blog

Is IoT Smart Lighting Worth It? Growing and Diversifying Your Revenue Through Smart Lighting Control

  • 07.06.17
  • ::
  • By Erik Davidson

Cortet Blog - Financial Benefits of Smart Lighting Control

Welcome to my next post in an ongoing series focused on helping you build a successful Smart Building Control strategy – particularly in Smart Lighting.

In my last post, I outlined why we think now is the right time for all luminaire & lamp OEMs to start offering their own IoT-based Smart Lighting Control (SLC) solution.

This post will be a bit longer.  In it, I will delve a deeper into the opportunities for using a strategically designed SLC portfolio to expand your overall sales, increase profit margins, and begin building recurring, subscription-based revenue.

 

EXPANDING YOUR TOTAL ADDRESSABLE MARKET (TAM)

 

If you produce and sell luminaires and/or lamps, you have an immediate opportunity to add a Smart Lighting Control (SLC) system to your portfolio to increase your top line sales.  This increase will be primarily be caused by two things:

1. You will now gain revenue from selling an SLC system; and

2. You will also pull along more luminaire & lamp sales and perhaps even increase your share of a given contract by owning the selected SLC system.

But, is the opportunity big enough?  Should I care?  How fast is the SLC opportunity growing relative to luminaire sales otherwise?

Let’s dive into some numbers.

The latest data from numerous sources show that the SLC market is poised to grow by an impressive 25-30% CAGR (Compound Annual Growth Rate). According to one analyst report linked here, the market for just lighting control products alone is expected to reach $3.7 billion in revenue by 2020. Within five years, by 2022, another analyst report linked here projects that the TAM for SLC systems will exceed a whopping $19 billion.



"Analyst Firm Markets and Markets Predicts that SLC TAM Will Top $19 billion by 2022"


 

By comparison, data from Strategies Unlimited linked here suggest that the LED luminaire market has been rapidly growing at an 11% CAGR and will reach a TAM of approximately $40 billion by 2020 and $45 billion by 2022.

What’s interesting, exciting, and very important about this data is that it suggests that the TAM for SLC systems will rapidly become a very high percentage of the overall LED lighting industry TAM: $19 billion for SLC systems within a $45 billion LED luminaire market.

Most notably, this is because CAGR for SLC system sales will likely be more than double the already-impressive growth rate of LED luminaire sales over at least the next several years.


GROWING YOUR CAGR AND SHARE OF WALLET

 

With all this data in mind, it is not hard to see that if you are manufacturing luminaires, hitching your wagon to a solid SLC system sets you up for an increased growth rate in a cutting-edge market segment on the rise.

If you’re hoping to beat the market as a manufacturer of LED luminaires, you might be currently targeting an ambitious 15-20% CAGR.  But, with an SLC play, you could be targeting something more aggressive: 30-35% perhaps.



"Use SLC to Target a CAGR of 30-35% for Your Business"


 

There is also another important financial opportunity you should be paying attention to, and that’s your ability to expand “wallet share” with your end-customers.

If you’re unfamiliar with the phrase, share of wallet refers to the percentage your company receives of the end-customer’s total project budget. So, for example, let’s say an office renovator has a lighting retrofit budget for a small office space of $200,000 and it includes plans for adding SLC.

Originally, perhaps you’d be getting approximately 25%percent of that total budget, or $50,000, primarily for providing a share of the luminaires.

By adding an SLC solution pre-integrated with your luminaries, you have the opportunity to grab a greater share of the total contract budget from your competitors, both from selling more luminaries and from selling the SLC system.

Our latest research shows that, on average, you can increase your total share of wallet by 30-40% using an SLC solution over what you’d acheive otherwise.



"Use SLC to Increase Top Line Sales By 30-40%"


 

That would mean instead of making a total of $50,000 on the example contract above, you would have the opportunity to make $70,000 (35% of the contract). Over 100 similar small projects, you have increased sales by $2 million.  Not bad.

 

HIGHER CONTRIBUTING PROFIT MARGINS

 

There’s more good news here.  In addition to larger TAM, CAGR and wallet share potential, adding an SLC solution gives you an opportunity to significantly increase profit margins.

First, when building your strategy for entering the SLC market, we recommend you start by IoT-enabling the lamps and luminaires in your portfolio that are already the most successful and are already providing the highest contributing margins.

Why? Because by offering these products integrated with your SLC platform first, it increases the chances of success for the total offering, since the original devices are already well received, in high demand and generating profitable revenue.

Our research shows that when you combine these winning devices with a white-labeled SLC platform (such as the Cortet Lighting Control Solution), the total profit margin can increase by as much as 50% over lamps and luminaires alone.

This is especially true since luminaire & lamp manufacturers are seeing their profit margins get crammed down at a staggering rate due to rapidly increasing competition.



"Use SLC to Increase Profit Margins By Up To 50%"


 

Let’s revisit the example from above.  Perhaps, you are selling in a mix of luminaires, both low-margin and high-margin SKUs, for a combined direct profit margin of 20%.

But, now you can offer luminaires integrated with an SLC solution.

Because you chose to have your SLC solution integrate with your higher margin luminaire products first, you can sell in a greater percentage of your higher-margin devices and the higher margin SLC solution components (e.g. white-labeled intelligent control gateways, wireless control devices, software, etc.).

By selling this integrated solution, you can increase your overall profit margin to 30%. And, since you were now able to take the increased 30-40% wallet share, in our small office space contract example, your total profit from the contract goes from $10,000 to $21,000.  Over 100 similar projects, you have now increased your contributing profit margin by $1.1 million.

As you’ll recall, those 100 projects resulted in a $2 million revenue boostSo now you’ve seen that $1.1 million was pure profit.  Now we’re talking.

 

NEW SOURCES OF RECURRING REVENUE

 

There’s one more important opportunity that SLC brings, and that’s the ability to build and grow subscription-based, recurring revenue streams over time.

This aspect of the SLC opportunity is just beginning to emerge, but stands to be one of the greatest financial benefits of IoT-enabled lighting in the future.

You want to be ready when the growth wave comes.

Based on our many conversations with luminaire & lamp OEMs, you are likely generating most of your revenue from individual sales contracts. You bid, win, fulfill the contract, are paid once, and then move to the next customer.  In this scenario, you typically do not have the opportunity gain additional revenue from that installation. It’s “one and done.”

By adding an SLC solution to your installations, you add two things that fundamentally change the financial equation: data capture and a direct connection to the end customer.

Since devices (e.g. luminaires, lamps, sensors, networking devices, etc.) in an SLC configuration are networked, your SLC solution has the inherent ability to capture information from these devices. That data can be saved, analyzed and used to create a limitless number of value-added, subscription based internet services.

Furthermore, new services can be delivered using these networked devices such as location-based services (LBS), artificial intelligence (AI) driven energy & space optimization services, etc. Although these types of services are only now starting to emerge, imagine the possibilities in the future.

Perhaps by partnering with a software-as-a-service (SaaS) and data analytics firm, you begin offering a subscription based service for optimizing energy efficiency and cost-savings. The sensors from your installed SLC solution provide real-time usage data of when people are in or out of the building, combined with data on existing sunlight levels. The solution then consistently and automatically adjusts luminaire brightness levels in the building to achieve the lowest energy usage without sacrificing productivity.

Most of the management of the system is done remotely over the web and through mobile devices, enabling you to offer the service nationally or even internationally. In this example, perhaps an end-customer pays you a monthly subscription of $10, for a total of $120 annually. In return, they save $160 in energy costs each year, so the solution pays for itself.  If you were to win 1,000 such contracts, you’d have added $120,000 in highly profitable software revenue that recurs annually.

You add recurring revenue, they reduce costs, everybody wins.

This is just one example of the infinite types of subscription-based revenue opportunities that SLC can usher in. We’ll be exploring many more in future blog posts.

 

UP NEXT IN THIS SERIES: HOW TO START BUILDING YOUR SLC STRATEGY

 

To recap: So far, I’ve covered why now is the right time for you to introduce an SLC solution, and in this post I've covered why the SLC financial opportunities are so strong. But, but at this point you may be wondering where and how to begin.

Fear not! In my next post I’ll provide recommendations on how to start planning your overall SLC entry strategy to maximize your chances of success, even if past attempts didn’t go so well.

See you there.

up next

Why Now? The Smart Lighting Control Opportunity for Luminaire and Lamp OEMs

  • Erik Davidson
  • ::
  • 05.08.17

Key IoT Hardware Considerations: Wireless Device Range

  • David Wilde
  • ::
  • 08.09.17

subscribe