Merging the physical and digital world: Building blocks for IoT business models

With the Internet of Things, the strict separation of the physical and digital world is outdated. This has an impact on possible IoT business models: Typical digital business models can now be transferred to the classic industry – at the same time, completely new concepts are being developed. This article presents concrete building blocks and patterns for IoT business models.

IoT business models originate from a simple basic idea. As a business provider, it is essential to merge a physical “thing” with a few IT elements such as sensors, actuators, Internet connections or cloud-based data analysis – in such a way that a demand is generated from it. Basically, it is therefore a matter of linking a classic product to the Internet and thus offering the potential customer a surplus benefit.

The following figure shows, using various examples, how a thing with its original “thing-based function” becomes a new IT-based service by merging with IT.

The clock above is still a device for reading the time, even if it has a GSM module, microphone, and loudspeaker. The physical and local benefits are thus retained. In addition, however, it will be equipped with IT elements with added value and completely new functions that enable IT-based services such as emergency calls. The result is a hybrid construct that has never before existed.

In its publication “Business Models and the Internet of Things“, the University of St. Gallen and Bosch IoT Lab have developed a model for IoT business models, distinguishing between five levels (see picture).

According to this, the value of an IoT solution for a manufacturer consists of the combination of a classic (non IT) product with two to four layers from the graphic. This value unfolds on the customer side, on level 5, as a benefit from the physical product and the associated digital services.

Digital Charged Products

From their analyses of IoT applications and companies, the authors have extracted two main pillars or business model patterns. The first is formed by so-called “Digitally Charged Products”.

This concept combines a physical product with digital services into a hybrid bundle, as described above. This makes it possible to add a new digital benefit to the existing, locally experienceable use of a thing.

This concept is available in different “building blocks”:

• Physical Freemium: This model sells a physical asset together with a free digital service. Optionally the buyer has the possibility to buy a premium service. The US-Startup Canary, for example, sells a smart home system with sensors and cameras. Basic monitoring functions are integrated free of charge, additional functions cost money. The Digital Add-On model works similarly, which activates additional functions for an extra charge for certain products. Such examples can be found in cars or intelligent thermostats.
• Digital Lock-in: Digital Lock-in is an IoT model that binds users to a product by adding value. This is usually done by ensuring that only original components are compatible with the system. Patents often protect these. Typical examples are printer manufacturers who bind their customers to the company with special cartridges, Nespresso with its coffee capsules or Apple with iTunes.
• Product as Point of Sales: The physical product is used here for further sales that the customer consumes directly on the product: With the Amazon Dash button, for example, you can buy items at the touch of a button without having to log in to the Internet first.
  Object Self Service: With this module, the product automatically triggers orders. A typical example is the refrigerator, which orders foodstuffs on its own or the heating system, which orders oil on its own.
• Remote Monitoring: Remote Monitoring enables remote monitoring of the product used. This can be found, for example, in bike sharing or car sharing offers. This means that the operator of a fleet of leasing vehicles with appropriate IoT technology can monitor the condition of his fleet at any time.

Sensor as a service

A second main pillar alongside the Digitally Charged Products is “Sensor as a Service”. A new service is generated based on sensor data and not a specific product is extended by a digital service. The device is completely in the background, the focus is solely on the generated data – an added value is created exclusively with the collected data of the sensors.

An example of this model is Smart Parking. Bosch, for example, equips parking lots with sensors so that private individuals can be guided to free parking spaces with the help of an app, thus saving themselves the tedious and nerve-racking search. In this case, the customer does not own the sensor as in Digitally Charged Services, but by the service provider.

A commercial company using this concept is the Californian company Streetline. It installs sensors in cities and on private properties which can detect the occupancy of parking lots with the purpose of selling the collected data to interested third parties. Drivers receive the information via an app free of charge. For the authorities, the somewhat different data formats are of great value: their physical effort to identify parking offenders is reduced, the utilization of parking spaces increases, and the information needed to optimize their infrastructure improves in quality.