IoT Billing: How to Choose an IoT Business Model

Ralph Heredia
Jan 12, 2021 6:45:00 AM

IoT is changing the way people engage with the world by changing how devices relate to each other. And its market growth is exploding, with end-user spending expected to be around 258 million at the end of 2020 and projected to grow to nearly 1.6 trillion by 2025. As a result, this technology is powering new growth for businesses that are harnessing its potential. 

But it can be challenging to implement a streamlined approach to billing for IoT since data needs are variable. The solution is for businesses to implement a modern billing system that aligns business requirements with their IoT ecosystem’s technology and business components. Here’s how to choose an IoT billing solution that will work for your business model without creating operational complexity.

What is IoT Billing?

IoT billing is a term commonly used to refer to the charging and billing of services tied to IoT solutions. There are many ways IoT services can be monetized, but one of the best ways is tying billing closely to cellular data usage. A well-thought-out IoT billing solution is foundational to business success. Because the industry is changing so rapidly, billing models need to offer flexible and progressive pricing structures.

The subscription model is ideal for IoT since it’s recurring and bases pricing on the amount of cellular data each customer uses each month as well as the value of the service being provided. Subscription billing is used by businesses ranging from coffee roasters to clothing companies, so it’s a well-known and accepted model. With IoT, customers will expect real-time metered usage-based pricing with bundled services. And subscription billing is a way to meet this expectation.

IoT Business Models and Billing

The subscription model isn’t the only option for IoT billing, though we’ll explain in a moment why it solves IoT challenges so precisely and why we recommend it for most businesses. Here’s the full range of billing models you can choose from.

1. Subscription Model

Leverage 24/7 connectivity to create a recurring revenue stream. Subscription models introduce an “as a service” business model for a system with software and hardware and allow for creative and flexible monetization strategies. 

2. Data Monetization Model 

Some companies collect valuable data from customers and sell it as a product to a third party. This approach aims to have significant data volume across many customers, so the devices are often provided for free to facilitate this access. We don’t recommend this model due to privacy concerns.

3. Pay-for-Usage Model

Monitor devices to track usage and create a pricing model based on usage instead of the one-time sale of the device itself. 

Learn more: What Is Consumption-Based Pricing?

4. Asset-Sharing Model 

This model is appropriate for high-cost devices and systems where the upfront cost of an IoT solution may be a barrier to purchase. By lowering this barrier to entry, this method could enable you to achieve faster market penetration.

5. Outcome Model 

Customers pay based on the benefit the product provides instead of the product itself. This can be helpful for customers who don’t want to purchase an expensive depreciating asset from an accounting perspective as it allows them to pay for the outcome.

6. Service Model

Use an IoT product to enhance an existing service or to offer a new one. With a service model, you can offer a maintenance contract, optimization services, etc., along with the IoT product to monitor and measure a customer’s process.

We expect this list to grow in time as companies develop more creative business models based on the value of IoT. It will be exciting to see how it evolves. 

Learn More: 5 Effective Types of IoT Business Models

IoT Billing Solutions

Billing models are closely tied to business models by nature, so your billing solution should match the IoT business model you choose. It should also accommodate the inevitable evolution of the IoT industry since you don’t want to build a business on an assumption that will quickly change. 

Learn more: What Is a Billing Solution and How It Can Grow Your Business?

What are the Challenges with IoT Billing?

There are four primary challenges when it comes to IoT billing. As we look at these hurdles, you’ll see why we typically recommend the subscription model.

1. Fragmentation When Integrating with Legacy Systems 

When businesses need to integrate data with legacy systems manually, the result is an increase in inefficiency and errors. They are unable to capitalize on the opportunities and evolving use cases that IoT solutions enable. 

2. Pricing Flexibility Demands

Traditional billing models across industries are being replaced by subscription-based models based on actual usage. Businesses need to be agile to offer more tailored billing options. Billing systems also need to account for subscription adjustments made for things like upgrades, discounts, free trial periods, and more.

3. Ecosystem Complexity

With IoT, you’re not only looking at a seller and a buyer. There may be manufacturers, resellers, vendors, and end-users, and more. These additional business partnerships and relationships make billing even more complicated.  

4. Revenue Recognition Challenges

Revenue recognition standards add accounting challenges when dealing with subscription-based revenue. Businesses must ensure that the deferred income earned is recognized at the right time to avoid legal ramifications. 

Learn more: 4 Top IoT Billing Challenges and Solutions

Subscription Model for IoT

The subscription model is ideal for many IoT offerings, and it offers advantages to both companies and users. Subscriptions are easy for customers to understand, and people have come to expect this billing model. It also provides a low barrier of entry as it’s more feasible for more customers to be able to pay on a monthly basis rather than a lump sum upfront, even if the long-term cost is higher. Additionally, once people are used to paying that monthly subscription and have developed brand affinity, they are more likely to respond positively to an upsell if there is more value being provided, thus creating more revenue opportunities for the seller. 

It’s also easier to offer a trial period with a subscription than with a one-time cost. And subscriptions provide businesses with predictable revenue. All of these make the IoT subscription model a win-win scenario. So, while creative new billing methods exist, as described above, we typically recommend the subscription model for its operational and financial advantages. 

How to Choose the Right IoT Business Model

The IoT market is rapidly evolving, requiring businesses to adapt quickly to stay ahead of the changes. Though IoT solutions can introduce new billing challenges, businesses can reap the benefits if they can identify a business model that matches the nature of their product’s strengths and holistic business needs.

Unsure of the right billing option for your IoT solution? We'd love to help. Contact us to discuss your company's unique needs. We’re happy to provide you with insights that will help you make the decision.

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