Why Pricing for IoT is so Confusing

By Peter Thorne

There’s a pattern in technology pricing, and the signs are that this pattern is emerging again for many of the technologies associated with the Internet of Things (IoT).

Cambashi calls the pattern the ‘Henshell Curve’ because it was a discussion with Cambashi associate Dr. Richard Henshell that crystallized our thinking into the price development trend curve shown in the diagram.

Figure 1: The Henshell Curve for technology pricing

Let’s have a look at the four phases, in turn:

Risk

In this first phase, the technology might:

  • come from a university for free
  • cost a fortune if you commission a development team to create it for you

Each vendor in the market (and there are many) offers a different bundle of functions at a different price.

We call this the risk phase, because the chosen provider may not stay the course; or the technology may not develop in the way it was planned, and these changes could leave your investment stranded.

There are no benchmarks to measure against.

Throughout this phase, the top priority for the buyers and users of the technology is to manage risk, and make sure their vision of the potential benefits is a reasonable balance for this risk.

This phase draws to a close as the market converges around one definition of price and function.

Function

Many (but not all) vendors survive into this second phase.

The survivors make money, because the market grows fast and the price tends to rise.

The key competitive factor for the user is now function, and the leading vendors invest to deliver new functions to beat the competition.

The signal for the end of this phase is the appearance of a new entrant offering 80% of the function at 20% of the price.

Price

In this phase, functional bundles are well-defined and well understood, and price now becomes the main competitive weapon.

Part of the market discovers that the 80% offer is all it needs, and so market leaders come under pressure and prices start to fall.

This is a very challenging phase for larger companies, which have to find leaner business models in order to stay in the business.

Brand

After the price wars, the survivors have a technology which is accepted at a price point which leaves a small profit margin.

The technology tends to be treated as a commodity item, and the key competitive factor is brand. Vendors use strategies such as portfolio planning, and add-on services to smooth out their revenue and profit curves as one or more technologies progress through these phases.

Each phase attracts different types of customer, from the adventurous, experimenting with the new technologies during the risk phase, to the very cautious, who buy only from respectable brands, after the price battles are over.

Where is IoT on the Henshell curve?

The specific piece of research that triggered this article was some Cambashi work to look at ‘cloud providers for IoT’.

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