Digital business is the competitive strategy of the decade. The Internet of Things (IoT) can be the magic glue between physical products, traditional services, and the new digital business. For traditional manufacturer or service providers, this is easier said than done. Profitable and stable business models are not easy to find.

Just as bring-your-own-device (BYOD) drove the mass adoption of business applications based on smartphones and tablet computers, at Forrester we believe that bring-your-own-thing (BYOT) will stimulate adoption and stabilise new business models around the engagement with customers. Understanding the underlying adoption dynamics, promising use cases, and emerging business models will be vital prerequisites for CIOs to act as innovation partners for their business.

Bring-Your-Own-Thing will drive IoT maturity – Five key levels

Forrester talked to a number of industry leaders to understand the sequence of maturity levels for IoT business models. CMOs and CIOs reported not only examples initiated in the consumer space and then extended into the enterprise space as described above. There are also business models started in the B2B space and now spanning into the consumer space.

While consumer cases such as wearable computing reach mass adoption quickly, their hardware sales model lacks of sustainability beyond the first hardware innovation wave. On the other hand, some enterprise IoT cases are profitable already, but they are lacking a broader adoption and commoditization of devices.

IoT business models in general can evolve over the following maturity steps (see below):

Level 1. Experiment. Near field communication examples like Sensorberg's iBeacons in the B2C space or smart electricity meters in the B2B space are good examples. We need these startup companies or even mass deployment of smart meters before the full business model is baked out. It is the platform for future innovation financially driven by venture capital and M&A.

Level 2. Hardware. The hardware sales model is in most cases the incubation of an IoT technology for a limited time frame. Vendors make their hardware more attractive with free cloud services such as Nike's free cloud service around its FuelBand. However, after hardware prices erodes, there will soon be no margin left to operate these add-on services for free.

Level 3. Bring-your-own-thing. This maturity level is the most attractive one, as it is the first level bridging between the consumer and enterprise space across the mass-adoption chasm. Recurring services revenues are combined with the hardware sales of connected things. Multiple things, even from competing vendors might be connected to the same commercial cloud service.

Level 4. Service-funded things. Once the market of enthusiasts — bringing their own things — is saturating, the BYOT momentum for a certain device category will slow down. To continue a growth path, vendors need to switch gears from a hardware-plus-services model to a pure services model to capture the remaining customers. Many connected things will be available for "free" on a consumption-based model.

Level 5. Commodity IoT service. Once connected things are ubiquitous, consumers and enterprises will consider secondary use cases of devices originally purchased for a different purpose. This will be a service-only business model at a very low price and margin, which assume that the connected device is already in place. While there is no IoT example yet, we are aware of this effort with pre-paid SIM cards plugged into older cell phones.

Some IoT vendors might remain on a certain step successfully for quite some time. Moving on the fifth level too quickly is certainly not desirable, as this offers the lowest margin and most extreme competition of all models. However, reaching the third level quickly and preparing for the fourth level in case the competitive landscape demands the transition is the best strategy.

Avoid becoming a dinosaur of the digital age

Especially if major vendors are used to a highly evaluated brand and decades of stable success with physical products, underestimating the importance of digital customer experience is dangerous. If you are also behind on exploring new IoT technologies, you risk the Digital Dinosaur trap. In ages where digital masters like Amazon, Apple, or Google have market capitalisations higher than some traditional car manufacturers with lots of physical assets but little digital business, it is no surprise that Digital Dinosaurs are either simply acquired or go out of business.

Therefore, CIOs need to make IoT a central part of their tech management agenda. Moving from the old technology operations model to a modern business technology management requires not only business relevance but really a contribution to your company's position in the age of the customer.

Stefan Ried is Forrester analyst serving CIOs