The Internet of Things is undermining product-based business models, according to Daniel Delorge (1/2)

A few days ago, I sat down with Daniel to discuss the potential of the Internet of Things. In its recent survey on breakthrough technologies that will create value, making these shows that the Internet of Things may create between $2.7 trillion and $6 trillion in value by 2025. Most of my discussion with Daniel revolved around understanding how the Internet of Things could create such value.

I/ Daniel’s bio

After nearly 40 years of experience and management in IT and innovation technologies, Daniel Delorge works as an independent consultant. He helps companies to better value their assets and their intellectual capital, and also to optimize their operational performance thru Information Systems.

Daniel Delorge contributes to the promotion of Professional associations and he is one of the founding members of l’Observatoire de l’Immatériel, a Think Tank whose goal is to develop the knowledge of the Intangible Economy. He is more actively involved in the value of Information System Capital, Human Capital and Customer Capital.

 

 

II/ Today, most companies are built on a product-based business model

 

We started out by noting, that today, most companies have built their business model on selling products, whether it’s a new car, a TV, a refrigerator, an oven, or any other product, businesses make money by developing products that consumers buy. Companies only have a limited number of assets to increase profits and expand their business:

• First of all, they can increase their market share in an already mature market. This involves investing in differentiation.
• Second of all, they can expand to new geographies.

 

Both of these strategies have been used. But given that today consumers are already equipped in TVs, cars, or other products, relying upon expanding to new geographies or capturing market share from competition seemed too limiting.

 

 

Thus, a third tactic was put in place. This involves creating products which have a planned obsolescence. In other words, when consumers buy a refrigerator, the refrigerator will only work for a limited period of time, according to The Economist. This is good news for product companies who can count on a new purchase once obsolescence is reached, but this is bad news for consumers who are uninformed of programmed product obsolescence.

 

However, the Internet of Things has the potential to disrupt this existing business model.

 

III/ The Internet of Things is undermining product-based business models

 

Let’s assume that a company that has been selling refrigerators develops a new kind of service. Instead of selling refrigerators per se, they’ll approach consumers with the new value proposition. The value proposition could be something like the following: “pay a monthly fee, and will provide you with refrigeration services to all your foods”.

 

In this case, the company doesn’t sell the refrigerator but the service of refrigeration. Consumers don’t need to buy a refrigerator if they have subscribed to a refrigeration service. And, the service provider will be encouraged not to develop a refrigerator that will become obsolescence in a few years simply because if they need to replace it, they will have to support the cost of replacement. But, at the same time, the Internet of Things provides something really new.

And this is something we elaborated upon during our next discussion.

 

 

 

Further readings:

• For an interesting HBR article on the security of the Internet of Things, here
• For an interesting blog post on the security of the Internet of Things, here
• For an interesting Wall Street Journal article, please refer here
• For a critique of solutions-based business model, please refer to Tim Kastelle’s blog post, here
• For an interesting case study on solutions-based business model at Zara, please refer here