The Smart Home market poses unique challenges, especially for companies that approach it with a hardware business model. One problem is that a Smart Home offering typically involves more than a leading device; it also includes an integration point, a broader family of devices and a universal user application. In other words, it is more of a software-based networking system than a piece of hardware.

The business challenge is that even if a manufacturer can recoup the initial costs associated with those components, there remain significant if sometimes hidden ongoing costs. Those could include the following:

  • Product support and development. Overhead is a standard component for any product’s cost structure, but solutions billed as “smart” and interactive call for a high level of continuous product management.
  • Interoperability and compatibility testing. Smart home devices are part of broader “ecosystems” that require initial standards compliance, as well as updates to ensure that they truly work with the new devices and system enhancements.
  • Cloud infrastructure. Hybrid Smart Home architectures combine hub-based local area networking (LAN) with cloud-based applications; the latter incur periodic hosting, testing, and other data center charges.
  • Customer communication and support. Customer email communication may cost only a fraction of a penny, but they add up, and the potential complexity and interactive nature of Smart Home solutions may require additional higher-tier support.
  • Technology licenses. Rights, licenses, and maintenance fees are all standard costs in the software realm. Smart Home networking includes other licenses, such as those linked to the proprietary Z-wave protocol.
  • Back-office and analytics. An online application or device store that extends a Smart Home’s reach, or an analytics engine that provides custom insights requires maintaining additional infrastructure.

To make the business work by selling devices alone, some companies try establishing a high premium upfront. Some companies are selling to homebuilders who can bundle Smart Home deployments into a high-end property’s list price or as an optional upgrade. Manufacturers of individual products may try this, as well. The list price for a Nest device, for instance, remains 10 times as high as that of a non-programmable thermostat.

The Smart Home market, however, is aiming for the consumer mainstream, not exclusive niches. As such, most Smart Home brands need to think beyond one-time device purchases to more broad-based and sustainable services. Even Nest – via its DropCam acquisition – turned to market a cloud-based video recording service. While there is no single way to capture more revenue, companies that try supplementing device purchases with services that offset their ongoing operational costs have a better shot at mass adoption.