How the Internet of Things (IoT) Will Change the Pricing of Things | BCG

Traditional product manufacturers face new and complex challenges in monetizing the services made possible by “smart” products. They will need to redefine who their customers are and how those customers value data-driven services. They will need to adopt pricing models unconventional in their industries—models that can accommodate various price levels and payment frequencies. And they will need to change from an approach based on discrete product life cycles to one based on a continual flow of data-driven service innovation.

How Much Should We Charge?

Setting a price point for IoT services is a critical strategic decision, because the price point inevitably creates tension between the goals of market penetration and of revenue maximization. The price point may also be dynamic, in that it can change continually or as the service reaches different stages in its life cycle.

The greater the speed of market penetration, the larger the company’s network of customers and data becomes. This network improves the volume and richness of data, expands the market for services based on it, and establishes barriers to entry. Setting comparatively low prices in the beginning of the life cycle helps a company penetrate the market quickly. On the flipside, however, if the pricing model is inappropriate or price levels are too low in this penetration phase, the company risks turning a lucrative opportunity into a set of unsustainable promises that become a drain on resources.

The necessary analysis for price setting focuses on understanding the monetary value customers place on various services and how urgently and frequently they would use them. A mix of established market research methods provides the deepest understanding.To introduce IoT services, it is vitally important to engage with potential customers early and often in the development phase.

Manufacturing companies tend to have more of an inward focus than a customer-centric one. To introduce IoT services—given their variety, complexity, and novelty—it is vitally important to engage with potential customers early and often in the development phase. These initial customer reactions shape concept testing and drive refinements to the services and the pricing models long before the product is launched.

Focus groups or workshops conducted on artificial intelligence platforms have proved very effective in gaining these insights; these platforms bring together hundreds of potential customers, regardless of their location. The sessions reveal customers’ priorities and preferred service alternatives, expressed in their language and driven by their needs.

Indirect quantitative methods (such as conjoint measurement) as well as direct price-testing methods (such as van Westendorp and Gabor-Granger) draw out how much customers are willing to pay for various alternatives. Interviews with industry experts provide additional context on the value drivers, the feasibility of alternatives, and the value customers place on different uses.

All of this information flows into an economic benefit analysis that yields estimates of sales volumes, revenue, and profit under various pricing and variable-cost scenarios for a service. This mix of price and appeal is indispensable for validating the attractiveness of a service and assessing price points.

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How the Internet of Things (IoT) Will Change the Pricing of Things.