We recently published a report showing that e-commerce doubled in popularity as a business model for Internet of Things (see Commerce of Things report for details).
But what does an ecommerce business model really mean in the case of Internet of Things? Broadly speaking, a business model describes the rationale of how an organization creates, delivers, and captures value. We add to that the question of how an organization creates a sustainable competitive advantage (a barrier to entry that is difficult to replicate by competitors).
It’s simpler than it sounds. Let’s take Oral-B, a toothbrush maker, as an example. (This example works well in our strategy workshops.) A toothbrush maker creates value by improving dental health. The value is delivered through, well, a toothbrush. The value is captured by sales of toothbrushes through retail channels. Ability to put the product in front of as many shopper as possible is of paramount importance. Therefore, access to the retail shelf-space becomes the key competitive advantage.
Can we use technology to make a better toothbrush? Of course! Let’s make a Bluetooth-connected toothbrush that comes together with a smartphone app. Now the “smart” toothbrush helps Oral-B do a better job in maintaining dental health by “focusing, tracking, motivating and sensing” (whatever that may mean).
The toothbrush is smarter, but the business model isn’t. The connected product supposedly creates more value for consumers, but all the other elements of the business model remain the same. The value is still delivered through a toothbrush device, captured by the sales through retail channels, and access to the retail shelf-space is still the key competitive advantage. Not much business model innovation here.
What’s next?… Well, let’s make an open toothbrush! Developers will use a Software Development Kit (SDK) of the open toothbrush to make apps that extend the product.
Sceptics, of course, will ask “who the heck needs developers to extend the toothbrush?” But mothers of young kids will see a sea of opportunity here: Someone can make a game rewarding kids for good job in teeth brushing and save the mom the need to “hover over their kids telling them that a couple of brushes is not good enough” (actual quote from a Slack conversation).
Now we are making progress with innovating on the business model, too. Not only do developers improve in value creation, but value is delivered through apps working in concert with the connected toothbrush. Plus, the developer ecosystem formed around our developer program creates competitive advantage that is difficult to replicate. However, we still have to make money by one-time sales of the “smart” toothbrush through retail channels.
(See “5 Ways Developers Can Extend Your Business Model” for deeper discussion on the role developers in business model innovation.)
Can we take the business model even further? Meet Beam Dental. The Ohio-based company offers a connected toothbrush that comes together with dental insurance and a subscription for the supply of floss, toothpaste, and brush heads—all delivered to your doorstep every 3 months. In fact, the offering is a recurring service that makes money outside the “toothbrush market” going beyond one-time product sales. The toothbrush itself is part of the customer acquisition costs for the much more lucrative dental insurance and dental consumables market.
Beam completely reimagines the business model of a “connected toothbrush”. The value creation is much more comprehensive and includes all aspects of the dental health. Value is delivered through insurance and re-supply service. Value is captured through making money in insurance and consumables businesses. The toothbrush and the app are “top of the funnel” consumer touch points allowing Beam to acquire new users and interact with their customers.
Notably, Beam doesn’t really compete with toothbrush makers like Oral-B. Instead, the company competes in the dental insurance market, where it has decisive competitive advantage in the form of consumer data collected by the toothbrush and the app. This data helps the company to optimise its insurance premiums and offer insurance at prices that are difficult to match for the traditional insurance companies.
As simple as they may sound, the series of toothbrush examples shows that:
- Technology (software, connectivity or data), when viewed as a feature of a product, is hardly a game changer for the product maker.
- Opening the product to the external innovation by developers can create competitive advantage that is difficult to replicate.
- E-commerce companies see devices not as source of profits, but as a part of the customer acquisition costs, serving as a vehicle for customer acquisition and engagement. (Amazon Echo or Xiaomi phones are not much different in this respect.)
You can replace the toothbrush with almost any everyday object to see how adding connectivity, developers and data can help reimagine its business model. (See this video on understanding developers.)