This article originally appeared in Pipeline Magazine.

With the connected home market continuing to grow in size, the question is no longer, “Should I play in this market?” but “How can I best monetize this opportunity?”  As the number of market players and the sheer volume of dollars being thrown at the connected home rapidly skyrockets, so too does the market complexity.  There seem to be as many business models, ecosystems, and pricing strategies as there are offerings and players in the market, with no signs of simplification on the horizon.

To translate the potential into actual revenue, companies must carefully consider three key questions:

  1. What is my ecosystem strategy?
  2. How should I price my product or service?
  3. How can technical support help accelerate product adoption and usage?

 What Is My Ecosystem Strategy?
Today’s connected home platform players – including Nest, Samsung’s SmartThings, ADT’s Pulse, Lowes’ Iris, and Belkin’s Wemo platforms – are all actively expanding their portfolio of compatible devices. Apple has also joined the fray, having announced at CES the first batch of compatible products for its HomeKit platform.

Each of these platform players is hoping to win by creating a comprehensive ecosystem of multiple devices and use cases that would allow it to become the home’s natural—and singular—control point.   With no single “killer app” having emerged, the race is on to build the ecosystem that will be able to capture the mass adoption use case whenever and wherever it occurs.

Despite this rapid expansion of ecosystems, complications still exist for consumers due to the lack of a single communication standard across devices.  Zigbee, Z-Wave, and WiFi are just three of the standards in use today.  Device makers have avoided choosing a “winner” by making their devices work with as many communication standards as possible.  Samsung’s SmartThings platform and Quirky’s Wink platform, for example, are fully compatible with these three main communication protocols as well as others. This multi-standard functionality means ecosystem builders will be burdened with the extra cost of supporting all of these standards—helping consumers integrate devices, getting them to work, and troubleshooting when issues arise.

 How Should I Price My Product?
Monetization also means arriving at a viable pricing model; but, with today’s connected home market lacking a dominant pricing strategy, there is no “one-size-fits-all” approach.  Managed service providers like smart home security providers (ADT, Vivint) and the telecom and cable companies (AT&T, Comcast) have adopted a monthly subscription and long-term contract pricing model, since they already used this model elsewhere in their portfolio.  Alternatively, single use-case connected home devices (point solutions) and multi-use-case device platforms that don’t offer managed services (like SmartThings and Lowes’ Iris) have until now adopted a transactional approach to pricing.  To date, the market hasn’t dramatically favored one pricing model over the other. In fact, both have achieved similar market traction.

Managed service providers will face challenges pushing adoption into the mass market due to pricing. A subscription contract that costs $50 per month or more can be quite expensive for the average consumer (ADT Pulse, Vivint, AT&T Digital Life and Xfinity Home all have packages at this price point and higher).  Also, there will always be a significant portion of the consumer market that is resistant to long-term contracts. Mobile providers have recently moved away from the traditional subsidized smart phone plus long-term contract approach in favor of a “pay as you go” model. This type of pricing switch would be difficult for managed service providers, who typically offer the consumer a package of hardware components either heavily or completely subsidized. These subsidies can be so great that customers won’t become profitable until well after the first year or two of ownership.

Point solutions face their own challenges in delivering on the connected home value proposition. Connected devices are not consumed as isolated items, but as web-enabled devices that can be monitored and managed through computers and mobile devices. Providers must offer an integrated solution of applications, cloud infrastructure, and analytics to deliver on this recurring series of consumer interactions. This is not an inexpensive proposition, and it requires a continual level of investment above and beyond the typical product.

It is the series of recurring consumer touch points over time that will drive long-term revenue in the connected home space. We expect to see continued investment in post-sale services and support, which will enable the provider to drive a consistent user experience across a disparate and multi-vendor ecosystem.  Many point solution providers are already experimenting with subscription service tiers. Lowe’s has experimented with service tiers since inception, and SmartThings recently introduced a premium service offering of advanced monitoring, control, and video recording features beyond their base product.  The difficulty with this added-service pricing approach is finding a sufficient willingness to pay for it in a sub-market of consumers used to spending money just once on the product.

Others in the connected home space are looking for alternative pricing approaches that don’t rely on end users as the sole source of revenue. One source of value to third parties is the data collected by a connected home device or system. Theoretically, this data could be used to create more targeted advertising campaigns, to improve product service delivery, to fine-tune product R&D and more. Selling this information to third parties does have challenges though. Consumer adoption needs to be larger for the datasets to be more robust; the datasets need to be presented in a manageable and intelligible format, and consumers have to become comfortable letting their data be used in such a fashion.

The overlap between home energy management and utility providers is another third-party monetization opportunity to explore. Driven by energy cost constraints and a need for better energy management, utility providers are driving consumers to participate in demand-response programs where consumers limit energy usage during peak demand periods. Smart home energy management systems like smart thermostats are potential enabling tools in pushing users to opt into these programs, and the smart thermostat providers like Nest and others see the utility providers as a natural channel for their products. Thus, we see many utility programs offering smart thermostats to customers that are heavily or fully subsidized.

Key Pricing Considerations

  • What are my priority target segments, client buying behavior, and willingness to purchase?
  • What pricing strategy will most effectively reach and penetrate my target segments?
  • Is there opportunity to create value to other stakeholders outside of the end consumer?  Would it be possible to get these players to subsidize my core offering?

3.    How Can Technical Support Help Accelerate Product Adoption and Usage?
Given how early-stage the market is in terms of adoption, the primary support needs are fairly basic: ensure the connected devices are installed properly and make sure consumers know how to use the offerings. SmartThings has recently partnered with Cross County Home Services (a provider of home warranty and related services) to develop premium support services to customers, with install services as a key gateway offering.

At Parks Associates’ Connections Conference at CES earlier this year, we came across dramatic statistics on the importance of set-up and user know-how.  According to Sutherland Global Services (a BPO provider of tech support services), if a consumer is not able to set up a connected home system or device within 30 minutes of opening the box, the likelihood of the product being returned increases by 3X. If the consumer has the device set up, but uses the system infrequently, the likelihood of return goes up by 2.5X. Given these statistics, it’s not surprising to see where the tech support market has been focusing its attention.

At this stage of the connected home market’s evolution, simple device education can play a vital role in helping drive greater market adoption. This will likely require a multi-channel approach to communication, such as leveraging online video media and social networks to connect with the consumer above and beyond the traditional support call. This will no doubt continue to evolve as attempts are made to further drive consumer interest and adoption.

Key Support Considerations

  • What hidden costs may exist by assuming all purchasers can effectively set up, integrate, and start using my product?
  • Do I have a handle on my no-fault-found returns or my 30/60/90 day churn rate?
  • What else can be done to promote an outstanding out-of-box experience?  Can my product economics support a premium install (remotely or in person)?

Looking Forward

In the coming years, we’re likely to see dramatic actions taken to capture the value in the growing connected home market place. Navigating the complex web of market dynamics, creating and managing an ecosystem of partners, setting and refining a pricing strategy, and evolving the end-to-end customer experience will be key to effectively monetizing this growing opportunity.  The sooner that players build and test their strategies, the better positioned they will be to capitalize on connected home opportunities as they emerge and avoid being left behind.

About the Author

Hubert Selvanathan

Hubert Selvanathan is a Partner at Waterstone. At Waterstone, Hubert’s work with Software businesses focuses on transitioning to and optimizing Subscriptions business models, including pricing of subscription offerings, re-aligning post-sales organizations, design of key customer facing processes, and improving Customer Success and Support models.