According to Microsoft analysts, up to 75% of all IoT projects fail to yield the expected results.

Among the top reasons for that are the high cost of scaling IoT solutions, technical issues manifesting themselves late in the development process, and a lack of skills to carry out an IoT project.

Additionally, 21% of IoT initiatives go awry due to the absence of a clear product and business strategy.

This is especially true for IoT startups developing connected products to solve a particular business problem, such as reducing last-mile delivery costs, strengthening cybersecurity, or scavenging data from sensors installed in remote locations using satellite connectivity.

Even though IoT startups’ funding increased by 30% last year, marking the best result for the Internet of Things companies in 19 years, investing in IoT startups remains a risky endeavor.

One way to win investors and ensure a continuous revenue stream for your startup after product launch lies in developing an effective IoT monetization strategy from day one.

Here’s how your company could monetize IoT solutions through 2024 and beyond.

A Rundown Of IoT Monetization Strategies

There’s one peculiarity that renders traditional monetization strategies like freemium less effective for connected solutions.

IoT products are multi-layered systems spanning physical hardware, embedded software, cloud infrastructures, and end-user applications.

Each of these components can be a source of income for your company — provided you play your cards right.

What does this mean in practice?

First and foremost, your company must not confuse the “business model” and “monetization strategy” terms.

To help you wrap your head around the business model concept, I used Alexander Osterwalder’s Business Model Canvas to analyze the business model of a fictional smart home startup.

As you can see from the image above, revenue streams are just one of the nine building blocks comprising an IoT business model.

To select a successful IoT monetization strategy for your startup, it is crucial to take into account additional factors. These factors may include your value proposition, the costs involved in running your business, important assets, and preferred distribution channels.

Without further ado, let’s investigate some promising IoT monetization strategies your company could pursue.

Key IoT Monetization Strategies

• Perpetual Model

This approach involves selling your product just once (i.e., one-time payment) without exploring additional IoT monetization strategies. The model best suits products that have no direct competitors and enjoy stable demand. Companies that choose the perpetual model can easily calculate future profits and make smarter business decisions. On the downside, one-time purchases may not fully cover further IoT product development activities, such as adding new features and rolling out firmware and software updates. Consider using the perpetual model if your startup produces hardware — for instance, smart fitness equipment, connected door locks, or intelligent thermostats. However, devices that remain connected all the time can consume a large portion of your earnings because of the high costs associated with cloud computing. So, your marketing team will need to put in extra effort to consistently attract new customers.

• Subscription Model

This IoT monetization strategy addresses the shortcomings of the perpetual model: as long as you have a loyal and growing user base, there will always be a steady revenue stream to cover your ongoing operational expenses. IoT startups that opt for the subscription model charge a small fee on a monthly or yearly basis. Additional features, such as device or software upgrades, can be billed separately. The model suits both hardware and software companies; whether you offer a predictive maintenance platform or install smart surveillance systems in offices, subscriptions can keep your business up and running.

• Outcome-Based/Pay-Per-Use Model

Instead of charging customers for the IoT solution, companies opting for the outcome-based model take payments for actual results their clients achieve — or the time they’ve been using the product. This IoT monetization strategy works best for industrial Internet of Things startups leasing connected equipment, such as cement mixers or injection molding machines, to manufacturing companies. To become profitable, however, your startup must ensure that your user base is large enough while the equipment is used frequently.

• Razor-Blade Model

In this tactic, an IoT startup bills customers for hardware and software components that add value to a cyber-physical system — for instance, disposable parts or applications that allow users to manage connected devices efficiently. Unlike the outcome-based model, the razor-blade approach helps eliminate situations when your product remains unused for extended periods, affecting your profit. If you’re manufacturing connected dishwashers, printers, or other equipment that requires replaceable parts, opting for the razor-blade model could be a smart decision.

• Service Model

Conceptually, this model incorporates elements of the subscription and outcome-based approaches. Companies following this path use IoT solutions as a means to induce clients to purchase related services and products. For instance, they can collect sensor data and sell it to marketing companies — as long as the information has been collected in a transparent and lawful way and is of good quality. They can provide maintenance services to industrial manufacturing companies and install sensors on equipment to detect signs of deterioration. Platform-as-a-service (PaaS) solutions, which allow businesses to prototype and deploy their own IoT systems, are also frequently monetized using the service model.

• Hybrid Monetization Model

To generate a steady income, your startup might want to leverage several IoT monetization strategies at the same time. If you produce smart HVAC units, you could sell the equipment at a fixed fee, charge an extra fee for maintenance services, and sell filters separately. There is also an option to develop several plans for different customer segments. For instance, your startup produces connected devices with an average lifespan of two years. With this knowledge, you can monetize your product in three ways: 1) Offer a budget-friendly device with a monthly subscription to premium services. 2) Provide a reasonably priced device with a six-month subscription to premium services. 3) Offer a high-end device with a price that includes both hardware costs and a one-and-a-half-year subscription to premium services.

How To Select A Strong IoT Monetization Strategy For Your Startup

Now that you know what monetization options your company could explore, you should pick the ones that would allow your business to thrive.

For this, you should:

• Conduct Extensive Market Research

For starters, study your competition, including their product features, competitive advantage, and revenue generation tactics. On the technical side, you should pay attention to the competitors’ integrations with third-party IoT ecosystems, such as Google Home and Apple HomeKit, supported networking protocols, and notable security accidents (or lack thereof). This way, you can determine what functionality would set your product apart and find a profitable yet unoccupied niche.

• Select Your Target Audience

Getting to know your customers is essential to price your product competitively and adjust your marketing strategy. You could also adjust the functionality of an IoT solution to address the needs of different customer segments and utilize several monetization strategies to maximize your revenue. An example of such flexibility includes selling connected exercise equipment at a fixed price to end users while offering the pay-per-use cooperation model to gyms.

• Advertise Your Product

With the proliferation of IoT solutions (particularly, in the consumer electronics segment), many startups fail to build a solid customer base and go out of business — no matter how valuable their products and services are. As a new company, you should allocate 20-25% of your budget to marketing, hire an in-house marketing team, and select digital and offline channels that would allow you to reach your audience faster.

• Build Your Own Ecosystem

To minimize customer churn, you should pull an Apple, persuading your clients to create an entire IoT ecosystem using your products. For instance, if you’re manufacturing connected fitness mirrors, you can extend your product line by developing custom fitness trackers or sensors that can be attached to weights and woven into sports apparel. You can also offer APIs to foster IoT software development activities around your product.

• Continue To Innovate

To succeed in the burgeoning IoT market, which is on track to top $3.3 trillion in just seven years, you should keep your finger on the pulse of the Internet of Things technology and continuously improve your product. To that end, it’s recommended that you establish a dedicated R&D department or join forces with skilled technology consultants.

Crafting a savvy IoT monetization strategy is as crucial as the innovation behind the product itself.

Your key to success lies in choosing the right mix of models — be it perpetual, subscription, outcome-based, or hybrid — to match market demands and sustain revenue flow.

Alongside this strategic choice, a relentless focus on market research, customer engagement, robust marketing, and continuous product evolution forms the cornerstone of success in the competitive IoT space.

As the sector continues to grow, startups that can effectively navigate these elements will not only secure their financial stability but also take the lead in the connected technology revolution.

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• Source: https://iotworm.com/how-to-monetize-iot-products-in-2024-guide-for-startups/