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:
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.
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.
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.
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’.
The cloud category fits into one of the six layers we use to segment IoT technology.
There are of course some category gorillas, for example:
Amazon Web Services for IoT
IBM Cloud (integrated into its Bluemix environment, which addresses IoT and other environments)
PTC’s Axeda cloud offer alongside Thingworx
Microsoft’s Azure IoT Suite
But you don’t have to look at the IoT category for very long to find there are many providers, all offering something special, all with their own local or industry focus points. The offerings and pricing plans from these vendors fill the shaded area in the risk phase.
Some, but not all of these providers are destined for greatness, there are too many to list here, so apologies to those I haven’t included. Click on some of the links and you’ll get the right impression.
But is it the case that all IoT technology and tools stacks should be regarded as being in the risk phase?
For example, software development tools are one areas that already largely follows well-defined functionality bundles (and so have progressed into the function phase).
But the picture is never static, and there’s always room for a new entrant; whether it’s introducing a new technology (on the left of the diagram), or as the disruptor, offering 80% of the results and 20% of the price.
And that’s why this is a market that’s fun to watch!