In today's rapidly evolving business landscape, companies are under constant pressure to innovate while navigating tight budgets and fine margins. Amidst these challenges, the Internet of Things (IoT) is a powerful digital transformation strategy for long term success. Connected devices, assets, and people enables companies to increase revenues, reduce costs, and transform business processes.

As with any substantial investment, an IoT initiative requires a clear and measurable return on investment (ROI). Demonstrating ROI is vital for organisations to justify the expenditure and validate the ongoing value that IoT provides.

In this article, we examine the various benefits that IoT can bring to your business, both direct and indirect. However, before you start calculating ROI you should first decide what success means for you and create a clear plan to achieve it.

Defining IoT Success

Before exploring the details of ROI, it’s important to consider what success looks like to you and your business. After all, every business is different, and success or failure will depend on the goals of the project. Returns can come in various forms including cost savings, increased productivity, enhanced customer satisfaction, as well as new business opportunities.

The timeframe for seeing a return on an IoT investment can also vary significantly depending on the complexity of the deployment, the industry, and the specific use case. Some businesses may start seeing benefits within a few months, especially if the IoT solution addresses immediate operational inefficiencies. Others may require a longer horizon, spanning several years, to fully realise the strategic advantages and financial gains.

Setting ambitious, yet achievable goals early on in the project will set you up for success.

Calculating IoT ROI

Calculating the ROI of an IoT solution involves a thorough analysis of both direct and indirect benefits, as well as a clear understanding of the associated costs. This process can be complex due to the multifaceted nature of IoT implementations, which often deliver value across different areas of the business.

Key performance indicators (KPIs) and financial metrics such as Net Present Value (NPV), Internal Rate of Return (IRR), and payback period are instrumental in quantifying these benefits.

Net Present Value (NPV): NPV measures the profitability of an investment by calculating the difference between the present value of cash inflows and outflows. A positive NPV indicates that the projected earnings exceed the expected costs, thus justifying the investment.

Internal Rate of Return (IRR): IRR is the discount rate that makes the NPV of all cash flows from a particular project equal to zero. It represents the expected annual rate of return and helps in comparing the profitability of various investments.

Payback Period: The payback period determines the time required to recoup the initial investment. This metric is crucial for understanding how quickly the business will start benefiting financially from the IoT solution.

IoT-Enabled Revenue

To measure ROI of your IoT solution, first assess any direct revenue generated from IoT-enabled products and services. This could be from new offerings, or enhancements to existing products that make them more attractive to customers.

IoT solutions often add significant value to products and services, allowing for price adjustments. Businesses can often justify higher prices by enhancing functionality, improving performance, or making life easier for your customers.

This added functionality can provide a competitive edge, helping to increase market share. By offering superior products or more efficient services, you can attract new customers and gain a larger portion of the market.

Measuring all direct revenue sources is a great first step to determining the ROI of your IoT solution. IoT initiatives can also impact revenue indirectly, and you should take these into account. In the following sections we'll look at some indirect benefits of IoT solutions.

Join our Mailing List

Join thousands of professionals and get IoT tips to help you transform your business.

Customer Lifetime Value

IoT solutions can enhance the customer experience, leading to increased Customer Lifetime Value (CLV). Improvements in product performance, aftermarket services, and enhanced user experiences can encourage longer relationships with customers, resulting in higher long-term revenue.

Customer Retention

IoT solutions can play a pivotal role in retaining customers. Enhanced service offerings, improved product reliability, and proactive maintenance capabilities contribute to higher customer satisfaction and loyalty, reducing churn rates and stabilising revenue streams.

Brand Loyalty

Improving customer satisfaction through IoT solutions can significantly boost brand loyalty. Satisfied customers are more likely to make repeat purchases and recommend the brand to others, leading to increased sales and market share. This domino effect strengthens the brand's market position and contributes to long-term profitability.

In equipment manufacturing, IoT-enabled Aftermarket Services help to retain customers over the lifetime of the product by providing a superior service. This not only drives service revenue in the short term, but also improves customer satisfaction and retention in the long term.

Product Development

The data generated by IoT devices can be a valuable asset. IoT data can inform and enhance product design, leading to better products and reduced development costs over time. Insights gained from real-world usage can guide improvements and innovations, resulting in products that better meet customer needs and command higher prices.

Businesses can also monetise IoT data by selling it to customers or third parties, using it to improve internal processes, or developing new data-driven products and services.

Cost Savings

Many IoT initiatives aim to use connected hardware and software to improve internal processes. As such, these initiatives are more focused on improving productivity and reducing costs than generating new revenue.

IoT solutions can lead to substantial cost savings across many areas of the business. These savings are achieved through the introduction of efficiencies, reduction in maintenance costs or line down events, and the ability to troubleshoot issues quickly using comprehensive, multifaceted data.

Below we list several common areas where IoT can have a significant impact on reducing costs. Consider these when calculating the expected ROI for your IoT project. Also think about any other areas of your business where IoT may be able to help save money.

Maintenance: Predictive maintenance capabilities provided by IoT platforms can significantly reduce unexpected breakdowns and extend the lifespan of equipment. By anticipating failures before they occur, businesses can perform maintenance proactively, thus avoiding costly downtime and repairs.

Parts Management: Better management of inventory and parts through IoT solutions can lower costs by ensuring that the right parts are available when needed, minimising excess inventory and storage expenses. This leads to more efficient use of capital and space.

Time Savings: Automation and improved processes facilitated by IoT solutions save time for employees, enhancing overall productivity. With IoT-enabled devices handling routine tasks, employees can focus on more strategic activities that drive business growth.

Overheads: Optimised operations resulting from IoT deployments can reduce general overhead costs. By streamlining processes and improving resource utilisation, businesses can lower expenses related to energy consumption, labour, and other operational aspects.

Reduced Downtime: Implementing IoT solutions in-house can minimise downtime by ensuring continuous operations. Real-time monitoring and analytics help identify potential issues before they escalate, allowing for timely interventions that keep systems running smoothly.

Improved Stock Control: Enhanced visibility and management of stock through IoT solutions can reduce excess inventory and associated costs. Accurate tracking of inventory levels and demand forecasting enable businesses to maintain optimal stock levels, thus reducing carrying costs and the risk of obsolescence.

Conclusion

IoT solutions offer a myriad of benefits that can drive significant value for your business. By enhancing operational efficiency, improving customer satisfaction, and generating new revenue streams, IoT investments yield substantial returns.

As we have explored, the potential for cost savings, increased productivity, and enhanced customer loyalty makes IoT a compelling investment. However, realising these benefits requires clear objectives, strategic planning, and continuous evaluation.

In part 2, we’ll take a closer look at the costs associated with implementing an IoT solution, and how best to minimise them. By understanding and managing these costs, businesses can further optimise the ROI of their IoT investments.