IoT Offers Greater Revenue – and Complexity

IoT unlocks new offerings and revenue streams

Internet of Things (IoT) technologies create new revenue streams for manufacturers and distributors. These offerings include smart devices and products that create a connected infrastructure for clients, new services and software solutions.

According to recent Alexander Group industry research, top diversified manufacturers and distributors now drive up to 40% of their sales from innovative new products, services and software. New products account for 10% of revenue for the top quartile of manufacturers and distributors, while services and software account for 34% and 2% of revenue respectively for manufacturers and distributors. Leading diverse-portfolio manufacturers are clearly driving more revenue through innovation, with distributors just getting started.

It’s clear that innovation is a competitive advantage, counteracting commoditization. But it also means that manufacturers and distributors must invest to stay ahead of the curve. While innovation is now a mandate, solution selling will require more roles and expertise, especially for connected products and new service and software offerings. Nevertheless, the payoff can be substantial for companies that make the investment and monetize it to drive growth.

Monetizing IoT

IoT offers four routes to monetization:

1. Higher prices for connected products (compared to non-connected products)
2. Additional subscriptions with dashboards and analytics
3. Service and maintenance contracts
4. Bundled PaaS (Product as a Service)

A recent Alexander Group survey with manufacturing and distribution executives revealed that 60% offered services and maintenance contracts, 33% had additional subscriptions, 25% had products with higher prices, and 17% offered PaaS. Interestingly, 42% of manufacturers and distributors did not have a product to monetize, however many were making plans for an IoT play.

While IoT offerings provide revenue growth, customers must also be open to the idea of using IoT, requiring manufacturers and distributors to provide education as to applications and benefits. Without customer-relevant data and insights, proving the value proposition of IoT services will be challenging. In addition, exclusively monetizing IoT through a one-time higher price may be a risky move if there are recurring costs for the manufacturer.

Sales Investments Increase 3X to 5X

“XaaS is the holy grail for valuation, but difficult to do as a manufacturer.” ―SVP Global Sales

Moving from a traditional sales model to an advanced IoT product and service model will require additional investment, especially in talent. For example, selling a subscription requires more time and effort and continuous delivery of customer value and success, resulting in higher costs to properly support the customer and ensure such ongoing value.

It is clear that as the sales model becomes more complex, expenses increase significantly. However, such investment appears to pay off in gross margin increases. Alexander Group research shows that traditional manufacturing companies, focused on transactional product selling, highly efficient sales models and a simple rep-based coverage approach, have a sales expense to revenue ratio (E/R) of 5% yielding a gross margin of 40%. Advanced manufacturing companies, featuring significant investment in software, XaaS-savvy commercial resources, and highly autonomous software teams, average 7% E/R and an elevated 43% gross margin average.

The above numbers differ greatly when compared to technology industry hardware/software hybrids at 15% E/R with 55% gross margins. And pure-play XaaS software companies double that E/R to 30% but enjoy 75% gross margins for the increased investment. These advanced technology industry commercial models often feature robust new customer acquisition engines and investment in the customer success function to drive ongoing adoption, growth and renewal.

The introduction of IoT typically requires the involvement of new influencers and buyers throughout the sales process. Many offerings require the involvement of IT stakeholders for successful implementation and may require elevated buying decisions with senior line of business buyers or the c-suite.

Traditional sellers may be comfortable selling established products; however, generating sales from new products often requires a different coverage model that includes a greater diversity of talent. Coordinating sales motions, delivering more complicated value propositions, and providing a more holistic customer message are all imperative as manufacturers adopt advanced solutions, software and XaaS models.

Coverage models can range from simply adding the innovative solution to the existing generalist rep’s bag, to adding overlay SMEs, investing in specialist hunters, or even creating a separate dedicated sales team. Considerations for which model to choose include:

• Product positioning (e.g., substitute or complement)
• Buyer overlap
• Product depth of knowledge required
• Desired pace of change
• Current talent

IoT Sales Compensation Models

Traditional manufacturer pay levels average $131K in Target Total Compensation (TTC = base salary + target incentive) per seller. When manufacturers move into selling IoT products, services, and XaaS, the revenue model changes, as does the sales compensation, requiring firms to go head-to-head and compete for highly sought-after tech sales talent. Advanced manufacturing and hybrid tech hardware companies can expect to pay an average of $186K in TTC per seller, and moving to XaaS increases the price tag to $257K in TTC per seller. As we saw above with the relationship between E/R and gross margin, the increased investment in sales compensation should pay off if these new models are designed and deployed effectively (and of course with a compelling and differentiated solution).

How do we measure success from a sales perspective? In a typical manufacturing model, a rep is credited when a product leaves the factory or when a customer is invoiced. In a recurring revenue model, a customer may be making annual or even monthly payments for a software subscription. In this model, it is important to credit the seller at the time of booking the contract. This calculation may be based on the Annual Contract Value (ACV) or Total Contract Value (TCV). There are two key reasons to reward at the time of booking:

1. To ensure the credited value is meaningful to the seller
2. To avoid annuity-based incentives that don’t align with influence

In addition to differentiated coverage, talent, and pay levels, successful IoT models may also demand new or different compensation solutions. Many options exist for how to emphasize or create focus on IoT solutions in the compensation plan, including:

• Add-on Bonuses
• Key Sales Objectives (KSOs)
• Rate Value Adjustments
• Credit Value Adjustments
• Gates
• Multipliers
• Separate Measures

What’s the right sales compensation model to use? Alexander Group observes that a company’s maturity plays a key role, along with the desired philosophical focus on “carrot” vs. “stick” – that is, the focus on providing incremental incentive without penalty vs. taking away pay for not achieving specific IoT-related objectives. Separate measures, gates and KSOs all represent the higher intensity of the “stick” approach, while add-on bonuses, credit/rate uplifts and multipliers represent “carrot” strategies.