Biz Model for Nest's Smart Thermostat

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These slides use concepts from my (Jeff Funk) course entitled Biz Models for Hi-Tech Products to analyze the business model for a Nest Lab’s Smart Thermostat. This thermostat learns user behavior, uses motion sensors to detect human presence, and programs itself. We recommend that Nest sell directly to end users and work with HVAC, construction and building automation companies to have their thermostat installed in new buildings. Nest, which was recently acquired by Google, can profit from the sale of these devices and the sale of software apps that can add functionality to the product.

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Biz Model for Nest's Smart Thermostat

  1. 1. Business Model for NEST Labs- Smart Thermostat We’re Nest. We reinvent things. “Saving Energy is a beautiful thing”
  2. 2. Archit Anusha Deepak Ramanan Santhosh Business Analysts
  3. 3. Overview Context Setting • The Product, The Company • The Consumer Need and Opportunity • Industry Construct • Competitors, Market Size, Growth Value Proposition • Product features • Comparison of product offering with competition • Positioning, USP,… Raison d’être Consumer Selection • Usage & Attitude Study • Who to Target • Collaborators, Partners, Channels Value Capture • How they make money • Financial projections Scope of Activities • What they do and what they don’t • Vertical disintegration • Acquisition by Google Strategic Control • Patents • Way forward
  4. 4. CONTEXT SETTING
  5. 5.  The Next Generation “smart” programmable thermostat  “Learns” your preferences and schedule and programs itself!  Easy to use, easy to control  Save energy and money! The Product and The Company Tony Fadell •Apple Employee, “Father of the I- pod” Matt Rogers •Apple Engineer, i-Pod Software Development team Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Founders  Home automation company, HQ – Palo alto, setup in 2010  Started with the iconic thermostat, moving to new products  Bought by Google in Jan 2014 for $3.2 Billion
  6. 6. Consumer Need & Opportunity Source: US Department of Energy Heating and cooling (HVAC) accounts for ~50% of the annual electricity bill of the avg. US household Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control
  7. 7. History of the thermostat Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Source: “How people use thermostats in homes: A review” - Peffer, Pritoni, Meier, Aragon,Perry, Building & Environment Journal, June 2011 The Smart Thermostat Revolution…
  8. 8. Consumer Need & Opportunity Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control 41% households had programmable thermostats in 2011… 40% of them never programmed them! 45% of them did not program in winter! But… Source: “Who Wants Efficiency? Americans' Attitudes and Actions around Energy Use” , LeBlanc, Cooper and Reeves, E Source, 2012 Source: “How people use thermostats in homes: A review” - Peffer, Pritoni, Meier, Aragon,Perry, Building & Environment Journal, June 2011 If only they could be simple to use… and could program themselves!...
  9. 9. Challenges with Existing Technology • People forget to Turn down the Thermostat • Poor remote management, returning home early from a weekend outside - • Poor electricity management, especially during summers. • Poor automatic temperature regulation feature.
  10. 10. The future looks very promising… Although adoption of programmable thermostats has been slow… Consumer Need & Opportunity Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Source: oee.nrcan.gc.ca, http://www.greentechmedia.com/articles/read/is-32-million-smart-thermostats-by-2020-a-lowball-estimate ~$1.4 B in 2020
  11. 11. Industry Construct Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Source: http://cleantechnica.com/2013/11/14/honeywell-leads-smart-thermostat-leaderboard/ Navigant Research : Navigant Research Leaderboard Report: Smart Thermostats, Nov 2013 Honeywell – oldest and largest player in thermostats for last 50 years… Top 10 Vendors: 1. Honeywell 2. Nest 3. Trane 4. Carrier 5. ecobee 6. Energate 7. Emerson 8. Computime 9. Radio Thermostat Company of America 10. Venstar But Nest has already become the #2 player in just 3 years after launch!
  12. 12. Nest is starting to expand… - - - - - - - - - - - 10,000500,000 3,125,000 6,250,000 12,500,000 25,000,000 - 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Year Number of smart thermostats sold Nest Industry
  13. 13. VALUE PROPOSITION
  14. 14. Product and Features Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control
  15. 15. Learns user behavior, from settings made in the first few days of installation Provides tips and info to make energy-conserving choices (green leaf symbol) Wi-Fi connected, easy to control remotely from office, bed etc. Programs itself, set the best settings to achieve maximum energy saving Easy to install, You can Do- It-Yourself, or with help from Nest support Motion sensors to detect human presence and turn to Auto Away mode when not around The only Thermostat that learns over time… Value Proposition Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control
  16. 16. Value Proposition Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control • Programs itself so you don’t have to. • Learns everyday and Keeps you comfortable
  17. 17. • Control it from anywhere • Control it through smartphones, tablets & PC Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Value Proposition
  18. 18. Value Proposition Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control • Built-in Activity sensors for monitoring human activity. • Turns itself down when you’re away
  19. 19. Value Proposition • Easy installation and compatible with most of the HVAC systems • 3 out of 4 customers install Nest themselves in 30 min or less! Or else… Call a Nest Certified Professional to help you! Source: https://nest.com/thermostat/installation/ Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control
  20. 20. Source: http://programmable-thermostats-review.toptenreviews.com/ Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Comparison with competition
  21. 21. Source: http://programmable-thermostats-review.toptenreviews.com/ Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Comparison with competition
  22. 22. Awards and Recognitions Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control
  23. 23. Nest Thermostat – Raison d’être… (Reason to be!) Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Amazing functionality Ease of use Bold, beautiful, unprecedented look and feel A lifestyle symbol The I- pod of thermostats… People did not just buy an mp3 player They bought an Ipod! Not just a thermostat A Nest!
  24. 24. CUSTOMER SELECTION
  25. 25. 23% 20% 5%15% 7% 13% 17% Cost Savings Interface Ease of Use Connectivity Reliability Features Source: Tugrul U. Daim, Ibrahim Iskin, (2010),"Smart thermostats: are we ready?", International Journal of Energy Sector Management, Vol. 4 Iss: 2 Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Customer Selection • Cost – Pricing used as an element to signal quality, aspirational value and to make a statement. • Features, Savings – Proven to be better than competitors • Ease of use – Nest Thermostat’s hallmark attribute How Nest Thermostat fits in…How consumers buy smart thermostats
  26. 26. Customer Selection – the Ecosystem Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Individuals Home Automation companies HVAC professionals Construction companies Building automation companies Decision makers / influencers Smart thermostat users Households Existing houses New houses Commercial Buildings New buildings Existing buildings Non users / mechanical thermostat users End customers As a home automation company ourselves, cannot partner directly with other competitors!
  27. 27. Smart thermostat users Households Existing houses New houses Commercial Buildings New buildings Existing buildings Non users / mechanical thermostat users End customers Customer Selection – deep diving Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control ~60% households use manual themostats Upgrade them Source: “Who Wants Efficiency? Americans' Attitudes and Actions around Energy Use” , LeBlanc, Cooper and Reeves, E Source, 2012 ~40% households use other smart thermostats Move them Only ~24% renters have thermostats as against ~51% owners Attract them with ease of use, DIY, features & savings!
  28. 28. Customer Selection – deep diving Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Individuals Home Automation companies HVAC professionals Construction companies Building automation companies Decision makers / influencers Everybody is a potential customer, you just need to reach them in different ways! Have significant influence on customers Partner with them – “Nest Certified Professional” ~51% of new houses as against ~38% old houses have thermostats (as in 2005) Partner with them, increase adoption No direct partnerships Build customer pull – Make customers ask for Nest Thermostat, like they once did for “Intel Inside”! Source: “Who Wants Efficiency? Americans' Attitudes and Actions around Energy Use” , LeBlanc, Cooper and Reeves, E Source, 2012
  29. 29. Product Standards Utility service providers Government Programs Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Other stakeholders in the ecosystem…ProductStandards Working with ENERGY STAR® to define industry standards for home automation devices (“Program Requirements for Residential Climate Controls - Partner Commitments”.) Utilities Natural allies helping reduce utilities consumption (gas and electricity used for heating). Ex : Nest partnership with Reliant, a Texas-based retail energy provider to offer a Nest thermostat to customers who sign on for a two-year contract. Nest can reach 1.5M customers of Reliant this way TheGovernment Partner to understand trends and ways to reduce energy use. Govt. policies could be a catalyst in adoption of smart thermostats http://www.engadget.com/2012/06/25/nest-partners-with-texas-utility-offers-intelligent-thermostat/ http://www.humanities360.com/index.php/how-the-1970s-oil-crisis-affected-the-us-economy-2-11702/
  30. 30. VALUE CAPTURE
  31. 31. Value Capture Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control The Users Software Developers $ (Revenue) Nest-Smart Thermostat Nest-Smart Thermostat (App Store) SDK $ (Markup) Nest-Smart Thermostat $ (Royalty) Apps Apps NEST certified professionals $ (Partner fees) Training & Certification $ (Markup) CURRENTFUTURE
  32. 32. Nest Honeywell wifi smart Ecobee smart Venstar color stack Lennox iComfort wifi Cost 249 299 238 284 427.95 249 299 238 284 427.95 0 50 100 150 200 250 300 350 400 450 Cost Source: from Amazon Competitive Analysis – Cost
  33. 33. Financial projections Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Basis of projections  Nest sold ~40,000 to 50,000 units per month in Jan 2013 http://gigaom.com/2013/01/29/exclusive-nest-has-raised-another-80m-now-shipping-40k-thermostats-a-month/  Assumptions – Trend of sales growth, whole sale price of $ 125 per unit, at 100% markup http://blog.nextmarket.co/post/73320622998/breaking-down-the-valuation-for-nests-3-2-billion Year 2013 - beginning 2013 2014 2015 Units per month 50,000 75,000 150,000 250,000 Units per year 900,000 1,800,000 3,000,000 Retail price per unit $ 250 $ 250 $ 250 Whole sale price (per unit) $ 125 $ 125 $ 125 Total revenues, Million $ $ 113 $ 225 $ 375
  34. 34. SCOPE OF ACTIVITIES
  35. 35. Scope of Activities Consumers Hardware Manufacturer Nest Lab Inc. Nest Lab Inc. R&DUnit Hardware assembly & software integration unit $ Distributors$$ $ New Product Nest Lab Inc. Soft & Mobile App Dev unit Hardware SpecSoftware Customer Feedback Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control
  36. 36. Segments of Supply chain • Product development • Innovative technology • Production • Manufacturing capability – outsourced to manufactures in China • Sales and Marketing • Distribution through familiar retail outlets, such as Best Buy and hardware stores, Apple stores • Service and Support • Online installation support and for software upgrades Vertical Dis-integration – Supply Chain Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control
  37. 37. Financial might, global reach Infrastructure (servers etc.) Analytics and s/w intelligence Sales & Distribution net Vendor base (for electronics) Acquisition by Google - synergies Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Nest can focus on the core value creation – Making great new products, improving them and supporting users who use them. Vertical disintegration…
  38. 38. STRATEGIC CONTROL
  39. 39. Strategic Control – Patents Key Means of Strategic Control: Patents • Patents covering both Technology and Applications 100 IP’s, 200 more filed with USPTO, 200 more in line ready to be filed. • E.g. US 6429893, US 6686838, US 6943681, US 7042352, US 7047092, US 7102504, US 7102505, US 7142107, US 7142123, US 7156316, US 7163156, US 7168627, US 7168632, US 7199701, US 7218237 and more 30 Trademarks • Nest®, the Nest logotype, the Nest house logo, the Nest leaf logo, Airwave®, Auto-Away®, Auto-Schedule®, Auto-Tune™, Heads-Up™, Heat Link™, Learning Thermostat™, Let’s Stop Wasting Energy™, My Energy™, Nest Learning Thermostat™, Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control
  40. 40. User Friendly Interface for Control Unit - US 2012/0203379 A1 Thermostat Graphical User Interface - US 2012/0131504 A1 Thermostat User Interface - US 8,195,313 B1 Thermostat With Self- Configuring Connections to Facilitate Do-It- Yourself Installation - US 2012/0248211 A1 System Methods for Updating Climate Control Algorithms – Under Review Adaptive Power Stealing Thermostat – Under Review Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control Strategic Control – Patents
  41. 41. The way forward – building an ecosystem Build an ecosystem of innovative products, with proprietary standards , under the home automation umbrella • Similar to Apple’s Phone-Mac-Pod-iTunes ecosystem Consumer Stickiness, , “invisible” strategic control on customers Barrier to entry Context Setting Value Proposition Customer Selection Value Capture Scope of Activities Strategic Control
  42. 42.  Transparency and ethical conduct  Stringent privacy policy, user data protection Customer Segments Customer Relationships Value Proposition Key Activities Channels Cost Structure Revenue Streams Individual Houses Commercial Buildings  Self Learning  Self Programming  Remote Control  Auto Away  Motion Sensing  Energy Conservation  Ease of Access  R & D, product development  Building partners and channels  Product sales and support Key Resources  Patents , trade secretes & trade marks  Talented manpower  Sale of thermostat units (more home automation products in future  Apps revenues for home automation systems in future Key Partners Upstream  Component makers, contract manufacturing units Downstream  Utility Suppliers  Construction companies  HVAC companies  Electronics retailers  R & D, talent and manpower costs  COGS, Manufacturing costs  Distribution, Sales & Marketing costs  Online( websites like Amazon), Apple stores etc..  Partnering with Energy suppliers . Summary
  43. 43. Thank You

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