Host:
Welcome to Insight Exchange, presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators and the doers who are right now rebuilding the world around us.
Gavin McGrath:
Welcome. The connected home ecosystem comprises an estimated 1.8 billion smart devices and it's climbing. I'm Gavin McGrath, partner and managing director in L.E.K. Consulting's Digital Practice, and in this episode we'll explore the connected home. Can your company plug into opportunity? In a recent L.E.K. Consulting survey, 89% of current connected product owners considered purchasing a connected device within the past year. Moreover, 60% of connected product non-owners also considered purchasing a connected device. Depending on the product, search volume for key connected products increased two to three times from 2017 to 2022, and despite variations in the speed of penetration growth, most third party forecasts expect increases of more than 20% for the next five years or so.
Factor in the new industry standard matter which enables greater interoperability and this presents an obvious growth opportunity for an array of prospective players. This includes members of the investment community as well as players within industries that have an organic connection to the space across a range of product categories. We'll discuss key takeaways, including how the connected home ecosystem continues its rapid growth. To be successful, companies need to first determine whether they have a role in the connected home and then where that role is.
Lastly, companies also need to determine whether they will be orchestrators or enablers. To provide insights on these topics, let us welcome our experts, Paul Bromfield and Cory Highfield. Would you please each take a moment to introduce yourselves?
Paul Bromfield:
I'm Paul Bromfield. I'm one of the coordinators of our residential services practice, and most recently I've spent a lot of time in the connected home space.
Corey Highfield:
My name is Corey Highfield. I am a principal in our building and construction practice at L.E.K., spending a good bit of my time in the digital world as well within Connected Home.
Gavin McGrath:
To start out, what are the key success factors for companies seeking to capitalize on the connected home products market?
Paul Bromfield:
Well, Gavin, it's a great question and you covered some really key and important points in your opening remarks, that there's just tremendous growth here.
So lots of opportunity but also lots of players and I think if there's one success factor we highlight most of all based on the research we've done is that A, there is no one size consumer. You really have to understand the consumer segments, the consumer preferences, and where they're looking for specific solutions.
Just as an illustration of that, what we found is that only 17% of respondents indicate voice control is really their preferred method of interactive with connected product, and yet we've seen companies investing in voice control products, which not unexpectedly have not really been successful. So that's one key factor. And then the other key success factor is really companies need to figure out what is their role in this ecosystem of the connected world? And that's something we can get into more detail in this conversation.
Gavin McGrath:
Thanks so much, Paul. Corey, I guess what are those essential elements or components of the connected home ecosystem? How do they interact with each other? What are they?
Corey Highfield:
Gavin, you've got three major stakeholder sets or segments within the connected home ecosystem. You've got devices, management suites and digital interfaces or solutions. All of these groups are co-mingling and inter-operating in this connected home ecosystem. So starting with devices, this is what you'll typically think of when you think of connected home. It's your physical connected product with a sensor and interface could be anything from a smart doorbell to your HVAC system that has your ecobee control with it, or it could even be your TV and your entertainment center. And you've got your management suites, so that's really going to be your integrators, right? Your software that allows multiple products to operate in a connected system and to interact with each other.
So this could be everything from your eco, your integrated platform like a Vivint, a solutions app like Ring, could be Google Home, MyQ, et cetera. And then lastly, you've got solutions. These can be service providers, these could be OEMs and really, what they're doing here is offering that incremental value beyond the device themselves. So it could be some security monitoring, could be predictive maintenance, could be some targeted ads that are being pushed through, can be energy management as you think about the energy system or the HVAC system in a household.
So all of these components and all of these stakeholders are operating together in this ecosystem and as you think about potentially playing in this space, it'll be really key for companies to figure out where do they fit and where do they actually fill a consumer need and where can they provide value given all the data that's operating within this system.
Gavin McGrath:
Paul, you talked about success factors. What are the key drivers or challenges for consumer adoption in connected homes? How can companies differentiate themselves in the ground market?
Paul Bromfield:
Well, that's a big question, Gavin, and to really break it down the way we think about it, you have to think about what's going on with the homeowner, what are the major trends and drivers that the homeowner is experiencing? And then what's going on in the ecosystem or what I really mean by that in terms of the players, the suppliers, the changes in the technology landscape and how are those things coming together? And so what we're seeing really is increasing penetration of the connected home but with a number of key pain points that still need to be resolved.
So homeowners are becoming much more aware of connected devices. And at the same time, the providers of these devices, you're seeing a proliferation as new companies enter the market as I referred to earlier, and as existing companies expand their device portfolios. Homeowners are looking for a strong value proposition, especially as they adopt more devices, the cost of those devices becomes more important to them.
The good news is that companies are leveraging scale to really reduce prices for devices, not universally, but in many instances. And at the same time, they're expanding and enhancing device functionality, so you're seeing an increased value proposition. All of these things are driving adoption, and then you add to that specific needs outside of the connected home world that are driving connected home interest and adoption. So obviously a big one is the desire to reduce energy consumption, either for financial benefits or sustainability benefits as we've seen a rise in energy costs obviously over the last couple of years. And then you've got companies coming up with solutions in home energy management, again, a driver for adoption.
One of the challenges though is this device and data proliferation, and what that means is there is some level of fatigue among homeowners and so it becomes really important for companies to find a way to create some form of differentiation as to why their solution set, whether they are a solution provider or whether they are a device that's really giving value to the homeowner.
Gavin McGrath:
Corey, you had talked about the three essential components of the home ecosystem in connected homes. Those were management suites and devices and solutions. When Paul's talking about consumers, are there different segments of the consumer in the home ecosystem for connected products? How do they vary in terms of their adoption rates or engagement levels? Are there differences in demographics or things like that?
Corey Highfield:
Great question, Gavin, and absolutely, there's is. There's a very diverse range of segments and groups as you think about the end customer here. You've got everybody from enthusiasts and early enthusiasts, down to your dabblers or your disenchanted and non-adopters at the other end of the spectrum, and they all have different demographic factors that can drive where they sit in the segmentation, but they also have different customer needs as you think about what they're looking for and what they truly value. So it's really important as a player in this space to determine early on who do we want to target with our solutions and our products and how? We probably can't cater to everybody. It's very difficult to cater to that enthusiast and the non-adopter, but you might be able to cater to the enthusiasts and the early enthusiasts.
As you think about these segments, they vary by income, housing ownership, psychographic profiles, and these are all going to impact their adoption levels for a connected home, which devices or which types of devices they're adopting and what they're caring about or valuing in their devices.
You’ve got your enthusiasts at the high end with highest incomes, strong home ownership, and they really take pride in their homes. They see themselves as the forefront of those early adopters and they can own upwards of 25, 30 plus connected devices throughout their homes.
Similar to them, you've got your early enthusiasts. There may be more mid-level or average income and age but are less likely to live in a single family home but more likely to own that residence. They typically heavily research a product before purchasing.
Then you move down the chain. You've got your accidental adopters, somebody that's slightly older, probably less worried about personal safety and just wants to enjoy being busy or productive. They're about 15% of the market and typically own about five devices. You get all the way down to your non-ad adopters, less likely to be in a single family home, lower income, your laggards or last folks to come into the fold as you think about connected home, but it's very important for each of these segments to understand and realize they have different characteristics and preferences and that's going to impact the products they buy, how they engage with these products and which types of products and which types of features they're really going to value.
Gavin McGrath:
Well, I agree with you. I probably do show up in the enthusiast segment given the years of interest and research in this space, but how widely does the sort of device penetration vary across different categories in the connected home ecosystem, Corey?
Corey Highfield:
Yeah, it's pretty wide-ranging as you think about the different categories. At the top of the fold and probably no surprise here is entertainment. That's about 85% penetration. You think about folks talking to their TVs at home to switch on Netflix or go to YouTube TV or their favorite app. So you'll see greatest penetration and that's usually one of the first connected devices that a homeowner or an end consumer might purchase.
At the lower end or the lowest end, you've got energy solutions, about a quarter of adoption today, so 25%, suggesting there's potential room for adoption runway and penetration here. As you think about some of the things that Paul mentioned around energy conservation, sustainability, certainly when energy prices spike, this becomes a more top of mind consideration for the homeowner. Getting back towards that top end, you'll see below entertainment but still quite high, appliances and lighting. So you'll see things like smart plugs or smart lighting to be able to remotely operate these throughout the house when you're away on vacation and that can be a real value add, especially to those enthusiasts.
As you think about the future and where this usage goes, one that is probably most ripe for strong adoption growth is connected security and access control products. That's where in our work, the homeowner has shown most interest in moving next. They really value that ability to have that peace of mind when they're away to lock the door if they feel like they've forgotten it on their way to work or to drop the kids off to school.
There's less enthusiasm as we've seen for connected outdoor products. Again, some less so on the wellness and energy, but those can shift as consumer trends and energy prices change. But the real big importance here is you think about where a company potentially wants to play in this space. It's really key to understand what are the specific consumer segments, what are the pain points or what's their journey today and what value can we as a company specifically provide or what needs can we meet that aren't being met already today in the ecosystem?
Gavin McGrath:
Paul, what challenges and risks do companies face in developing strategies for the expanding connected home ecosystem?
Paul Bromfield:
So one of the key trade-offs that companies have to make between differentiation versus having a solution that is very connected and interoperable with other solutions. So incompatibility with broader ecosystems, again, being very aware of what's being developed around you, particularly if it's by a more powerful player. Similarly to that, as you start to see more centralized management suites potentially gain traction, there's a potential risk that you could lose the insight from your own data. Again, being aware of what is happening around your particular part of the ecosystem is really key.
The differentiation point that we talked about with proliferation and some level of fatigue in some circumstances by consumers, it's important to have something that's really adding value and that people are willing to adopt. And similarly, as we talked about the benefits of lower cost for adoption, there is also the risk that goes with that at some level of commoditization, and is it going to be possible to make margin and profitability and the solution set that you are providing? We think that there's lots of opportunities to do that, but again, you have to be very much aware of what is going on around you and whether your particular part of the system is being commoditized or not.
Gavin McGrath:
It's interesting because a lot of the discussion is about the consumer and it's about that consumer experience, but you've just raised some interesting thought around the benefits to the firm for evaluating these types of innovations. I guess as you think about the positive trends impacting strategy development, Corey, are there opportunities that you see and how should companies think about navigating those changes?
Corey Highfield:
Yeah, great question, Gavin. Certainly some great opportunities as you think about the way this connected home ecosystem evolves. Paul mentioned data proliferation from interoperability and increasing a rising number of devices. This creates potential for post-sale services, as Paul mentioned. You've got a break fix issue with an appliance. You've got the opportunity to push add-ons for a specific product. You've got an opportunity to potentially sell customer leads or customer data. So there's the opportunity to monetize that, but as Paul also mentioned, there becomes the challenge of who owns that data as it becomes increasingly numerous or as it multiplies in this ecosystem? Is it you as the product manufacturer? Is it the ecosystem integrator and that management platform? So it's very critical as you think about this evolving space, understanding the data rights and what you are actually going to have ownership of and access to, versus a third party or somebody else in this ecosystem because there's got to be shifting dynamics as increasing adoption and data proliferates in this segment.
You've also got growing demand for home energy management. We've had recently in the last year or two, some pretty significant spikes in home energy prices. So people have become more attuned to this, not to mention the sustainability element or the sustainability lens that plays here.
So it all means that once you set your product plan or your strategy in the connected home space, it's not set in stone for very long. This is a continually evolving space that needs to be reassessed and continually assessed to understand where the opportunities and the risks lie, and make sure that you as a provider are maximizing your potential or your opportunity to differentiate and drive value in this ecosystem. Because without it, you might have a strong value proposition for a point in time, but as this rapidly evolving space changes, you could be quickly left behind. So it's one that companies need to stay attuned to nearly in real time to make sure that they are shifting track and shifting strategy appropriately.
Gavin McGrath:
Paul, you touched on this idea of the role that a firm can play within the connected home ecosystem, and honestly, I think that's one of the biggest questions we get from our clients, what a organization can do to determine its role? Everyone wants to be able to participate in innovative and exciting trends, but how can an organization determine what's viable for them and what are the roles of those orchestrators or enablers within that context?
Paul Bromfield:
Yeah, it's a really key question as you say, Gavin, that we are frequently running up against and it's a question that CFOs are asking and business leaders, "What exactly is our company's role in this connected home world? Do we have a role?
And we've come up with this notion of being, and I touched on it earlier, an orchestrator or an enabler. So orchestrators are really those that are driving ecosystem change and development. They're very visible to the consumer and they're really the movers and shakers of the connected home world at different levels.
Enablers are really more offering products. They're offering very specific point solutions. They're providing change in development and getting customers and other stakeholders moving along in the direction that the ecosystem system enablers are really leading. They're really facilitating the smooth operation. Now, both roles are critical and it's important to really figure out, "Well, am I going to be an orchestrator or am I going to be an enabler?" A lot of people would translate those as, "Am I going to be a leader or am I going to be a supporter?" And many people of course want to be the leader, but the leadership role is not necessarily going to be obvious or appropriate for every company.
So we've highlighted in working in this space a number of key questions that the company should ask themselves and some examples to really just be table stakes criteria as an orchestrator. Do consumers have a high degree of thoughtful interactions and drive meaningful value from your function in the home? Does your offering have a compelling value proposition to homeowners and do you have access to and control the access to the data of your own product?
Those are just the minimum things that you need to do to be an orchestrator, but there are also really key other questions to consider that's going to help you differentiate as an orchestrator. How easy are your products to install? How reliant are you on upstream stakeholders? How many downstream stakeholders are necessary to get your product offering to homeowners? These are all the kind of questions that will determine whether you can be an orchestrator or not.
Now, no one can predict the future, but I think we can look at players in the space and say, well, which type of player is more suited to be an orchestrator or more suited to be an enabler? Our assessment would be that controls OEMs, major platform software providers and integrated software platforms are well positioned to act as orchestrators in their respective connected home systems. Those are probably the best place to be orchestrators. So if you are a company that's not in their group, that does not mean that you can't be an orchestrator, but you do need to really pose those questions and make sure you have the right answers to take on that leadership role.
Gavin McGrath:
Corey, what are the other crucial considerations for companies deciding whether to pursue a connected home strategy or not?
Corey Highfield:
Yeah, there's a lot that will go into that ultimate decision, Gavin. You've got internal factors as you think about the strategic direction and strategic plan for individual companies, as well as in investment considerations, is this where we want to focus our time, our dollars and our resources? That answer will be different for each company, but there's opportunities to play to varying degrees. To Paul's earlier point, a company might look and say, "Doesn't really seem like a fit for us," but there's space for pilots, for experiments, for partnerships and participatory activities that give a company optionality to continue to learn about the space, to continue to stay involved and give that optionality to make a more full-fledged investment or approach in the market down the road without just removing themselves completely because it's not part of the strategy today or we've got capital allocated elsewhere in the business. There can be smaller chess moves or smaller plays that a company can make to give exposure, at least initial exposure and allow them to make a bigger step or a bigger movement down the road.
It's really important for companies to identify as they start to make these decisions where their preferred space or opportunity is. To Paul's point earlier, are we going to be that orchestrator? Do we just want to stick to being a product manufacturer? Is there opportunity for us to monetize our data and offer some services? So really honing or keying in on where we want to play and who we want to serve? It might not just be the homeowner in the connected home ecosystem. It might be other participants if you were that orchestrator and that integrator across different products and different categories, and ultimately, at the latter stage of this decision is some sort of capability gap assessment or analysis.
What do we do well today that we can bring to the connected home space, that we can leverage or use to enter this arena? Versus where do we need maybe partners or third parties and where do we just not have the expertise, the institutional knowledge, the capability set today? And from an economic perspective, it's just more efficient for us to rely on a third party or partner because as you develop your offering, your solution doesn't mean that it has to be fully or fully made in-house.
So there's a whole host of decisions or stages as you think about a company's strategy, their investment capability, where they want to play? Who they want to play with? What capabilities do we have and what can we partner or outsource with third parties to enable us to provide that holistic solution that really hits on that key customer segment for us and drives value?
Gavin McGrath:
I know you've looked at a number of different examples in the research with the team. I wonder if you could touch on the Generac example, Paul, as you think about how they determined position and strategy in the connected home space?
Paul Bromfield:
Yes. So as we've been talking, obviously it can really come across, there's a lot to get right here and has anyone got it right? And we do think Generac is a good example of following some of these principles. So they really concluded that the connected home space was a good fit for their business, that it was something they needed to participate in, and they did the analysis to really come out with a conclusion that they needed to be an orchestrator within the energy management ecosystem, just really considering the clear adjacencies and potential expansion areas that would help meet their objectives. They also recognized though that they had some gaps, that they needed to have more thoughtful consumer interactions. They needed more controls than their core systems had at that time. They also realized that they needed to have more software capabilities that they also didn't have in place.
Gavin McGrath:
Well, I appreciate the time today to talk about the connected home and how companies can plug into opportunity. The market perspectives, the case example, all really helpful. Thanks to our experts for discussion. We're happy to provide more detailed discussions on request and invite you to connect with us to learn more about L.E.K. Consulting's extensive experience in providing strategic support to subscription-based or growth focused businesses, as well as investors who focus on opportunities in the connected home. Curious about success factors, consumer segments, orchestrators and enablers, or how companies should navigate these positive trends impacting strategy? Reach out and connect.
Host:
Thank you our listeners for joining us today at the Insight Exchange, presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
