Smarter business: How new business models are driving success in the smart home

Smart home tech is without doubt the new black, with some analysts predicting that the market will grow from $46.97 Billion in 2015 to $121.73 Billion by 2022¹, at a CAGR of 14.07% between 2016 and 2022. This explosive growth has – and will continue to have – significant effects on the diversity of business models. We can already see that the range of business models operating in the smart home market is extraordinarily broad, from traditional through to bleeding edge and beyond, with a range of opportunities to suit almost any business – and this evolution is only just beginning.

Traditional and direct models

It’s fair to say that the smart home market began with the traditional, possibly the most obvious being direct consumer hardware sales. This model will be familiar enough to most, from a reference point of high street or online retail, but there is innovation even here. Verticals not traditionally engaged in direct retail activities, such as telcos and utility providers have begun to retail white-label products and services to their significant consumer bases. Two topical examples are:

• Slovak Telekom, one of the largest telco in Slovakia, has launched a consumer offering that aims to deliver protection and monitoring, energy conservation and home automation
• Major utility provider Vattenfall (key exponent of wind energy in the UK), has retailed different Smart Home packages in Germany that bundle a QIVICON² Home Base, app and hardware

Another familiar strategy is the provision of pay monthly subscription-based services, but one that has delivered well for new entrants into the connected home market. Telco providers and utility firms in particular have established successful new models by supplying a smart home gateway, apps and compatible devices on a 24-month contract basis³. Part of this success has to be attributed to these vertical’s strong pre-existing customer relationships, which have allowed businesses to expand into the young market rapidly and relatively cost effectively.

PAYG for simplicity

A variation on this theme is the pay-as-you-go business model, which has been delivering strong results for many connected home businesses in Europe. One utility in Germany is offering six-month Prepaid Smart Home packages that wrap in a gateway, app and hardware, while others use a combination of hardware bundles of a gateway with app, compatible devices and one time payment/24 month packages. This combination has proved successful by lowering consumer uptake barriers and hugely simplifying billing.

Unique proposition wins through

Perhaps the most unique model that is currently operating in the European connected home market is the regulatory business model. Specifically due to some national utility regulators allowing smart thermostats to feature in their energy obligation targets, the result has been a real adoption driver in certain countries, with many European utilities becoming very successful in signing up large numbers customers to these devices. This situation will have a knock-on effect in coming years too, as smart thermostats can be viewed as a soft entry point into the consumer home. Once installed and operation there is considerable opportunity for cross-selling in other sensors and value add devices, such as home security systems, for example.

Creating service bundles is an area of considerable innovative potential, and one area that has blossomed to date is where new green energy tariffs are linked with connected home products, creating a virtuous circle for consumers. There has also been considerable cross-pollination here, where consumers are incentivised with a voucher for a Smart Home Starter Pack to sign up to a specific energy tariff. This strategy has clearly got longevity, and has already created some unique and highly innovative partnerships. For example, Dutch telecoms giant KPN has rolled out Deutsche Telekom’s smart home platform and entered the market with ‘KPN SmartLife’, a service that offers users control over their security, energy and comfort. KPN partnered with third parties, such as security experts Trigion, to add additional functionality to their offer.

Future potential for loyalty

A traditional model that is working particularly well is the loyalty-based model, where consumer churn is reduced by leveraging connected home products. One major European utility has seen significant reduction in churn by providing connected home thermostats to existing customers, and there is great promise for this model to be extended. For example, by aggregating new data points created by connected home devices entirely new possibilities can be created. For example, a utility may be able to interpolate the data from – say a smart thermostat, and a weather station in home X – to realise that the insulation could be improved. The utility can then offer the homeowner free or discounted insulation and installation in return for extending their existing contract.

Data – and the competent leveraging of it – will be the mark of the most successful connected home players. The importance of being able to aggregate third party data and segment it in new and powerful ways cannot be understated, although there are significant pitfalls along the way. Consumer trust is not so easily earned, and if lost even the best technical implementations and biggest brands can fail – robust and transparent data policies are essential for the entire industry both now and in the future so that new models can flourish.

Take aim at affiliate

We also expect to see models such as like affiliate programmes or metered use begin to take hold in the very near future, along with micro subscription services, where devices monitor their own consumables, from printer ink to coffee pods, and automatically re-order the consumer’s preferred brand. There have been many steps towards this over the last six months, both logistical and technical, so the reality for consumers ‘on the ground’ cannot be far away.

Overall, it is an extremely exciting time for the connected home market, and while new products often steal the headlines, the ever-developing business models can sometimes supply the most interesting bellwethers for the industries direction. One thing is certain – the next big innovation is only just around the corner!