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03/14/2016
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By Mike Kavis, Contributor

How IoT Changes Pricing Models

How IoT Changes Pricing Models
03/14/2016
By Mike Kavis, Contributor

How IoT Changes Pricing Models

There’s a lot of talk today about the technology that makes up the Internet of Things (IoT). What fascinates me the most is the impact IoT can have on the way companies can drastically alter their business models to leapfrog the competition.

In the past, companies kept track of their key performance indicators (KPIs) by running reports at month’s end. They would then put plans in place to make the necessary adjustments to improve upon those KPIs going forward.

With real-time data, companies can make split second decisions to create competitive advantages in the marketplace. With IoT, they can obtain real-time data from “things” they never had access to before. The ability to know KPIs in real time creates opportunities for companies to provide new or improved services that are transforming their industries. Here are a few examples.

Risk Reduction

Risk is an important attribute that has a huge impact on costs, customer satisfaction, brand recognition, and public perception. In the insurance industry, risk plays a big role in premium pricing. We already have examples of sensor technology being used to measure things like driver safety, environmental safety for homes and commercial buildings, biometric data for health insurance, and preventive maintenance for products.

Insurance companies can offer discounts to customers who use IoT solutions, because they provide real-time data that can prevent unfortunate events, or improve response times if they do happen and thus reduce collateral damage. In addition, insurance providers can get a better understanding of a customer’s risk profile and provide lower rates to lower risk customers.

Risk also plays a huge role in pricing when trading commodities like energy, precious metals, livestock, etc. Commodities trading is highly dependent on forecasting production (supply) and predicting demand. I’ve written in the past how sensors on wind turbines can measure wind, vibration, and weather patterns, and automatically adjust turbine blades to optimize energy output. Sensor data is then ingested into a large NoSQL database and combined with other data feeds on local weather conditions and patterns. Machine learning algorithms are then applied to accurately forecast wind energy output in future months.

Similar approaches are being used in the mining and oil industries. Producers can inspect atmospheric attributes to better predict how much they can extract from a mine or oil rig. Livestock producers can monitor animal health and make necessary adjustments to maximize growth. They can also compare an animal’s growth against historical patterns and better predict the amount of meat they’ll produce.

When companies can predict outcomes more accurately, they reduce the speculation that goes into forecasting supply and demand, which drives down costs. IoT is enabling companies to forecast more efficiently and more accurately, giving them  a competitive advantage over companies mired in older technologies.

New Pricing Models

Many companies are taking advantage of IoT to transform the way their products and services are priced. Connected homes is an area with lots of IoT activity. Sensors can detect fire, smoke, carbon output, water damage, abnormal activity, and much more. Video cameras can capture suspicious activity, health emergencies, weather damage, and other potential threats.

Forward thinking home security providers are now offering tiered services. Traditional pricing is based on the average cost to service customers, whether they never experience an incident, or have 10 of them. In the new tiered model, customers pay a low fee for basic monitoring. There are then tiers of charges for various other services, such as incident response, recommendation services, threat prevention, etc. Much like the pay-as-you-go cloud computing model, customers only pay for the tiers of service they consume.

This is great for both consumers and the provider. Consumers get better service at a lower price and only pay for what they actually use, while the provider benefits from a more competitive product. In addition, with access to both real-time and historical data, the provider can make preventive recommendations to consumers to head off events before they occur. For example, customers in cold climates can have water pipes freeze and burst, causing flooding. The provider can compare incoming sensor data against patterns from other customers who experienced flooding and warn the customer, so they can make the necessary adjustments.

Flexibility Creates Complexity

The examples above are just a few of  the many creative ways companies can use IoT to change the way they price products and services. Access to real-time data from sensors, devices, and IP-enabled “things” are creating for service providers new opportunities, new services, and flexible pricing strategies that can transform entire industries.

The downside is that pricing flexibility creates a challenge for companies to figure out how to bill clients and recognize revenue. But with every challenge comes a new opportunity. One company zeroing in on such opportunities is goTransverse. They have years of experience helping telecom providers with billing and revenue recognition challenges. These are the result of the many different calling plans and service tiers the carriers offer. Taking their business model forward into the age of IoT, goTraverse now uses sensor and device data to accurately provide billing and revenue recognition in real time.

Going one step further, once goTransverse has accumulated enough data to start identifying trends and patterns, their customers can leverage this data to optimize their pricing model. This is how the new world of IoT is opening up opportunities for companies by applying new pricing strategies for services. And we are at a watershed moment, just scratching the surface of ways to monetize IoT.

Summary

IoT gives access to more real-time data, allowing companies to create opportunities that were never before available . As these companies gain more experience working with IoT, we will continue to see trail blazers coming up with innovations in types of services and methods of pricing. Five to ten years from now, we will look back at today’s pricing models and they’ll look as outdated as rotary phones and 8-track players.


This article was written by Mike Kavis from Forbes and was legally licensed through the NewsCred publisher network.

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