, 2016 | 3 Min Read

If you’re considering creating a connected product or service, the Internet of Things will have a profound impact on how your business creates and captures value.

If one thinks about a business model, one tends to think of a static diagram, or a blueprint, that depicts how a company does business. But, what companies are finding is that those static business models no longer work when dealing with the almost endless ways of connecting a business, the consumer, and a service together via a connected device. To borrow from the 1980’s Oldsmobile campaign, this is not your father’s business model.

Business models for connected products and services can more effectively be thought of as existing in a dynamic ecosystem. Since business models are about value creation and capture, your model needs to focus on how you can create and capture value at an ecosystem level rather than the product level. (see this paper by Westerlund, Leminen and Rajahonka for more on IoT Business Models)

The Unconnected Journey

One way of understanding the “flow” of value through an ecosystem, is to examine the customer journey. A journey map is a tool that maps an experience through a service. If one was to create a high­level generic journey map for a “traditional” (ie: unconnected) product, the phases in that journey might look something like this:

The consumer, ideally, moves through the phases of awareness, consideration, action and then on to loyalty. The journey starts with the customer somehow becoming aware of the product. Then, once aware, they might consider its purchase by trying it out, reading a review, or doing a competitive analysis. The customer will then take an action, ideally, purchasing the product. At that point, in traditional businesses, the relationship with the customer may have ended, with a subset of businesses focusing on the post­purchase relationship to drive cross­sell or upsell.

The Connected Journey

Even with an example this generic, when talking about connected devices and services, this model needs to change to reflect a more dynamic experience, and those endless ways of connecting a business, the consumer, and a service together via a connected device. So, to re­draw this generic journey for the internet of things, it would look something more like this:

The journey still contains those high­level phases of awareness, consideration, and action, but also includes the new phases of usage and new services. In this new connected world, the relationship with the consumer starts with the purchase. Then, ideally, based on product usage (about which the business can gather data) the business can offer new services. These new services can be in the form of additional functionality, or related products and services. The consumer then enters the customer journey again, needing to become aware of those new services so that they can consider them and decide if they are interested in engaging with them.

An example of this profound change in the business model via a connected device, and therefore the business service offering of value to the consumer, can be seen in the example of the pHin ecosystem of products and services. Their approach of monitor, notify, drop, relies on the real­time tracking of the pool water via the connected pool device. The range of services that they offer allows the consumer to either: manage the water quality themselves via the app notifications and as­needed product delivery, or rely on a service professional to do the maintenance for them. Due to this connected device, the business model for pHin is a much more dynamic ecosystem, containing the connected pool device, a mobile application, the consumer, the business, pool service professionals and pool product providers. It’s not hard to imagine how new products or services could be added on to further augment value creation and value capture within this business ecosystem.

If you’re considering creating a connected product or service, the Internet of Things will have a profound impact on how your business creates and captures value. Considering how your business model will change and the new related products/services that it may bring is a critical step before moving forward in your pursuit of a connected product.

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