Which IoT OEM business models are most likely to thrive?

Many equipment manufacturers (OEMs) have made significant progress in developing Internet of Things (IoT) strategies, adding software and services to their business models. This evolution has allowed some of them to successfully implement thousands or even millions of IoT devices. Prominent examples in this field come from car manufacturer BMW, agricultural implement manufacturer Deer and Schindler in the lift sector.

Aware of this scenario, IoT Analytics, an analyst in the Internet of Things market, has published a report of more than 200 pages in which it highlights some key points to guide the business models of OEMs that want to succeed in a world where connected products will be the norm – the expectation is that by 2026, more than 50 per cent of the products sold by OEMs will be connected to the IoT.

According to Knud Lasse Lueth, CEO of IoT Analytics, the report highlights the importance of harnessing customer equipment usage data as a basis for innovation and for offering personalised solutions that improve experiences and operational efficiency. “The road to success in IoT lies through in-depth customer insights and innovative business models. It takes years to get there, but the first innovators have already shown that the journey is worthwhile,” says Lueth.

With more than 16 billion connected IoT devices active worldwide, the transformation in business models doesn’t just involve sales methods or partnerships. It is now essential to understand customer behaviour and analyse it in order to better meet their current and future needs.

The IoT Analytics survey analysed 100 OEMs to find out what practices these companies have developed to successfully increase the number of connected products by the thousands or millions. Some questions were raised about the advantages and disadvantages of launching smart connected products on the market, for example:

• Which resources to focus on during development?
• Monetising hardware, software, services or data? Or perhaps a combination of them?
• Charge only once, monthly or per use?
• Offer some resources for free?
• Rely on an external supplier’s technology stack, develop in-house or use an open source solution?

The full report provides answers and points of view on each of these issues, but there are some main points that can be highlighted in four parts.

1. Presenting arguments to defend connected products, for example by determining how they will contribute to generating revenue, outlining the main benefits and highlighting the main beneficiaries;

2. IoT product development, including budget, parts supply, time to market and feature development;

3. Development of business models, with market positioning, main use cases/resources, value chain and revenue model;

4. Commercialisation of IoT products, determining forms of monetisation and measures to boost adoption.

Insights from the survey

For the first part, two insights were highlighted. The first revealed the importance of connected products. Survey participants reported that, on average, connected products represented 40 per cent of the mix of products sold in 2023. And this average is expected to rise to 54 per cent by 2026. Machinery OEMs and electrical equipment manufacturers led the way in the fourth quarter of 2023, but other sectors are expected to take a larger share over the next three years, including automotive.

The second insight has to do with the high value of connected product usage data in bringing OEMs and customers closer together. For 67% of participants, having in-depth information on the use of products and services is extremely or very useful for promoting sales and establishing specific partnerships, but also for better understanding customer behaviour. After usage data, the second most highly rated item in terms of the benefits of connected products is better management of customer needs, with 61 per cent of responses.

On the product development side, the survey identified that OEMs need an average of 41 months to launch their connected products on the market (time-to-market). In the automotive industry, this period was the longest, with an average of 53 months from the start of the project to the first paying customer, while electrical equipment OEMs reported the shortest time-to-market (average of 33 months).

When it came to the technology stack adopted, the most outsourced parts of the stack were connectivity services, connectivity hardware (modems and gateways) and cloud applications. The most mentioned suppliers were Microsoft (in all 12 of the technology stack categories consulted), AWS (in 11 of the 12 categories) and Cisco (mentioned in 10 of the 12 categories).

When addressing business model development, the survey raised two more insights. One revealed that successful OEMs help customers optimise workflows. The 61% of participants considered successful, i.e. with a payback time of 24 months or less for their connected products, commented that workflow optimisation was crucial or of high value to customers, while only 21% of less successful companies said the same. This difference of 40 percentage points reinforces the value of the software or service for customers.

The second insight in this part identifies software upselling based on customer usage as the most successful innovation in business models. Upselling software/services based on actual use of the products was identified as successful by 90 per cent of respondents who had tried this option (60 out of 67 respondents). The most tested innovation was offering performance guarantees, with the second highest success rate (59 per cent), but with more risks, since OEMs must be prepared to deliver on the promise.

With regard to the commercialisation of IoT products, there were also two insights from the survey. One is about the main concern customers have when adopting new IoT-based digital services and software: data/IT security, which has remained a major obstacle since 2020. The other two concerns are problems with integrating products into legacy systems and lack of budget.

Finally, the eighth insight from the IoT Analytics study has to do with privacy and regulatory standards that are undermining the ability of OEMs. Regulations designed to protect customer data and cybersecurity standards may be making life difficult for OEMs looking to get the most out of their connected products.

To address these and other issues, IoT Analytics suggests an innovative but also more complex Equipment-as-a-Service business model. It recommends a pay-per-use method for some or all connected devices. IoT Analytics is due to publish a report on this business model soon.

Alongside this report, IoT Analytics will be publishing a study on the equipment-as-a-service (EaaS) business model. Of the various business models, EaaS is the most innovative and, in turn, the most complex. It is designed to charge for some or all of the equipment on a usage basis.