Overcoming Analog Habits. Part 4: Creating a viable business model

Making things “smart” by adding sensors, data storage and network connections opens up a multitude of possibilities and is core to the creation of a digital business. However, many of the things that are technically possible (and often popular with enthusiasts) have little or no economic justification and hence don’t necessarily represent a business opportunity on their own. Just because you can do something doesn’t make it a good idea.

We’ve seen this play out before, most recently with Radio Frequency Identification (RFID) – adding mostly passive data storage to items so that they can be efficiently tracked throughout the supply chain by a network of scanners installed in manufacturing plants, warehouses, distribution centers, trucks and retailers. Being able to track and positively identify items clearly helps combat forgery, counterfeiting, theft and lost or misdirected packages and there was a strong (and valid) business case to do this for high vale or safety critical items.

However, many enthusiasts tried to extend the ideas to “everything”, using an argument that “optimizations” would deliver enough benefits to pay for the added costs of RFID tags and infrastructure. A detailed study and modelling exercise undertaken by the Grocery Manufacturers Association (GMA) demonstrated that even if the tags were free to make and attach, the costs of the rest of the infrastructure (readers, data management and storage and analytics processing) exceeded any possible benefits from reduced spoilage, wastage and “shrink”.

It took a while form this reality to sink in and a lot of time and effort was wasted before the value of RFID could be focused on the use cases where it made sense. The same thing seems to be happening with some areas of digital transformation – especially those areas associated with the “Internet of things” (IoT), often cited as a primary driver of DX. While there are clear business cases for many IoT applications in the Industrial and some commercial sectors of the economy, it’s less clear that these justifications hold up for the potentially much larger consumer IoT opportunity. It costs money to make things smart and connected and then to collect, analyze and store the data those things generate. Unless we can reduce operational costs for products and services as a result, we’re going to need someone willing to pay for what we can do. It might be possible to charge for “convenience” – anticipating device failures or preventing an empty pantry, but it’s by no means certain that enough people will place enough value on the capability to build a business on it, let alone create a competitive marketplace. RFID still (over a decade later) isn’t cost competitive for low value items with thin profit margins. IoT probably won’t be much better – at least for a while.

“Freemium” market strategies might help in some cases, but you can’t pay for everything with advertising – even good engaging advertising – and if you can’t Freemium means you have to convert a reasonable number of “free” customers to “paid”. Digital business models need to be able to model these assumptions and test them for reasonableness and stability: can they ever work under even the most optimistic circumstances and even if the can, will they last long enough to be worth investing in?

Although we have a tendency to believe the technology enablement means “this time it’s different”, it very rarely is. Economics 2.0 seems to elude us every time. Don’t bet on it this time either. There’s plenty of DX opportunities that do have viable business models attached. Let’s go after those first.