As Geoffrey Moore points out, there’s a reason business leaders are spending money to develop data-driven connected product systems today. Simply put, it’s to ensure they remain the business leaders of tomorrow. The world is changing. Soon, industrial equipment manufacturers lacking credible connected product offerings will be shut out of the market altogether. But not all industrial IoT business models are created equal. As a result, even significant investment and deployed technology won’t be enough for many enterprises to make it across this chasm.
Industrial IoT business models first, technology second
Fortunately, industrial IoT is no longer a technology problem. Manufacturers don’t have to develop everything in-house. Today, delivering connected systems that work well is a solved problem. So it’s not surprising that 86% of enterprises expect to increase their spending on IoT in 2019. However, when Cisco Research surveyed executives already on the path to digital transformation, they found only a 26% success rate. What’s going on here? In many cases, businesses didn’t pick the right partner or platform approach. Furthermore, they lacked a corporate strategy for unlocking the business value trapped in their data. As a result, their industrial IoT business models didn’t match the market. Let’s look more closely at the ones who made it successfully to the other side.
Service as a service
A few equipment makers are charging ahead to offer Machine-as-a-Service (MaaS) models. In this IoT business model, they provide their customers with subscriptions to outcomes instead of hardware. You’ll often hear how Rolls Royce and GE provide airlines with jet engine “power by the hour” rather than selling them the engines outright. This model may be appropriate in certain industries. However, it’s not necessarily the right first target for most manufacturers. For one thing, you’ll be disrupting your existing customer and vendor relationships. Even more challenging, your internal teams and incentive structures must transform as well to match the new IoT business model. Accordingly, we recommend a phased approach. Let’s look at a set of financial strategies serving as stepping stones along the way.
The IoT business model of blades and razors
Today, most equipment providers don’t make a lot of profit when selling their machines. They make their money by supporting ongoing operations. First, parts break and must be regularly replaced. Second, hardware must be maintained and serviced. Finally, consumables – blades, fluids, fuels, adhesives, inks, and other materials – are used up and re-ordered. In order to survive, industrial equipment manufacturers must protect and maximize these activities.
This isn’t new. Cheaper parts have always been a threat in a global economy, and service “pirates” exist in every industry. Now though, lower cost competitors are creating near-copies of the machines themselves. Mechanical technology is advancing so rapidly that many of these machines are “good enough.” In some markets customers now see hardware as commodity.
Industry leaders are fighting back with connected product initiatives to retain their competitive advantage. They’re creating more value for their customers than ever before, and keeping such challengers at bay.
Defeating the service pirates
Traditional service contracts are time-based. A technician shows up on a regular schedule to replace filters, lubricate gears, tighten bolts, and so on to keep machines running smoothly. These contracts are vulnerable to capture by independent service firms (aka “pirates”) offering customers similar support for less money.
With connected products however, manufacturers now monitor their equipment remotely. They see exactly when a filter is becoming clogged, or when a motor or pump is about to fail – without having to roll a truck to take a look. Meanwhile, pirates have to show up on a fixed schedule even if nothing is wrong. Furthermore, this IoT business model lets customers enjoy a reduced risk of paying for new parts or unnecessary maintenance just because a certain time has elapsed that may or may not correlate to actual usage.
Most importantly, connected equipment providers can guarantee service levels. They effectively eliminate unscheduled downtime. They keep their customers’ production lines running, maximizing output and revenue. Pirates can’t do this. Only the equipment provider has the data to feed to analytics and machine learning tools. They detect trouble brewing and alert appropriate personnel to take preventative action without impacting production. Over time, they can build predictive maintenance models and automate the process further.
The IoT business model of value-based pricing
It’s not just about lowering costs for equipment providers or their customers. Industrial IoT business models generate new value for the entire supplier and customer chain. Customers will pay more for guaranteed uptime than for time-based service. This makes sense. Service level agreements (SLAs) more positively and quite measurably improve their bottom line. Manufacturers know exactly how much money they lose each year due to equipment failure, waste, and re-work due to quality issues under the current time-based maintenance system. Therefore, any system guaranteeing to reduce such loss can command a price to match.
Protecting the core
Industrial IoT lets you do even more. Production challenges impact customers in other ways besides outright equipment failure. Take this welding scenario for example. Operators load metal wire into a feeder bin and set out to do their work. Each weld consumes more wire. Running out of wire unexpectedly stops the line, impacting production. Handling this manually is prone to error and delays. Today, connected products automatically verify wire levels are sufficient to complete the scheduled jobs before starting up the line. Then, they notify operators when action is required. Additionally, wire quality too is verified by the machine, ensuring strong bonds.
Copycat hardware can’t do these things.
For manufacturers, decreased production yields and end-customer complaints far outweigh the savings of purchasing stand-alone machines and generic consumables. Increasingly, facility owners are making connectivity and data-driven intelligence a base requirement for all equipment installed on their lines.
Through connected products, OEMs don’t just retain their ongoing customer service contracts. They also protect their upfront machine sales and recurring consumables businesses. Industrial IoT creates business models for OEMs where pirates and copycats simply cannot compete.
Building the IoT business case
To get started, make sure your organization is prepared to deliver a connected product system for taking advantage of these new IoT business strategies. Choose the right approach and partner upfront. Here’s a guide for evaluating your options.
In practice, industrial IoT business models often shift over time. Many digital transformation journeys start by optimizing internal operations. How can you provide existing service levels to your customers at a lower cost – to you? Sometimes the next move is to reduce costs for your customers as well. However, this path tends to hit diminishing returns quickly.
There is much greater potential upside for your bottom line and for your customers by optimizing their operations and increasing daily yields through connected product systems. Critically, what level of performance and operational insights would your equipment need to deliver for them to achieve their production goals?
This is the other half of the industrial IoT business model, and the revenue potential is enormous for equipment makers who provide better business results through their smart industrial products and data-driven insights.
This is how industry leaders compete in a connected world.