The Smart Home industry has been buzzing with potential these past few years with many analysts giving the industry a valuation of in the hundreds of billions by 2025. This has created a buzz of innovation from start-ups and established consumer electronics companies, as well as businesses with no prior interest in devices, sensors, or services for the home. So why as has the industry not fulfilling the potential analysts have been near unanimous about in scope of opportunity? And why is consumer adoption so slow in light of all the efforts of today’s device manufacturers?
Since I joined AppDirect in November of last year, I have worked with device businesses across the IoT ecosystem on their digital transformation strategies, and my first-hand experience has shown me some telling things about the industry:
- Pricing for smart consumer devices is very sensitive (Pricing for smart devices is not aligned properly with the perceived consumer value)
- Smart home technology to the consumer is confusing (Smart home technology is still a confusing proposition for consumers)
- Too many brands, apps, and vendors, which ecosystem do consumers buy into?
- Concerns around security and data, (Security and data leaks are still a concerning issue)
First lets look at the facts and figures analysts have attributed to the Smart Home market
Facts and Figures
Smart Home market value:
McKinsey: “$200B−350B by 2025”, broken down into:
- Connected thermostats, smart appliances, and self-guided vacuum cleaners: $135 billion,
- Energy management: $110 billion per year,
- Security: $20 billion per year (based on injuries and deaths avoided).
Markets and Markets: “The smart home market is expected to grow from $46.97 Billion in 2015 to $121.73 Billion by 2022”.
Statista: “The source projects the market to grow to $58.68 billion by 2020”.
Here are the three major things that device manufacturers and businesses in the smart home market can correct to achieve the potential value market analysts report:
- The Smart Home is about comfort and convenience – not productivity and efficiency
Industrial conglomerates will embark on digital transformation to increase productivity and efficiency, and will use cost savings, reduced wastage, and less downtime and greater insights through real-time data as a business case to justify the investment. Although consumers are educated on the cost saving benefits of smart home technology it’s often not enough for them to commit to purchasing. Let’s look at a few examples:
According to ukpower.co.uk, the average annual cost for a combined electricity and gas package in the UK is £1,066. Nest and Hive smart thermostats are both retailing for around £250 (with installation) therefore based on this justification their devices are an investment, not a cost, the device should pay for itself within 2 years.
Using energy efficiency and cost savings to market their products is not something that is converting mass consumers to invest, so what is? British Gas and Electrical Ireland both stated that consumer feedback from pilot programs and their converted customers who are using smart thermostats love the convenience and comfort, with very few commenting on the cost savings. Adding integrations to popular ecosystems like Samsung SmartThings and Amazon Alexa will only reduce the friction and increase device adoption.
2) Focus on converting “Early Adopters”
The buying process for consumers in Smart Home is somewhat muddied, the industry has yet to create a burning need for consumers to acquire their device / service.
When buying a consumer product we are usually driven by one of two scenarios:
- There is a problem – we believe the purchase will solve this problem e.g. my fridge has broken, I need a new one or I have nowhere to keep my food fresh.
- There is a new solution that gives me a better experience – we believe the purchase will give us greater satisfaction. e.g. my television picture quality compared to my friends is awful, I’m going to research where I can get a 4k TV from.
Many of the smart home devices we encounter on our visits to technology stores are new, the device is offering a completely new experience for the consumer, the experience often being a user journey we have not encountered or there isn’t a burning desire to change our current experience.
We therefore find reasons as to why we can’t justify the cost.
Research has shown that smart home device purchases are extremely price sensitive and the buying process from product discovery to purchasing can take over 6 months for items priced over £150. Amazon are a great example of a company who can drive a demand for their products and have been very successful in offering competitively priced devices to appeal to the mass market via their marketplace such as the Echo Dot, The Fire Stick, and The Fire Tablet. Amazon announced that the most purchased items on their marketplace during Q4 were:
- Amazon Echo Dot – RRP £49.99
- Amazon Fire Stick – RRP £34.99
- Amazon Fire Tablet – RRP £49.99
- Echo Speaker – RRP £149.99
The Smart Home on the Technology Adoption Lifecycle
Looking at the innovation adoption lifecycle bell curve (seen below) when it’s applied to smart home solutions gives a bird’s eye view of where the industry is in terms of converting consumers.
One device that comes to mind that has had the greatest success in converting consumers to live “smart” has been the Amazon Echo. The device was initially marketed as a “smart speaker” and once people got used to talking to the device with it’s limited functionality, Amazon started to add more capabilities. Amazon proactively reduced the friction in the smart home by continuously add new functionality, IoT network functionality, and e-commerce, while never losing the core messaging of what the device was intended for, “Hands-free convenience”. Not only have they presented the value to their customers, they have also shown their is monetization capabilities that will convince their ecosystem to keep innovating.
Experian put together an interesting infographic charting the journey of the early adopters of the Amazon Echo, “Unpacking the Breakout Success of the Amazon Echo”, available here. What the data suggests:
- The tasks owners use the echo are for convenience. “Play me a song”, “read me the news”,
- Over 80% of users have 2 or me people interacting with the echo. The early adaptor may bring the device into the house and find it becomes popular amongst the family, once they become comfortable and see the value in the new experience they too become a frequent user,
- 30% of requests have been to control another smart home devices and integrations are slowly being added. The echo is quickly becoming a central hub for the smart home.
- Alexa scores higher on satisfaction scores compared to Siri and Google. This further strengthens Amazon’s position to its ecosystem as the leading personal assistant and gateway to their service.
- Only 19% of the sample size thought that there was limited value in the device, with more integrations and skills coming we can only assume this figure will decrease.
Control, consumer adoption, and monetization is now driving their ecosystem, the likes of Philips Hue, Nest, Hive, and Fitbit have all realized integrations with the echo will help them to reach an increased audience of consumers who since buying an Echo device have increased their Amazon marketplace spend by an incredible average of 10%!
3) Security is a prime concern for consumers still
Last years DDoS attacks showed a clear threat to the industry. The threat of overwhelming an online service with traffic from multiple sources will only increase as more than 6 millions internet enabled devices are connected to our networks each day.
Many of the smart home devices were designed with limited processing power and don’t have the capabilities to utilize any additional security protection. Consumers are also to blame by not changing the default passwords and effectively providing an open door to their data for hackers, this could become a bigger issue in the future when all of our basic equipment such as toasters, kettles, ovens and fridges are connected to the internet.
Articles we see in the media will deter consumers from purchasing smart devices if they know they are vulnerable. The data collected in the home is a gold mine to the device manufacturers (and their 3rd parties) and in the wrong hands could threaten a user’s security and privacy with hackers being able to access microphones, cameras, and payment details.
When evaluating the entire smart home industry, analysts are right in the value appropriated to the devices and services coming to consumers. The keyword in this valuation is “coming” though as smart device manufacturers are challenged with the issues stated above. And while companies like Amazon have taken a much more comprehensive and scalable approach to their smart home device, many companies still struggle with focusing on the wrong elements of their device, creating compelling value for early adopters, and managing the security of the valuable data their devices collect from consumers. The smart home market is early days but as device manufacturers begin to navigate these challenges with software it will quickly bring untold value before to company and more importantly consumers.