The Debonair Commercialist

A blog about crafting compelling propositions and cultivating commercial nous

Category: Commercial awareness

The old and new business models making Internet of Things tick

Business models making IoT tick

Those days Internet of Things (IoT) is the topic of choice when technology people meet to discuss innovation and the next big idea. Being all-encompassing and omnipresent as a theme, Internet of Things gets injected in all forums around hardware, connectivity and value added applications – from everyday life to the cloud.

What is Internet of Things after all?

Since its beginnings until today, Internet has been a network connecting people to other people, to content and to services. Internet has evolved to allow more devices to access it – first computers, then mobile phones, then wearables, and so on. It is still a network in its core, with its protocols, language and rules.

Internet of Things is not anything different, still a network but this time allowing machines and sensors to track, monitor and relay their data to other machines or to people to fulfil an action – e.g. make a payment, send an alert, do a phone call, start a process.

IoT is so wide-ranging as a concept, that the current approach is to slice it into segments based on its applications. You can see three categories such as

  • Home and Personal IoT – this is probably the most prominent segment generating news every day, related to the Smart Home and personal-related care and analytics.
  • Industrial IoT – augmented reality, robotics, intelligent supply chains, 3D printing, etc.
  • Platforms IoT – all areas covering connectivity and networking, data processing, cloud, interfaces between the machines and the networks, APIs…

…And probably many more segments will appear in time.

Evolution of Internet of Things

Source: The Evolution of the Internet of Things, Casaleggio Associati (2011)

Value in Internet of Things

It is interesting to look out for business models that monetize the value of new technologies, such as IoT.

According to ABI Research which assessed the value chain for IoT, only 3% of its value lies in the connected hardware, 20% is in the connectivity, while 77% of the value will be in value added services. This is not a surprising split given that the potential revenue from sending data from a machine to another machine would be a fraction of a penny, and the margins will be even less.

I am intrigued how IoT will enable commercial innovation with the aim of providing customers with greater levels of flexibility and peace of mind.

So far, most of the monetization models discussed by service and hardware providers are fairly common and well tested by time. Undoubtedly, these will be rejuvenated but also superseded by new approaches to generate revenue. So which the core business models, that will drive monetization of IoT products and services?

Business models making Internet of Things tick

Usage based, also known as Pay-as-you-go

A very well-known model where the customer pays only for the amount of service used in a given period, with no commitment attached such as being locked into a subscription contract. It is easy to envisage how personal use of smart devices where the consumer does not want to own the device or industrial use of connected machines that are temporarily hired is linked to usage-based revenue models.

Do it for me (DIFM)

In my book, this model is going to experience an absolute renaissance as IoT matures. Businesses in all segments of IoT will compete to offer services to install, maintain, customise and repair the smart devices connected to the network. Given the sophistication of those devices, customers will be increasingly willing to use specialists to upgrade and maintain their devices plus further customise their gadgets.

In addition, the DIFM model will also cover Remote monitoring where companies and consumers may delegate the monitoring of their smart estates in order to prevent glitches and to cover support. This will further increase customer stickiness.

Freemium

No business model attracts more customers than free! In IoT world, any basic version of the connected product may be given away for free in the hope of eventually persuading the customers to pay for a premium version carrying more features and functionality. Skype is a good current example of that. Its free version attracts highest volume of customers, while the smaller number of paying ‘premium’ customers generate the revenue, cross-financing the free offering.

Leveraging customer insight using data analytics

As security of personal and corporate data is more paramount than even, we can see even today ventures where data aggregation is used to predict or recommend a set of actions to an end customer. Given how many sensors with collect, store and pass on data from connected devices, there will be enormous amounts of domain data that can be used to create insights that help consumers improve their lives – e.g. energy efficiency tips or companies to meet business targets – e.g. supply chain efficiency.

Product as a service

An interesting report I found from Deutsche Telecom (see link below) says that “75 percent of new cars are now purchased through a finance agreement, with customers essentially paying for the personal experience of ‘owning’ a car rather than paying the one-off, upfront price”. Fast forward to the future, IoT will make this model even more mainstream. Instead of purchasing the smart hardware, companies and consumers may only pay for the experience of owning it for a set period of time before replacement with a newer model. Judging from leasing margins today, this may be a lucrative model for revenue generation.

Transactional

This is the oldest trick in the book. You buy a product or a service, you pay for it and both sides in the transaction go on their merry ways. Just as you buy your Apple phone or Surface tablet, nothing can be compared to owning a new gadget….until the new model arrives. I believe manufacturers and device brands will try to skim the market for as long as possible selling smart devices as their novelty and exclusivity may drive higher margins.

 

Although this list covers some of the main revenue generation models, it is far from exclusive! If you work in IoT areas and you deal with its monetization and product strategies, I will be interested to lean which model will work for your company.

Meanwhile, some relevant articles on IoT business models:

Tech Crunch: “What can a toothbrush teach us about IoT business models?

Deutsche Telekom white paper: “How to Create Growth from the Connected Home

 

If you enjoyed this post, I’d be very grateful if you’d help it spread by emailing it to a friend, or sharing it on LinkedIn, Twitter or Facebook.

Don’t forget to sign up for my monthly newsletter too. Thank you!

High profit margin, low profit margin – a view across 90 industries

Profit margin per industry vertical

Over the years working in proposition development, I have developed a hobby to scout profitability data across different industries. I find the comparisons between industries quite interesting, especially for the Technology and retail verticals I work in – software, information services, and telecoms.

Apart from wider professional interest, margin data and analysis help greatly when developing a new proposition as these serve as a benchmark to improve the business, but also to explore different business models and commercial tactics.

I find the question on “what’s a reasonable margin for my business” a bit strange, as any business operates in a larger framework which more or less gives the settings, yet any company is empowered to create a unique business model in order to extract higher profit margins.

High profit margin, low profit margin – a view across 95 industries

I recently came upon a quite comprehensive update on Profit margins per industry from Stern school of business across 90 odd industries, which covers net margins, pre-tax/after-tax operating margins as well as EBITDA.

The dream of every business – big or small – is to grow profit but also profit margin that give freedom for growth.

High profit margins by industry

Some industries are simply subscribed to higher margins

Naturally, the divide between service-based businesses and those producing and selling physical goods meets the eye first. Almost all verticals that drive 15% plus net margins belong to services space – think investment management, banks, real estate.

When Forbes published Sagework’s ranking of the top 15 industries generating the highest profit margins, it was no surprise tax accounting services, real estate, dentist and legal services topped the list.

For most service companies, the profit equation is quite simple.

profit = revenue – cost of people – general expenses

Service industries command higher margin as their key differentiator is human capital that creates highly specialised output in the form of advise or intangible products, for which customers pay a premium. Their overhead and ‘keeping the lights on’ costs are relatively low and predictable over time, so service businesses do not need to spend cash on costly capital investments or high recurring costs.

Another parameter of high-margin businesses is the perception of exclusivity they create around the goods they sell. Exclusive products are difficult to compare or replicate, so like-for-like competition is difficult. Jewellery and fashion are good examples of industries whose end product maintains high margins. In technology, a mention on Apple’s products is enough to illustrate what ‘exclusive’ products mean in terms of design and customer experience.

Why a higher profit margin is better than lower margin?

We know that profit margin is absolutely key for company growth, but growth is a complex construct as it is dependent on many variables. Higher profit margin allows businesses to:

  • weather the storms of economic decline. A low margin may be easily obliterated in a downturn, dragging the company into bankruptcy
  • attract more customers – always a good thing!
  • attract better talent, as employees prefer working for growing companies
  • attract more investors, who value how the company keeps taps on costs to generate a higher profit

Profit margin that is higher than your competitors’ is something that catches the eye of investors and analysts. Amazon’s recent Prime Day is a good example of how the biggest online retailer zooms into items from the Fashion category, to diversify its product mix and increase its minimalistic margins.

A really good article on that is “Why Prime Day Was a Big Win for Amazon — and for Other Retailers” from Knowledge@Wharton.

Useful reading on profit margins

If you enjoyed this post, I’d be very grateful if you’d help it spread by emailing it to a friend, or sharing it on LinkedIn, Twitter or Facebook.

Don’t forget to sign up for my monthly newsletter too. Thank you!

What good looks like when working in business development

What good looks like in business development

My two-part series on ‘Ten behaviours to empower your career in commercial propositions’ spurred an interesting discussion. A few asked ‘Ok, I demonstrate those behaviours and skills, would that qualify me for the job?’ and ‘Would these make me a strong business development manager?’.

Spot on. When I interview people for such roles and ask them for examples to elaborate on these behaviours, I ask myself the same questions – is having those skills enough, have you really practiced applying them in different situations?

What good looks like when working in business development

Here is my take on how a strong business development manager or commercial, proposition professional live those behaviours daily, with examples from the organisations I have operated in.

I am very interested to hear if you find them helpful and easy to practice in your business organisations!

Owner mindset, giving everything you got

You always act the champion of the project, product or the proposition. And you use your determination to deliver it.

What good looks like: You notice when there is discord or procedural delays and you use an appropriate level of energy to remove obstacles standing in the way of delivering the project.

Structured thinking, making things simple and clear

You are able to package up choices or options with clear pros/ cons and make a recommendation.

What good looks like: You tell a concise story relevant to the audience instead of telling the entire story that includes all issues. And you make it clear where subjective judgements have been made.

Also, you can quickly immerse in complex issues and become a “one day expert” versus leaving the complexity to others.

Financial skills, looking for the bottom line

As discussed before, a solid understanding of the relevant profit, revenue, cost drivers, and volume metrics is a hygiene factor for anyone doing business development and commercial propositions.

What good looks like: You can identify the “killer questions” that enable a reasonableness judgement.  Then you identify ways to objectively assess those killer questions.

Also, you make effective judgements on what is important and what is less so and on the back of that you make quick and effective “ball park” calculations to enable this.

A strong manager does not wait for the perfect information before making judgements on the options.

Drive and passion, setting the high standard and trying to improve

Irrespective to organisation size or complexity, a good manager needs to have deep understanding of the processes and people needed to get the business opportunity delivered.

What good looks like: You understand both the organisation’s strengths and its weaknesses and use this to shape the delivery approach (this is one of the examples I always seek to explore in candidates).

You proactively seek out critical success factors to deliver the proposition or the deal instead letting others do their jobs and hoping it all works out nicely.

Customers come first, and you are their champion

There are numerous internal barriers to project the voice of the customer, usually these are non-intentional, but very real! Examples are internal procedures, governance, regulatory demands, so making sure you marry organisational demands to the customers’ needs is an absolute must.

What good looks like: You proactively reach out to all functions (eg. Marketing, Sales, Finance, Delivery, Legal) to gain their input and ensure their needs are considered. Then, you ensure there are “no surprises”, which means lots of communication to make sure that different views are explicitly understood.

You are very confident in using this knowledge to request that other areas deliver, versus not making an explicit request to another area for fear of not having the authority to request.

Doing what you say you will do

People rarely enjoy being challenged, but in business development and propositions it is really the norm the opportunity to be internally debated and challenged until all sides agree this is the right thing to do. Welcome challenges from anyone that might help improve what you do!

What good looks like: You present the arguments in a balanced way that acknowledges legitimate views from all sides. Also, you probe to understand the views of others, to the extent that they can accurately articulate the facts.

And finally, you balance being fair and open minded with sticking to a strong argument  versus being afraid of confrontation.

What good behaviours look like in your practices? If you want to share tips and stories and lessons learned, please feel free to send me your comments.

If you enjoyed this post, I’d be very grateful if you’d help it spread by emailing it to a friend, or sharing it on LinkedIn, Twitter or Facebook. Don’t forget to sign up for email alerts too. Thank you!

Profitability: Rule #4 of proposition development

Profitable propositions

Marketing community might be cross with me after reading this post, but I can assure you that profitability  of any new proposition is the most omitted part from crafting value propositions. I have nearly seven years in product marketing and you can trust me on that.

Why profitability is sometimes neglected in proposition development?

Because it is the most difficult step – to prove that your idea is not only relevant to the customer, focused of strong capability and differentiated from competition, but that it can actually make money and drive profitable revenue.

To assess whether a new proposition will be commercially beneficial, you need to have a good understanding of your business’ cost base – i.e. what drives the cost to deliver your current products or services and how this cost base will be affected when you launch a new service and start selling it in volume.

In big organisations, building such understanding is no mean feat. Even for smaller businesses this requires the proposition professional to develop a robust grasp of the activities requiring capital investment and the ones driving incremental operational expenses.

Yet, without having a very clear idea if your new opportunity drives more money than generates costs, you risk launching a product or service that does not deliver the goals you have set initially. Even worse, this new offering can eventually hurt your business and disappoint customers.

Yes, but what about Amazon?

I know that Amazon is a great example of a fantastically successful business that does not focus on short-term profitability. If you want to know more how Amazon does that for so long, I totally recommend Ben Evan’s analysis on Why Amazon Has No Profits (And Why It Works).

Nevertheless, 99% of businesses launching new products and services should explore profitability as the fourth pillar of successful propositions.

Why profitability is so important for a new proposition?

Let’s explore why profitability is the fourth pillar of any compelling proposition, in addition to Relevance, Focus and Differentiation.

•    True measure of success – a product or service can have impregnable differentiation from the competition or utmost relevance, but if it burns cash rather than it generates you cannot say your proposition is truly successful.
•    Improve current cost base – By analysing how the new offering can generate cash, you can uncover cost efficiencies and ways to improve how you do things in your business overall.
•    Generate cash for growth – By launching profitable products and services you provide much needed bandwidth for the company to invest in other markets and verticals. Profit is freedom!!

Some time ago I spotted Mark Suster’s great piece on Should Startups Focus on Profitability or Not? According to Mark, “Most companies (98+%) in the world (even tech startups) should be very profit focused “ and he goes over the basis of profitability – revenue and cost of goods sold (COGS). Do read it when you have a spare 11 minutes.

In the next series, I will focus on some tactics that proposition teams use to determine future profitability.

What are your tools and levers to drive profitability in your new propositions? If you want to share tips and stories and lessons learned, please feel free to send me your comments.

If you enjoyed this post, I’d be very grateful if you’d help it spread by emailing it to a friend, or sharing it on LinkedIn, Twitter or Facebook. Don’t forget to sign up for email alerts too. Thank you!

Focus on strong capability: Rule #2 of propositions

Focus on strong capability

In this second principle of the Proposition Mantra, I will explore the next fundamental rule of developing compelling propositions – Focus on strong capability. One that matches the customer need. This is the doability rule and any business development effort should be able to address it before progressing to the next steps of building a new offering.

So far, we covered the Relevance to customers principle  and went though how to identify that a business opportunity is relevant to  customers and the market a company operates in. We have done our research uncovering strong data points, we have been given strong customer feedback that the opportunity will be improving your offering. Now what?

Let’s move to the Focus on strong capability element, whose main concern is what product or service capability you are offering to address the market opportunity? Or even simpler:

Can we do it?

No matter how relevant and direct the tie between the business opportunity to the market, if a company cannot deliver a strong product or service to match it, we do not have a compelling proposition.

This is the step where many business development efforts find their Rubicon. Good intentions and strong insight are worth nothing if you cannot deliver a capability that relates to what customers wants.

Focus on strong capability

Let’s use the same two examples from the Relevance to customers post – a startup company and a big corporation to examine two real scenarios.

Developing a strong product or service is a popular topic and a whole library of books is dedicated to it, but here I want to illustrate how Propositions and Commercial professionals go through the principles in order to establish if an idea or an opportunity has any legs.

Focus on strong capability

Small start-up example: The startup has launched a rich software suite and customers are excited. Sales increase and with those the customer feedback to provide 24/7 support from software developers to those customers that want to implement the software and need near constant developer-to-developer interaction.

Now following the Focused rule, the company has to analyse whether they can deliver such a support wrap.

On the face of it, around the clock support is a great service shout but implementing it means that the company has to provide extra time for its precious software developers to deal with customer queries or hire more software developers to deal with support issues. Another third option is to outsource the support function entirely to a third party software development team offshore.

The startup proposition team really wants to make this happen and decides to hire more software developers in order to expand the core team. There is little room for trial and error, so before progressing with the hiring campaign they test the idea with current employees who are willing to spend a chunk of their time supporting customers in order to improve their communication skills and general business awareness.

In addition,  another idea of the propositions team to boost the 24/7 support capability is implementing a “10% support” rule,  across the whole software development team. This is where 10% of the time of each software developer will be dedicated to supporting customer questions, issues or asks. They believe that this drive even greater customer focus in their product development process and improve Agile techniques.

Big corporation example: Our devices team have found a remarkably strong unmet need in their consumer segment for a Do Not Disturb capability on their phones, one which prevents unwanted calls and gives customers peace of mind when they need it most.

What does it take to develop a Do Not Disturb functionality on your phone? Well, this must be a new product feature, which requires a series of steps to make it real. For simplicity, lets outline the most obvious ones:

  • Add Do Not Disturb to the user experience specification,
  • Develop the software rules managing how Do Not Disturb manages calls – how the phone behaves when this option is switched on,
  • Build a relevant capability for the answering machine,
  • Perform good testing of the new feature,
  • Update user guides and training documents.

It does sound like a standard process for adding a new feature to an existing product. Yet, the team is worried about the impact on customer experience if this new feature prevents too many calls to reach their intended recipients. It is a very valid concern, which the proposition team needs to test further.

In both examples, the companies need to develop this functionality from scratch, and go through testing the idea before weaving it into their existing offerings.

Building a strong capability and making it real is the hardest part of proposition development, but before any business takes the decision and gives a green light it needs to explore two more parameters: Build it better than the competition and Monetise it.

Next in the series in how to Build it better and how to differentiate from the competition. Stay tuned! 🙂

 

If you have any questions, or you want to share stories, lessons learned around proposition development and commercial innovation please feel free to leave a comment.
If you enjoyed this post, I’d be very grateful if you’d help it spread by emailing it to a friend, or sharing it on Linkedin, Twitter or Facebook. Thank you!

 

Propositions in the news this week: 15 May 2016

Several interesting articles from this past week on proposition development:

In Product Development, Let Your Customers Define Perfection

 

 

Propositions in the news this week: 8 May 2016

Things I am reading this week include:

Water utility deals herald revolution in energy industry

Connecting the disconnected: the Internet of Everything

Morrisons’ supply chain is ‘a key strength’

Disruptive innovation of little interest to Civil Servants despite tech being critical to their plans

Self-Driving Vehicles May Be Closer Than You Think

How to build commercial awareness in 5 steps

Anyone who has looked for a new job in the recent years knows that commercial awareness about the business vertical and the company he or she is applying for is an increasingly important prerequisite. But basic commercial awareness is a good life skill even if you are not looking for a job and there are plenty of websites which offer sound advice around improving basic numeracy skills, getting a voluntary role or learning about world business in media such as The Financial Times or The Economist.

But how do you build that extra commercial nous when your day job is to spot new opportunities in the market which a product can address, or to conceive new ways to sell an existing product?

Commercial nous and proposition development are like salt and pepper – you cannot cook a decent dish without applying the right amount of both.

To nurture the commercial talent in my team, I guide my colleagues through those five key steps:

Top productsFind out the top 5 products or services which bring the most revenue to your company (or the one your are applying for) and the top five that generate the most profit.

This will help you orient yourself in the product portfolio, no matter whether the company is a small startup with a handful of offerings or a big corporate with thousands of products and services on their list.

It gives you clues which products and services are likely to attract highest product development spend and but also strategy focus in the near future.

It shows what part of the portfolio keeps the company profitable (and pays your salary).

Top clientsIdentify the main clients of your company and what products and services they buy from you

For companies that sell products to big corporates, I apply the 80/20 rule. Find the twenty clients that generate 80% of your revenue, what is common about them, what are the volumes they purchase or rentals they pay for subscription, what service wrap they get on what terms.

For retail companies – I encourage my team to uncover what groups of retail customers find value in what you offer – a decent market research on consumer or business segmentation has a good cross section of personas, habits, propensity to purchase trends and many other useful information on the customer dynamics.

Why us vs competitorBuild strong understanding why those clients buy from your company versus any competitor and how they use your products.

By joining Sales reviews with those clients or speaking to Sales Relationship managers in your company you will learn tons about what sets you apart from the competition but more importantly what makes your products unique and desirable.

What is more, by interacting with customers directly you gain invaluable insight about how your products or services are used in real life and what can be improved upon – features, user experience, pricing, anything.

If you are new to the company or applying for a job and have no internal view, you can gather similar insights from product forums, customer reviews and feedback which is available online for most companies.

Commercial modelFind out how those top performing products in step 1 are priced and how their commercial model works.

After you have learned about who buys what from the company and why, my favourite next step is to get the detail on the pricing models  tried and tested in your market segment as well as the commercial structure applied.

Some questions for more in-depth analysis are: What are the implications of a rental model vs. one-off fees in this market? What are the subscription criteria? How has the company structured their commercial model to take their customers from a value product to a premium product?

As a proposition development expert, this step gives you not only a benchmark for any new proposition development but also brings to light how the market works and how clever new ideas can be tested – both as pricing and as completely new product offerings.

Product pipelineGet the most up-to-date view of the product development pipeline and what new products or offers are coming to market in the next 3-6 months.

For an outsider, you may think this information is a very highly guarded secret, but you are wrong. Most product or service pipelines follow an evolutionary path, rather than create a revolution with every release. A good comparator are competitors and their recent product launches. Also, press news are abundant on company product announcements or major market developments that impact the evolutionary path in products or services.

This pipeline view is a like a mirror into the company which shows you what capabilities and commercial models have passed through more rigorous testing with customers and have the potential to bring market share and ultimately profitable revenue.

And I may sound a bit biased, but in addition to all tips above one more way to build your commercial acumen is to sign up for my blog and get extra tips on commerciality every week.

If you have any questions, or you want to share stories, lessons learned around proposition development and commercial innovation please feel free to leave a comment.
If you enjoyed this post, I’d be very grateful if you’d help it spread by emailing it to a friend, or sharing it on Linkedin, Twitter or Facebook. Thank you!

 

On passion for proposition development

In the last 10 years I have brought to market many technology products and services. And I have learned that what is required to bring a new idea from the whiteboard, through business case with tens of scenarios exploring multiple assumptions, followed by proof of concept, and ultimately a launch takes more than good numerical skills and creativity. It requires passion.

On passion for proposition development

 

Passion is the most essential precondition for being a successful commercial propositions professional. What do I mean by that? I mean:

  • Passion to evangelise about your new product or service, which at times goes against the current flow of the business and charts new ground where no precedent exists – e.g. targeting a new market segment, developing new capability, trying out a new commercial model.
  • Passion to take on board throngs of internal stakeholders up to the point that they not only support, but also believe in your ability to bring customers in volume, believe your revenue forecast and overall benefits in order to give their omnipotent sign-offs.
  • Passion and grit to go through endless workshops to test your assumptions, and work with Product and Delivery teams to fine tune what the proposition delivers as customer experience.
  • Passion to see your idea through, into a finished physical product you can touch or a service you can seamlessly use.

Funnily, no job description for commercial and proposition managers mentions the word ‘passion’. Job ads talk about ‘energy’ and ‘excitement’, but these can take you that far, you need more than these to get a winning proposition on the market.

You need passion.

This blog is about sharing my passion for innovative propositions and the lessons I have learned along the way.