From product to connected Product-as-a-Service: Seven things to consider

Transform your business from selling a product to providing a connected Product-as-a-Service. Download our in-depth report to learn more.

Adopting a Product-as-a-Service (PaaS) business model is a big step. Once your product is connected to the Internet of Things (IoT), it becomes a direct link between you and your customer. Using the power of data from IoT and connected products, you can find new ways to build relationships and create value for your customers.

From an organizational perspective, making that step into the world of IoT and Product-as-a-Service is challenging. It requires a shift in mindset impacting strategy, processes, people and technology. To provide a guide to Product-as-a-Service business models, we commissioned the strategic consultants at Northstream to help us define strategies for PaaS business transformation. The result is our in-depth report entitled: From Product to a Connected Product-as-a-Service.

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Full Report: From product to a connected product-as-a-service

One of the biggest opportunities within the IoT is the possibility of transforming a company’s business model to offer a connected service, instead of selling an actual product.

As a preview, we have outlined the seven key factors consider as you invest in IoT and move towards Product-as-a-Service. The starting point is naturally the customers, the other factors can be considered in order or in parallel, depending on your situation.

Customers

Generate business from new customers while better engaging with existing customers – these are the main goals of moving towards a PaaS model. Offering a low customer entry price, with a pay-as-you-go revenue model, expands your potential customer base, with a path to continual end-user feedback and engagement.

Questions to ask

  • Who are the new customer segments?
  • How to transition existing customers?

Value proposition

With a traditional product, the value proposition is built around selling an asset with certain features and quality. In a PaaS offering, the value you provide is reliable, on-demand performance. Adopting PaaS requires a complete rethinking of the offering and how the value is created and delivered.

Questions to ask

  • How do we redefine from selling an asset to delivering a service for a fee?
  • What are the range of possible services connected to our product?

Offering product-as-a-service allows to create a stronger value proposition to customers but it requires a complete rethinking of the offering and how the value is created and delivered. With a traditional product, the value proposition is built around selling an asset with certain features and quality. In a product-service offering, the value proposition is centered around providing reliable performance when needed or offering specific outcomes for the customer.

Rolls Royce is a good example of a manufacturer that has successfully transformed from a product/technology company to a services and customer centric company.

“TotalCare” is their jet engine-as-a-service offering, designed to guarantee engine availability and charge customers (airlines) based on engine flying hours. Rolls Royce thus redefined their value proposition from what can be described as “we sell engines” to “we supply power by the hour”.

Each company needs to consider, what is the best way to deliver more value in a way that differentiates the offering?

What do customers expect and value with respect to the pricing model, repair and maintenance guarantees, software updates providing new features?

NRG Home Solar is another good example of how the value is delivered in a product-service model. The company offers solar panels-as-a-service to residential customers, which pay predictable rates per kWh. The product ownership and responsibility for the system performance and operation remain with the enterprise. The value proposition is based on providing clean energy, at no upfront installation costs, while customers can enjoy predictable rates and even reduce monthly electricity bills.

Business Case

As product-as-a-service and IoT are relatively new to every industry, quantifying a business case is challenging. However, to ensure the buy-in of management, it is crucial to understand the effect on revenue and costs, and the resulting return on investment.

Questions to ask

  • What is the impact on TCO and ROI?
  • What is our pricing model?
  • How do we manage payments?

Quantifying the business case is one of the main challenges that enterprises face since IoT is still a relatively new area and the impact of a new business model may be hard to assess. However, understanding the effect on revenue streams and costs, and the resulting return on investment are important in the decision making process and to ensure the buy-in of management and other key stakeholders.

Costs

The cost side of the business case should consider both the capital and operating expenses as well as the expected cost savings.

The CAPEX includes investments into new IT systems and capabilities (such as analytics platform) and adding incremental layers to existing systems (such as billing, CRM), which typically entails development, installation and integration costs.

The OPEX mainly consists of the cost of using third party systems and services, running costs for in-house systems, and subscription fees for connectivity. A connected product-as-a-service can also create cost savings for the enterprise over time. The cost savings are typically realized from improved (e.g. predictive) maintenance, optimized operations and supply chain, automated monitoring and more.

Product development

The need to redesign existing products is the biggest initial impact of adopting IoT on R&D. The long-term impact will be applying end-user data to transform the entire product development process.

Questions to ask

  • What initial product redesign is needed?
  • What functionality should be in-device versus in the cloud?
  • How do we support after-sales updates and customization?

Sales & distribution

Product-as-a-service requires a revised focus on after-sales to increase your upsell and cross-sell with direct and long-lasting customer relationships. As services become an integral part of your offering, all the people involved in service touch points need to act as ambassadors for your company.

Questions to ask

  • What is the impact on sales people and incentives?
  • With increased end-user contact, how do we ensure customer service?
  • Are new distributors needed to reach new segments?
  • How do we best collect user feedback to provide better services?

IT systems

Adopting a PaaS business model does not necessarily require a major IT overhaul. A better approach is to incrementally add layers to your existing systems. Piecing together various components and technologies requires an end-to-end solution that can manage system integration.

Questions to ask

  • What new systems and capabilities are needed?
  • What are the new technologies, infrastructure and skills you need to have in place?
  • How do we manage data ownership, privacy and security?

Connected product-as-a-service entails a number of important IT considerations. What are the new technologies, infrastructure and skills the enterprise needs to have in place to deliver an end-to-end solution? These include connectivity technology, application enablement and analytic platforms, customer facing applications, and more. In selecting IoT connectivity technology, in particular, enterprises face many considerations, which we have described in a previous report, “Connectivity technologies for IoT”.

A connected product-as-a-service business model does not need to entail a major IT infrastructure overhaul, but rather adding incremental layers to the existing systems.

System integration therefore plays a vital role, as one of the main challenges enterprises face is in piecing together all the components of an end-to-end solution.

Billing systems need new capabilities in order to be able to handle billing and invoicing of recurring revenues and the flexibility to define new types of offerings. Not only the software, but also the surrounding processes need to be transformed. The billing system needs to be also in sync with other systems such as CRM, ERP, customer portals.

CRM systems also face impact. Enterprises need to be able to bring data from sensors and devices into their customer relationship management software, combine that with data from other customer interactions (such as social media), and perform analytics to derive business insights that can be used to improve sales, marketing and customer service.

Interoperability

An important consideration in designing the technology solution behind a connected product-as-a-service is interoperability. How should the company’s product interface to other adjacent products and services that the customer is using? For example, light bulbs from one manufacturer may not be interoperable to a light switch or light control system by another vendor. The value of the whole ecosystem (e.g. connected home), and opportunities for innovation may be diminished due to fragmentation and closed solutions. An open system entails using open and standardized interfaces, that can provide access to other players to build synergies and additional value. In choosing their approach, enterprises need to evaluate competitive positioning, technical constraints, cost and time to market.

Skills and competence

One of the important aspects in realizing the benefits of IoT and a product-service model is to ensure that the right talent and organizational structure exist in the enterprise. Companies often need to acquire new competence and skills, for example, in software and big data/analytics.

Identifying what are the competence gaps and implementing a recruitment and/or training plan should be high on the agenda.

Data ownership, privacy and security

The data generated by connected products is a key resource and lies at the heart of value creation. Sometimes it may be hard to determine in the initial design phase what data may be relevant in a future context and it is useful to have the possibility to retrieve more data than currently needed. The focus though should not be on simply amassing as much data as possible, but on the intelligent collection and use of data that leads to customer benefit and creates value that the customer is willing to pay for. Key considerations with respect to data are data ownership, privacy and security.

Who owns the data – the customer, the enterprise or any of its partners? For example, would the data from connected tires be owned by the vehicle owner, the tire manufacturer or the automaker? Should the enterprise additionally monetize data by selling it to third parties?

These are some of the considerations that enterprises struggle with; the approaches can vary depending on the use case and type of data collected. Security is critical to establishing trust in the use of IoT.

The massive number of connected devices complicates the challenge. Security has a number of aspects – security of the end-device (poorly designed or non-upgradeable devices can expose customer data and become target for hacker attacks), security of data that is communicated from the end-device to the cloud and security of data that is managed and stored in the cloud. Ultimately, each enterprise needs to do a cost-benefit analysis. What are the customers’ expectations regarding security? What are the current and future security risks that the company may face? What would be the resulting damage from a potential security breach? And last but not least, what are the resources required to ensure a certain level of security?

Privacy is another integral element of trust in IoT and it needs to be appropriately safeguarded. Customers and enterprises often have different views on how private the data collected is and what constitutes fair use. This should be investigated and clarified.

Partners

In-house or outsource? This is the big question that must be answered as you go forward with your PaaS journey. When deciding on who to partner with, you need to consider cost, skills and competencies, time to market, scalability, control of key activities and data ownership.

Questions to ask

  • What should be done in-house versus provided by partners?
  • How do we define our role in an IoT ecosystem?  

Full Report: From product to a connected product-as-a-service

One of the biggest opportunities within the IoT is the possibility of transforming a company’s business model to offer a connected service, instead of selling an actual product.