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The Business Model of Things

The onset of the Internet of Things has unleashed a frenzy of new startup apps. In this cacophony of noise, who are the ones left standing when the music stops? The Chinese market offers lessons.

In a recent academic study Guo et al. (2017) track the success rate of 470 IoT app startups from the Middle Kingdom, focusing particularly on the type of business model being selected. Their conclusion: the “savers” and the “bundlers” tend to outperform their peers.

The researchers segment their sample into four distinct value propositions:

1.       Novelty-centred The “true innovators”: firms that seek to enact new forms of economic exchanges, often driven by new technology. For instance an app linked to a special mug that monitors your hydration levels

2.       Efficiency-centred The “savers”: companies that seek to make transactions cheaper and simpler, through leveraging information. Eg. energy saving apps

3.       Lock-in-centred The “sticky” business: apps that seek to “pull” their users in through creating high switching costs. Think customisable but not interoperable products

4.       Complementarity-centred The “bundlers”: firms aggregating several services, helped by the integration of different data sources. Say a disco-app that controls your lights and your music

Guo et al. track the progress of each startup over an 18 month runway. They refrain from using download statistics (too easily manipulated in the Chinese market…) but focus on the level of commitment still shown by the founding team. Top scores hence for functionalities that continue to be widely marketed in app stores and subject to regular updates.

These winners tended to be the efficiency and complementarity centered businesses. On the flip side the lock-in-centred apps struggled to take off and were typically aborted. And the novelty centered firms only really worked when they had receiving sizeable VC investments to help convert people to their cause. All of this controls for obvious success drivers, such as startup team size, age of the app, the founders’ programming experience and R&D expenses.

What does this tell us about the IoT consumer? He is attracted by the lure of saving money or killing two birds with one stone, while being distrustful of closed systems. Think pennies and ease and you may stay afloat in the Rat Race of Things!

Guo, L.; Wei, S.; Ke Rong, R. (2017). “Investigating e-business models’ value retention for start-ups: The moderating role of venture capital investment intensity”. International Journal of Production Economics 186: 33-45