The Bottom-Line Economics of IoT Solutions

There’s a surging interest in the Internet of Things, despite the fact that the concept pre-dates the internet. What’s driving this newfound interest so much that it is often called the 4th Industrial Revolution?

The bottom line is this: As technology advances and the economics change, IoT solutions become attainable to the masses for the first time ever. And we start to see IoT Solution value outweigh the cost.

The “Internet of Things” may not perfectly describe this technology revolution (would SCAWAS be better?). The IoT concept originated from the ability to embed sensor and computer-like capabilities into objects or things. These things were then given the capability to transmit and receive data through wireless communication technologies. This opened the possibility for these things to connect remotely to a more powerful computer system that a human can ultimately interact with. Voila, an IoT System enabling communication in the form of data transferring from Thing to Thing, Thing to Human, and Human to Thing.  machine to human iot system

IoT System Cost Barrier

The capability to build an IoT system is not new. The U.S. space program in the 1960’s is an early example of a big “thing” (space ship) communicating wirelessly to a central command or computer system (Houston). Fortunately for us today, a budget as big as the U.S. Space Program is no longer needed to develop an IoT system. What is different is we now have the ability to build IoT solutions at a much lower cost and we have the internet as a communications backbone, which did not exist in the 1960’s.

Component Size Matters

Back in the space program days, computers were the size of a house. They certainly were not going to fit into a motion sensing device the size of a match box. Today, however, we can pack a tremendous amount of computing power into a very small package. Your smart phone is a perfect example of this. Electronics are getting smaller and cheaper every day.

Same computing power in a handheld package

 

Ultimately, as IoT system components become smaller and cheaper, more ideas become attainable.  That is the simple economics driving the interest in IoT solutions.

There is, of course, another factor to consider….

It’s smart, but is it “smart”?

Sometimes, you shouldn’t do something just because you can. Is it smart to create a “smart” toaster? Do you really need to connect your toaster to the internet? Does the benefit outweigh the cost?

Economists have a concept called “utility”. Utility is a term for situations were an individual purchases a product or service to receive some non-monetary value in return. Basically, a measure of usefulness, enjoyment, or sense of security someone gets from a purchase. From IoT, consumers want utility that meets or exceeds the price they will pay.

Businesses, on the other hand are looking for a return on their investment. Stay with me here.

Measuring the Benefit of an IoT Solution

Ultimately, the viability of an IoT solution boils down to its direct or indirect influence on a positive utility for a consumer. Okay, so that may be obvious for a Business to Consumer product (our toaster for example), but what about the applicability of IoT in the Business to Business space?

Businesses exist to provide a product or service that returns more money than it costs to produce. They are either directly selling to a consumer, or they are part of a supply chain that directly sells to a consumer, ultimately promising utility for the consumer. Even missiles sold to the U.S. military provide utility to the consumer, safety and security for the U.S. tax payers.

Whether the IoT solution is improving the way products are manufactured or serviced, or whether it enhances the capabilities of a consumer product. The IoT solution’s cost cannot outweigh the value it provides. So, as an IoT Product developer, you must ask yourself,

Can you produce and support the IoT solution for less than the buyer’s perceived value (greater utility or the elimination of a problem)?

Justifying an IoT Solution for B2C

Consumer-centric IoT solutions in general automate what can currently be done manually. Ideally, a viable solution will sell for a premium price to justify the IoT investment and increase profit margins for the developer. A solution might also offer a capability that allows it to be chosen over a traditional competitor, therefore protecting or stealing market share but not necessarily increasing profit margin.  Being able to charge a premium price is generally the more favorable approach to justifying the project.

Justifying an IoT Solution for B2B

Most businesses will insist that a project investment (or spend) on an IoT solution must be justified by one or more of the following three scenarios:

  1. Enable a strategic initiative that is expected to contribute to the top and or bottom line of the company (CEO strategy alignment).
  2. Provide a capability that allows the business to adhere to a regulation or mandate (FDA regulation, emissions mandate, etc.).
  3. Pay back more money than the original investment required.

For example, let’s assume an OEM, provides equipment to a Producer. The OEM would like to install IoT sensors as a means for transmitting data from these sensors to a cloud solution that could provide real time performance information about the equipment to authorized people sitting in remote locations.

Below are four ways that this IoT solution investment could be justified:

ProposalJustification
OEM engineers would be able to monitor performance of installations to improve the product.Aligned to a C-Level funded initiative to improve the product – scenario 1.
The OEM could offer a fix-the-first-time service program with remote monitoring and diagnostics and perhaps even get proactive with maintenance services.Aligned to a C-Level funded initiative to overcome product quality issues – scenario 1.

Produce an alternative revenue stream (charge the Producer a premium) that exceeds the investment cost – scenario 3.

The OEM would like to offer the equipment as a service by monitoring and charging for output rather than a one time capital expense.Aligned to a C-Level funded initiative to grow a predictable re-occurring revenue model – scenario 1.
The OEM is liable in the event their installed equipment fails in a regulatory audit and therefore wants to protect themselves by remotely monitoring usage.Providing a means for complying with a regulation. In this case, the investment and operational costs cannot exceed the penalty and bad press received in the event of a compliance failure – scenario 2.

 

It is also worth noting that a solution that results in the client being willing to pay a premium will enhance the investment prospects.  If the client is not willing to pay a premium, the investment will impact the bottom line negatively and therefore must be justified by another means.

If you want more details about what drives the cost of an IoT solution, check out these articles:

IoT Solutions: How to solve the “IoT is Hard” problem

Introduction to the Internet of Things (IoT)

Summary

There are many factors and complexities that go into investment decisions made by businesses and purchase decisions made by consumers, many of which go beyond my simple example. The point is that as the cost of sensors, micro-processing, cloud computing, wireless communications, and data storage decreases, more opportunities will open up for IoT solutions.

Do you know what problem you will solve or what utility you will provide?  Before you get to far into development, be sure to understand the economics by having a clear strategy for justifying the investment.

The future of IoT is simply a matter of economics.

 

About the Author: Ron Pascuzzi leads sales and marketing at Bridgera, LLC in Raleigh, NC. Ron is an evangelist for the Internet of Things and believes that IoT initiatives should not be compromised due to a lack of software development skills. Contact him to learn more about Bridgera IoT, not just another IoT Platform but Custom Software-as-a-Service for the Internet of Things.

 

Guide to IoT eBook

 

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Written by Ron Pascuzzi on December 18th, 2017
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