The Internet of Things is on the agenda of every manufacturer. As part of their IoT strategy many manufacturers move from a one-off hardware sale to a recurring revenue model. Software Monetization is playing a key role in this transformation and IoT solutions will only be successful if software is protected, monetized and continuously updated.
Let’s take a step back. Which software are we talking about? An IoT solution does not use “one” software, there are different types that are being developed and maintained by different groups in an organization. Let me take you on a virtual tour through the software units in a manufacturing company:
Many manufacturers sell desktop software along with their hardware already and they have been doing that for years. There is a broad acceptance in the customer base to pay for it - like enterprises pay for other desktop software they are using. The desktop software group will be more challenged with moving on-premises solutions to the Cloud and moving from perpetual licensing models to subscription.
Often, there is also a Cloud or SaaS group that develops Cloud-based services or SaaS solutions that support new IoT models. For example, these solutions capture, store and analyze data from edge devices. Although Cloud or SaaS solutions are usually monetized in their own right, they also act as an enabler for IoT strategies because they deliver immediate value and visibility that wasn’t there before.
Connected to that, we see some manufacturers rolling out their own mobile apps - often as an alternative way to access data or control and monitor devices in the field. Mobile apps rarely are the only touchpoint and are often rolled out with a freemium model: users get the app for free but pay for premium features and services.
You thought Software was Intangible? Think about Embedded Software!
Most manufacturers today employ three to five times as many software engineers than hardware engineers and the main value of their devices is in the software. Often embedded software developers account for about 60-70% of the software business of a big manufacturer.
This is not reflected in the way products are monetized today. Although it is embedded software that makes devices do what they do, manufacturers see only little acceptance in their customer base to pay for it. For many years, sometimes many decades, customers have paid for machines and expect innovation, new functionality and updates to come with the machine. In addition, as opposed to other types, embedded software is intangible which makes it hard for some customer to see and appreciate what it really does.
Monetize Embedded Software - But how?
On the long run, manufacturers will have to create a return on investment for their embedded software. There is no panacea that will solve the acceptance problem straight away, but we have seen different monetization approaches that worked well:
- Change the pricing model and move to Everything-as-a-Service. In this case, the upfront payment for the machine gets reduces drastically or removed altogether. Customers pay for the outcome. Square meters of clean floor rather than a cleaning machine, miles moved rather than cars or airplanes, iron sheets cut rather than a cutting machine.
- Use Embedded Software to differentiate from low-cost competitors – in some industries devices from low-cost competitors almost look alike the original. The quality of embedded software and the difference in product functionality helps legitimate the higher price for the hardware or even an increase of the upfront price, even if the software does not get monetized separately.
- Change Packaging – another option is to start with a base price for the hardware and monetize additional premium features that can be purchased on demand. This actually makes embedded software more tangible as it shows the direct relation between the feature purchase and the additional value.
How do you monetize embedded software? Let us know!
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