The Debonair Commercialist

A blog about crafting compelling propositions and cultivating commercial nous

Category: Commercial management

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!

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!

Relevance to customers: Rule #1 in propositions development

Relevant - Propositions development

In my Propositions Mantra a couple of weeks ago, I outlined the four fundamental principles of proposition development. I got several reader requests to discuss my approach on how I evaluate an opportunity against each of those four, plus I already promised a small deep-dive for each.

Today I focus on the first element – Relevance to customers. This is the relevance of the proposition idea or ‘opportunity’ to your customer base, to the market segment and to your company. Its core question is “What is the strong insight which makes us believe there is an opportunity to fulfil a need and monetize it?”

 I usually take apart this question into two subsets:

Do you have data points from the insight to support the idea?

Search for data points to support and confirm the idea. You get those from multitude of sources ranging from direct, but consistent customer feedback to vast market segmentation and quantitative research. Working for several software start-ups, I have found that one of the best sources of ideas is customer feedback.

Small start-up example: While I worked for software start-ups, we found that the best source of proposition ideas to develop our offering has been our own customers. In one example, we had launched a new version of our software suite where the initial customer feedback was very promising. Over the next few months, some of our existing customers shared that introducing 24/7 development support for their own in-house team of software developers using our product will be highly appreciated and even expected.

Big corporation example: Let’s say your team is looking after a devices portfolio and a recent consumer market research shows a great number of consumers buying home phones would strongly prefer to have a Do Not Disturb feature on those phones, so they can avoid unwanted calls entirely while at home. Such data points come from a quantitative research, teasing out the preferences (or needs) against each consumer segment and how strongly these preferences affect your customers.

On the back of market research, proposition teams usually run a propensity to pay study to identify if these strong preferences can be monetized and whether a ‘sweet spot’ price range exists.

Relevance to customers

Is it relevant to your market and company strategy?

What turns your supporting data points from mere numbers into a true opportunity is the ability and judgement of the commercial proposition manager to connect the dots – from the findings to how those may potentially improve the product or service offering if they are implemented, and how the whole may become more desirable to customers.

Sometimes connecting the dots is obvious, sometimes it makes you leap into the unknown.

Let me try to illustrate that thought process in my two short examples:

Small start-up: “24/7 support” is nowadays a given in retail and service industries, yet in software development a 24/7 presence has been relatively novel…especially performed by other software developers rather than support officers who may not be software trained. Yet, it looks like this support opportunity can give an edge to this little company compared to more established competitors in this space. It is a relevant ask as it adds a service hug to the core software product and complements the proposition.

Big corporation: Looking to refresh your devices portfolio you search for exciting features to add to the new devices. At first glance, the evidence for a Do Not Disturb feature is really strong and such a feature will be unique addition to your product capability.

Is it relevant? Yep, 100% so.

Yet deeper analysis raises concerns. Your phones’ single purpose is to put a call through, not block it! How is your product going to be perceived if this new Do Not Disturb feature ends up blocking important calls? Is this going to be hurting sales eventually? Affecting your brand even?

Revelance is the first stage in the four step process – you cannot decide whether an opportunity is worth pursuing by looking at its relevance only.

In the next post of the series, I will move to the second attribute of any proposition – Focused, and develop those examples further. The Focused step covers what capability you need to address the market opportunity.

 

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!

The Four Elements of a Commercial Proposition – My Propositions Mantra

I call it the Propositions Mantra. Just as you repeat a mantra and it expresses a strong belief, the four elements in my propositions mantra are the basis of any new proposition that we launch.

We have all read in the marketing textbooks about ‘value propositions’ and ‘unique selling propositions’ before, yet you can rarely see in detail which of those four points sits behind the expression and how these are linked to commercial parameters. And I am always amused how the commercial angle is conveniently omitted!

My Commercial Propositions mantra: Relevant, Focused, Differentiated and Profitable.

4 Proposition Elements - Relevant, Focused, Differentiated and Profitable

In later posts, I will focus on each key ingredient of the commercial proposition in greater depth, but here I want to outline the four pillars.

Four questions whose answers build a winning proposition

  1. Relevant: What is the strong market (or segment) insight that makes us believe there is an opportunity to monetize?
  2. Focused: What product or service capability are we offering to address this market opportunity?
  3. Differentiated: What makes us believe that we can address this opportunity better than the competition? Why us? – Hint: ‘this is the ‘Unique’ in the ‘Unique Service Proposition’ expression.
  4. Profitable: Can our product or service address this opportunity profitably?

Skipping even one of those questions or having weak, unsatisfactory answers to any of the questions means that your business will be wasting good money on a mediocre proposition.

In my experience, all questions need to be treated equally and it is the job of the propositions manager to gather expertise from other teams in order to address those in a way that drives the idea forward.

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.