The Internet of Things (IoT) is the perfect marriage between the internet and electronics. IoT products are “smart” devices: inanimate objects brought to life with sensors, and sharing data with a hub. This hub collects the data, and transmits it to the internet.
The evolution of IoT is turning science fiction into science fact. By 2025, estimates suggest that there will be more than 64 billion IoT devices across the globe. This will impact the world’s economy by a predicted $4T to $11T.
With such potential economic impact, individuals and businesses alike are equating “smart” with “convenient”—a concept that sells. As a result, many businesses are examining how to monetize their products and services with IoT technology.
There are a few ways the IoT can accomplish just that. These methods will likely continue to morph as businesses find new practices to disrupt traditional models with machine-to-machine technology. What’s more, overcoming challenges to meet pricing goals will continue to cause shifts in the way internet-based businesses operate.
IoT opportunities come with pricing challenges
While there are ample ways the IoT has helped businesses break into different sectors, the pricing process isn’t always seamless. What is the most efficient way to price a product or service? With the traditional sales model, incorrect pricing might put off a customer one time, but in the subscription billing process, the wrong pricing model impacts recurring revenue for the foreseeable future.
Additionally, for businesses in the IoT ecosystem, there are even more concerns. While the costs to produce enterprise IT assets are dropping, affordability remains an issue. Businesses need to be able to cover the cost to manufacture devices and sensors, but they also need to make sure the pricing structure they select doesn’t become a barrier to potential customers.
If a business follows the more widely-known recurring billing model, they charge one flat fee every period, such as a month, quarter, or year. There are two possible problems with this scenario, however:
- You undervalue your product and lose money because customer usage is so high you can’t keep up.
- You overvalue your product and discourage low-volume customers. They churn, and you lose predictable recurring revenue.
One option that addresses these issues is charging based on usage. Usage based IoT pricing is similar to the way utility companies issue invoices.
Customers are largely attracted to this model because the cost of entry is comparatively lower than with a flat fee structure. While this billing situation may work well for a utility company, however, there are a few potential issues for other business types:
- Every invoice is a moving target each pay period, making it difficult to keep up with large-scale. This is especially true if a business is manually creating invoices.
- It’s difficult to predict what provisioning is needed month to month. For example, if there is a large pull on resources one month, that may increase the number of questions and concerns coming into the customer support team.
- A business may struggle with usage-based billing because there is no way to easily forecast future revenue.
The lure of hybrid pricing
In the world of IoT pricing, there is no one-size-fits-all solution. In fact, changing it up and getting creative with product pricing is something that customers not only expect, but demand. An IoT business aiming for continued success has to not only meet expectations, but also have the agility to cultivate healthy recurring revenue streams.
One pricing strategy quickly gaining popularity in the IoT sector is hybrid pricing, combining a flat fee with usage charges. A business can charge a flat fee for a device, while also monetizing the usage.
While hybrid pricing does have some inherent fluctuations, because it is partially based on usage, having a standard fee helps provide consistency and predictable recurring revenue for an IoT business.
Imagine a dairy farmer trying to manage the intricacies of a herd. IoT companies such as SCR by Allflex provide farmers with sensors for their cattle, collecting data with ear tags and sending the information to a hub. Data collected helps track everything from nutrition to pregnancy. With this information, farmers know whether a cow is in distress, when to milk, and what animals are sick or otherwise need attention.
What if the farmer also raises meat cattle? They might need a different data monitoring package that allows devices to be “turned off” when animals are sold or butchered, and back on when calves are born.
The ever-changing variables could be problematic for IoT businesses which do not have a single source of truth to track those changes and bill their customers accurately.
There are some other common challenges an IoT business may have when incorporating hybrid billing:
1. Complex catalogs
With a traditional flat-fee pricing structure, businesses may have a handful of “products” based on the different pricing levels offered. An IoT business that offers agile pricing would have an exceedingly more complex catalog of products. For example, SCR by Allflex, mentioned above, has multiple devices measuring a spectrum of products. SCR doesn’t just collect data on each head of cattle, but controls gates, feeding schedules, and walk-through scales to weigh each cow.
Not only do devices need to be cataloged, priced, and billed, but each feature and service has to have its own place in the catalog. If it isn’t there, it can’t be billed.
2. Time to market
In order to remain competitive, businesses need to be fluid, reacting to market challenges, competitor offerings, and updated features. Without reliable billing support, making changes can be tedious, and significantly slow your time to market. This typical billing challenge becomes exacerbated by hybrid billing, because adding even one feature can disrupt the billing process.
3. Real-time usage monitoring
Every customer is different, and every usage case is varied. Some customers may use a tremendous amount of data, while others are more conservative. Additionally, usage can vary from month to month. Consequently, hybrid billing will never be predictable for businesses.
Monitoring usage needs to be instantaneous. A business has to provide customers with usage details upon request, or their transparency comes into question—which can erode credibility with that customer.
4. Data capturing
The usage slice of the agile billing pie is based on the data derived from various sensors. This means that an extraordinary amount of information flows through a recurring billing system. That billing system needs to be able to measure and monetize that data.
When an IoT business is assessing a recurring billing system, it is essential to make sure a platform has the functionality to manage this data with servers, storage, and metering capabilities.
5. Managing resellers
Many IoT businesses work with resellers, either to add services to a purchased product, or to sell the device to businesses that then overlay their services. Who exactly should that invoice come from? Hybrid pricing, combined with complicated supply chain management, can be challenging to sort out. The billing system often has to support a complex IoT-manufaturer-reseller-end user ecosystem.
6. Monitoring unique circumstances
Often, businesses which opt for agile billing entice customers by offering a free trial period or a discount. With hybrid pricing, discounts come in many forms. A percentage off a billing cycle, the device, or the data being monitored are all possibilities.
An appropriate subscription billing platform should be capable of turning on pricing changes seamlessly, and automatically setting the time when that change is turned off. This prevents revenue leakage in this and other similar underbilling scenarios.
Hybrid pricing on legacy versus recurring billing platforms
As hybrid pricing increases in popularity, the need for a precise financial system of record becomes evident. Here are six costly issues when hybrid pricing isn’t supported by a single source of truth that can support billing activities:
1. Revenue recognition
In the recurring billing scenario, revenue recognition is absolutely essential. ASC 606 requires a shift in revenue recognition to differentiate earned and deferred revenue. In other words, if an e-commerce business charges $60 for a monthly subscription, they cannot consider that $60 as earned revenue as soon as it is received. Instead, it has to consider $2 on day 1 of the billing period to be earned revenue, while the remaining $58 is deferred.
This becomes even more complex with hybrid pricing, because it incorporates revenue recognition alongside the fluctuating price for usage.
With a legacy billing system, revenue recognition can be very difficult to track, and is extremely prone to manual errors.
A substantial recurring billing platform, in comparison, easily segregates earned and deferred revenue, along with the overlaying cost for data usage in a hybrid pricing structure.
2. Access to data
The data collected from devices and sensors drives the billing system, and businesses need access to it immediately, at any given time. A business that bills with hybrid pricing on a legacy or internal billing system may only have visibility to that information while invoicing. If they need access to the data halfway through a billing period, a lot of valuable time can be lost trying to find it.
3. Transparency
With a traditional sale in a retail environment, the business-to-customer connection generally ends after a purchase. Conversely, in the recurring billing model, customer service continues throughout the customer lifecycle.
Because of this, consumers have come to expect superior customer service, which includes business transparency. Even if a customer isn’t due to receive an invoice for three weeks, she may want to know how much data has been used partway through the billing period.
If a business is using manual tracking, they will need to physically access that information. This wastes time, and may give the perception that a business is not transparent. Losing credibility can mean losing that customer permanently.
An advanced recurring billing platform solves this problem by providing self-service portals, or SSPs, so customers can access that data anytime they want, day or night.
4. Customer overviews
Just as customers may want to know their billing data upon request, a business also may need to know where every customer is on their customer lifecycle, at any given time. Keeping a finger on the pulse of your customers gives a business the ability to re-allocate resources, if necessary, and to conduct revenue forecasts.
With a legacy billing platform keeping track of customer activity is difficult. However, robust recurring billing software provides a number of different reports so that a business knows the status of each customer, and their usage, at all times.
5. Cost of ownership
With IoT, there are many moving parts, often literally. From GPS devices to the sensors collecting and transmitting data, a business’s costs can vary significantly. When acquiring more customers, or generating partnerships, they need to have access to all assets and liabilities, including information on current customers.
Determining the true cost of ownership would be daunting with a legacy billing system. However, with a strong recurring billing platform, capturing this information is simplified.
6. Managing subscription information
Hybrid billing is always in a state of flux due to the draws on assets and the data that is used. On top of that, customers often make changes. From downgrading or upgrading a subscription, to altering the contact person, change is inevitable.
Those fluctuations may not be easily tracked through a legacy billing system. The information needs to be conveyed to the right team member, and then manually updated. With a modern recurring billing system, subscribers are easy to track. Information can flow to and from customer relationship management platforms so nobody gets lost in the shuffle.
In the IoT world, pricing and billing are quickly becoming synonymous with hybrid models. Recurring billing platforms vary in their capabilities, and some simply do not act as a single source of truth as is required by agile billing in the IoT world.
Managing fluctuating information with hybrid billing can quickly send a business with the wrong billing platform into chaos. With seamless support from an IoT-ready recurring billing platform, however, a business can not only manage its customers painlessly, but also positions itself to quickly scale when the opportunity arises.
