Consumer IoT, startups, and making money: some ideas
Matt Webb discusses some of the challenges he sees facing consumer IoT and some of the ways the industry can meet those challenges head on.
I gave this talk at the excellent IoT London meetup, which is the monthly get-together of a community of designers, engineers, entrepreneurs, hobbyists, thinkers and investors. If you haven’t been I highly recommend checking it out — IoT London is currently celebrating its seven year anniversary.
Startup business models
I want to have a conversation about business models for consumer connected products, whether smart home gadgets or wearables, because I feel startups making these products are missing a few tricks.
As an investor at R/GA Ventures, and as the managing director of our London-based IoT Venture Studio, I see a lot of companies and have many conversations with founders about growth.
In Enterprise IoT, we’ve been able to identify a reliable business model called Hardware-enabled SaaS.
Some definitions: Enterprise IoT is like Industrial IoT in that it involves business sales. But it is focused on products that are the same for every customer, so it’s quicker to scale. SaaS is an acronym for “software as a service,” which is the monthly subscription model commonplace in web-based services. Because SaaS is common, the approaches to growing companies based on this model are well understood by startups and investors.
In the background you can see Winnow, which deals with food waste for commercial kitchens. The Winnow system provides a weekly report of food waste to the exec chef, enabled by a tablet and a bluetooth-enabled weighing scale installed in the kitchen. It’s incredibly effective, halving food waste, and saving 100,000s of meals for Ikea so far. But it’s basically a dashboard with a monthly fee… enabled by hardware that rather than being a burden on the business, enhances both the product’s ease of use and overall customer retention. The recurring revenue makes this an appealing business for investors.
Consumer IoT is challenging
Consumer IoT is harder. Despite Kickstarter, and despite help from retailers, there are challenges for startups growing a connected product business.
There are product challenges: However great the initial product, finding real love and stickiness with consumers is a matter of feature fine tuning (and sometimes more radical changes). But while software startups iterate their product weekly or daily, the constraints of batch manufacture mean that iterating a hardware product is slow and expensive.
There are distribution challenges: Physical products often need to be experienced to believed. There’s none of the virality of a 99p mobile app where user acquisition is by word of mouth; it’s a rare customer who will spend £99 on hardware sight unseen. So either you fill the store of retail shelves with stock (expensive) or you buy ads on Facebook to find those rare customers (expensive).
There are revenue challenges: Margins are poor for hardware compared to the economies of scale found in software startups. And what’s more, customers only pay for hardware once: there’s no high lifetime value as with service-based businesses.
Yet business model challenges are faced by any new sector worth its while. Reid Hoffman, cofounder of LinkedIn, says it’s not enough to have a better product. LinkedIn itself was a better product for managing and sharing professional histories, but it also had to innovate with its distribution model: word spread by encouraging users to invite their contacts. And it adopted and popularised the then-new freemium revenue model. Freemium services typically convert only a single digit percentage of their users to paid. It allows for strong distribution and build trust before charging users.
So it’s interesting to look at some consumer hardware companies who are tackling these tricky bits of the business model. We might learn something from them.
Five favourite innovations
Technology Will Save Us uses range to increase lifetime value. This is a traditional model, but tough for single product startups. It kicks in later on: once you’ve acquired the customer and wowed them with one product, you can sell other products in the range more easily. A larger range means more entry points too.
Voice Originals (by Sensible Object) is an upcoming board game for Amazon Echo. The free version doesn’t require hardware, and has a new mini game daily. This model gets the word out and encourages users to involve their friends, addressing distribution without high cost.
An interesting question is whether the freemium model could be applied to app-connected hardware? Could it apply to some of the products below?
Beeline has shipped eight major features to the hardware, without the expensive step of updating the device hardware. Each update has been in response to user feedback and research, and so the Beeline has been moving ever-closer to “product-market fit” where the features offered are just what the customer wants. To do this scientifically, monitor usage over time, and check that new features encourage sticking around.
Iterating isn’t easy with most connected hardware, and it took some up-front design thinking to ensure the product could be iterated like this.
Eero Plus is sold alongside Eero home wi-fi routers as an (optional!) subscription service for extra security. If your product has strong retention, then it’s possible to upsell to a premium service. The monthly subscription means the business can now stand the recurring costs of cloud-based operations — a necessity for some consumer IoT but a burden without recurring revenue.
However, the allure of recurring revenue – if not done sensitively – can result in a terrible customer experience. Our salutary example is Juicero, the $400 home juicer that could only press proprietary juice packets that were bought on a subscription. Juicero is no longer operating so it’s easy to pick holes in this model, but there are similar businesses that work well – most obviously, Nespresso.
Nespresso Prodigio uses Bluetooth connectivity to act as a more immediate sales channel. Since the mid 1990s, Nespresso has understood that it has a valuable asset in its consumer relationship. It sells capsules online and over the phone, and now via apps and the brewer itself. The Prodigio is Nespresso’s first Bluetooth machine, and it prompts customers to purchase more coffee capsules when the household is about to run out. By treating the consumer relationship with tact and care, Nespresso is a great example for startups adopting a transactional model with consumer IoT, despite not being a startup itself.
The downside of this oft-imitated model is that it’s tempting to oversell to the consumer (like Juicero) or to sell the initial device (the brewer) below cost price to get customers in the door. This is poor economics.
But Nespresso’s insight that a connected product should be considered as a consumer channel for brand building, up-sell, cross-sell, and transactions is valuable for startups and corporates alike, and has implications for product-marketing and organisational structure.
These five tactics show that consumer IoT business models are still emerging. It’s not exhaustive: I haven’t brought up other methods such as making use of aggregate data, or licensing IP.
But I do wonder whether it’s worth digging into a couple of these tactics more:
Freemium: can this be applied to consumer hardware in a way that increases virality and making it easier to reach customers?
Premium: is there a pattern which is fair to consumers and also provides vital recurring revenue?
And, of course, how might consumer hardware be designed, at the outset, to incorporate business model twists like this?
Consumer IoT still has some way to go, but I believe that with these tactics and a lot of work from the UK startups scene, the future is bright.
Investment and support for great physical/digital startups
At R/GA Ventures, we love getting our teeth into challenges like this.
In February 2018, we’ll be starting our second London-based Venture Studio to accelerate Internet of Things startups. It’s aimed at enterprise and consumer IoT startups alike, and we provide £75,000 investment plus hands-on strategic and creative support over three months.
The deadline for startup applications is 7 December. We’ll be working with up to 10 companies. The cohort in our first program included everything from artificial intelligence for pedestrian footfall intelligence, to pay-as-you-fly drone insurance. Unlike traditional accelerators, we prefer to work with early growth-stage startups who have a little customer traction.
I need your help. Please share the website rgaiot.com with your networks, and encourage great IoT startups to apply. Or put them in touch with our program team directly. My email is email@example.com.