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Jun 24, 2019 | 5 minute read

Manufacturers are missing out on major IoT income

written by Darin Archer

Thanks to the Internet of Things and its counterpart, the Industrial Internet of Things (IIoT), a growing number of both business and consumer-facing products are entering the connected world. An estimated 10 billion devices will be IoT-connected by 2020, a group that goes far beyond smartphones and personal assistants. Toothbrushes, microwaves, printers, vacuum cleaners and blood glucose meters are just a few of the IoT-connected devices that can learn to reorder their own supplies

But instead of creating the internal systems to capitalize on these ready-made revenue streams, many manufacturers are letting the money flow into third-party vendors’ pockets. That’s a huge mistake. It’s time for manufacturers to wake up and smell the new revenue opportunities. 

How much money are manufacturers missing out on?

A lot. Here’s a sample scenario involving a refrigerator — an appliance every household owns and a good example of how much revenue manufacturers stand to gain:

Retail price to consumer: $1,799

Assumed price to the retailer (suggested retail prices are often marked up 35% from the manufacturer’s sale price): $1,170

Estimated cost to manufacture the refrigerator: $500

Gross margin: $670

But this refrigerator also uses a water filter that must be replaced annually. A sensor inside the refrigerator triggers a lightbulb that alerts the consumer to buy filters.

Filter retail price: $50

Hypothetical cost to manufacture the filter: $20

Gross margin: $30

Let’s assume the lifespan of the refrigerator is 30 years. That’s an additional $900in potential filter profit — far more than the manufacturer’s gross margin on the refrigerator. It’s also $900 that currently goes to a third-party vendor instead of the manufacturer.

How did we get to this moment?

Consumers didn’t graduate from in-store shopping to automated, IoT-enabled orders overnight. They needed to form new habits through incremental training, moving from browser-based online clothing shopping to grocery delivery to voice-activated searches.

Amazon anticipated this future when it introduced Dash buttons in 2016. For $5, consumers received an internet-connected button, branded to a product of their choice. Running low on toilet paper? Just hit the button and a fresh pack arrived in two days. 

On the surface the buttons seem like a great consumer revenue stream for Amazon, but they also served as a way for Amazon to make money off manufacturers, who paid $15 for each Dash button registered, as well as a 15% premium for each Dash product sold. 

Dash buttons did increase brand loyalty. For example, Cottonelle Dash owners spent roughly 86% of their TP dollars with the brand, compared to roughly 43% pre-button. But Dash didn’t allow brands to directly interact with consumers and there was no way to upsell products. Did Dash’s benefit to manufacturers really justify the cost of joining the program?

Amazon never intended for Dash to be a long-term program. The company knew a future of IoT-enabled D2C ordering was on the horizon, and wanted to gently introduce consumers to the concept while perfecting the technology. Production of Dash buttons halted in early 2019, though Amazon still supports existing buttons. 

"We never imagined a future where customers had 500 buttons in their home,” said Daniel Rausch, an Amazon vice president. “We imagined a future where the home was taking care of itself, including replenishing everyday items that customers would rather not worry about."

That future has arrived. 

How can manufacturers pivot to direct fulfilment?

Remember the refrigerator example I mentioned earlier? Instead of outfitting new models with a replacement indicator light, the manufacturer instead should build in a device that automatically orders branded, certified water filters. 

In the case of Whirlpool refrigerators, the indicator light in question doesn’t even automatically resetwhen the filter is replaced, which is both hilarious and maddening. The company also recommends using Certified Genuine Parts, but users can’t directly order certified filters through Whirlpool’s website and must visit a third-party site. It makes you wonder if Whirlpool even likes making money or cares about customer satisfaction.

The chip technology to move to a direct fulfilment model isn’t prohibitively expensive for companies like Whirlpool, and can be done to scale. So why haven’t manufacturers gotten their act together to cut out the middleman?

The issue comes down to change management. Manufacturers need to realize that while the old way of selling products has been successful, they will be left in the dust unless they pivot to a new sales model before direct-to-consumer sellers gain a stranglehold on the IoT ordering market.

Manufacturers should frame a direct-to-consumer model as the natural next step to remain competitive and relevant. While planning for direct fulfilment, the following considerations will be critical to success:

  • Budget --Where do you need to shift money from current investments? Will you need additional capital?
  • Distribution --Many companies likely haven’t worried about moving product directly, and will need to consult outside help. Will your company partner with a distributor instead? 
  • Hiring -- Your new workforce will need to include not just distributors, but a new category of engineers. Companies need the knowledge to write the new chip software that self-orders replacement parts. Do you already have that expertise on staff? 
  • Data --Your IoT-connected product will gather loads of data. How will you use it? Will you sell it to third parties? 

The most important consideration for manufacturers when moving to a direct-to-consumer model: frictionless fulfilment. In 2018, frictionless became the expectation, from mobile Starbucks preorders to checkout-free Amazon stores. There’s no reason every brand touchpoint shouldn’t be the same.

Today more than ever before, customers will seek alternatives if they don’t receive a seamless brand experience. And after all your hard work, their money still ends up in the pocket of a third-party vendor. That’s probably not your goal — unless you’re Whirlpool, that is.