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An introduction to smart home business models

Smart homes are changing. A modern smart home typically isn’t a self-contained, set-it-and-forget-it, custom installation. It’s a hyper-connected set of devices that work together to automate and enhance the users’ living space. Today’s smart homes contain devices from many manufacturers, running dozens of protocols, interfacing with multiple cloud backends. Navigating this ecosystem is challenging both for the consumer and for businesses determining their optimal business model in the space.

Smart homes evolve constantly; the business models associated with them should, too. Device manufacturers need to find sustainable business models that work for their customers, while matching the technology landscape as it evolves. In this blog, I’ll highlight a few approaches to smart home business models as well as tradeoffs and use cases associated with each.

Stand-alone device sales

One of the most common business models for smart homes is stand-alone device sales. In this model, a consumer buys a product from a retailer for a one-time fee and is free to use the device as they wish afterwards. 

This model has some advantages in its simplicity and lack of commitment required on the part of the consumer. A one-time fee can be easier to sell than an ongoing commitment. This model can be tricky for the company, however, because it must provide whatever support and cloud services the device requires for the lifetime of the product, based only on the initial purchase price. In a highly competitive market, it can be difficult to attain the type of margin required to make this sustainable.

This type of business model works best for devices that are highly reliable, and require little to no cloud connectivity. The key to success here is minimising the ongoing cost of support, having an accurate estimate of what that support cost will be, and building the net present value of that cost into the purchase price of the product.

We’ve seen a few examples of failures of this model recently, with several companies shutting down their servers as support became unsustainable. Two notable examples are Insteon and iHome, while others like Wink have had to start charging a subscription fee to customers who had already bought their product.

Subscription

In contrast to the one-time-fee model described above, a subscription model can alleviate some of the ongoing costs of supporting a device in the field. The subscription model is typically used for devices that offer a higher degree of service, such a smart home with security monitoring.

While it can be a tougher sell to get customers to commit to a subscription, this model can be a much more sustainable model in the long run. It can be easier to get a signup to a subscription plan if the hardware is sold at cost or subsidised, but, of course, this increases the risk for the company offering the hardware at a discount. If the customer churns quickly, the company is likely going to lose money. The key to this model is creating enough value for the consumer to keep a very low churn rate. Companies interested in the model should learn what services are their “stickiest”, or find ways to add additional features to help retain their customers for the long term.

Device as a service

A newer business model that has come onto the scene recently is the device-as-a-service model. This model takes “subscription” to the next level, eliminating the purchase of the device altogether. Since the consumer does not own the device, any repairs or replacements are undertaken by the company providing the device.

This type of model can promote sustainability, as the company offering the device is free to offer one that has already been in service elsewhere, and the device is unlikely to be thrown away during a move or when it breaks, instead being reclaimed by the company for repairs and to be put back into service.

This model is beginning to catch on in the smart appliance space, and has long been used with set-top boxes and routers from ISPs.

Freemium

Freemium models have had huge success in the software space. Whether it’s a “pay to win” type of feature on a game, or the option to upgrade to edit a PDF, most people have come across this type of model in their daily lives. 

This model type has begun to catch on beyond the pure software space as well. In the smart home context, providing hardware has a fixed cost that is hard to make up with a purely freemium model, but selling hardware at or near cost with freemium features as add-ons is a promising way to get recurring revenue from your smart home devices.

Freemium models are fantastic for encouraging new users to try your device or service, as the barrier to entry is typically as low as possible with this type of model. If your product can benefit from network effects, this is a good model to consider to try to boost your user base numbers. 

The challenge with all freemium models, however, is providing enough free value to attract users, while still keeping enough of that value gated to entice them to sign up for the paid version. Get this balance wrong and you may have severely limited adoption of the free tier or, conversely, a very low conversion to paid customers.

Conclusion

Companies in the smart home space have a lot to consider when preparing a go to market strategy, and the business model they select can make or break their products. Finding the right fit is paramount, as is finding a platform that can enable the business model you choose. Ubuntu Core’s app-based approach and the management capabilities provided by snaps and the brand store make it a top candidate for enabling any of these business models.

Resources for smart home businesses

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