Creating Value with Data in the Heating and Cooling Industry
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“Goods -> service -> data” – this is how HVAC trend researcher Arno Kloep describes the future shift in revenue sources for the heating industry.
“We are currently in a transitional phase. We are starting to generate a contribution margin from service. Various services, from measurement to maintenance, are offered as a priced service to the craftsman or the end customer. We think we can see that in a few years there will be competition between industry, trade and craftsmen as to who can provide and charge the end customer for the service.
In the final phase, we will give the goods to the end customer for free and in return we will be allowed to receive and evaluate the operating data. Goods will be without contribution margin, service will be offered at marginal cost and data will be the gold of the future.”
How value is created and money is made with a product is well known in the HVAC industry – it is full of excellent (and some not so excellent) products that provide manufacturers with their revenue.
Service has also always been an integral part of HVAC manufacturers’ offerings, and its importance continues to grow. Digitalisation is fuelling this trend. Firstly, because it can make the provision of familiar services such as equipment maintenance more efficient. And secondly, because it enables new kinds of services. However, many manufacturers are still facing the problem of how to make the step from service as a free supplement to product sales towards monetising the services themselves.
The connectivity of the IoT adds a service to every product
As described in the article “8 Challenges for Developing Connected HVAC Systems”, all Internet of Things products always involve a service aspect. The least that must be ensured is to guarantee the service of the network continuously, i.e. to operate the underlying web server in the long term so that the connected product remains accessible.
On the one hand, this is an obligation, but on the other hand it also brings with it the opportunity to stay in contact with customers and installations beyond the one-time purchase. This can initially be interesting for the manufacturer from a technical point of view, in order to simplify troubleshooting or to extract knowledge for product development. More on this later.
However, the ongoing service interaction can also be used for sales and commercial purposes, and thus offer approaches to monetisation. The most direct way to do this is certainly the remote maintenance contract through to heat-as-a-service.
In the car industry, Volvo already caused quite a stir in 2018 with its subscription model, which was dubbed “Netflix for car drivers”, among other things. In terms of heating, openness to subscription models is growing. In the heating industry, therefore, international brands like Baxi or Viessmann, among others, have already taken steps into heat-as-a-service.
A networked heating system can also contribute to branding if the connected service creates more frequent points of contact between the customer and the system – for example, by receiving a consumption report or useful (!) optimisation tips for the system with the manufacturer’s logo via app or in the mailbox. However, this should be well-dosed and always go hand in hand with added value for the user so that the contact point remains positively connoted.
The internet connection of heating and cooling systems can also serve as a subtle promotional channel. If, for example, the homeowner shows his neighbour the cool features of his heating modernisation, or the tradesman can show his colleague the performance data of his latest installation live over a beer, connectivity pays off in terms of advertising. If you want, you can even use this to enter into recommendation marketing with a clever customer-recruit-customer approach.
Through ongoing access to connected systems, the manufacturer also controls access to the spare parts business: the first to recognise that a pump needs to be replaced has the best chance of supplying this part. Or at least to influence which spare part should be installed – if only to ensure technical compatibility to prevent problems. The extent to which control of the spare parts business is feasible and at all desirable may differ from product type to product type and is ultimately also a decision of product management.
Regardless of the way in which the service aspect of connected heating technology is to be utilised, the change from a one-time purchase to an ongoing service should nevertheless be pursued with a sense of proportion so as not to ignore customer expectations. In the case of heat-as-a-service models, for example, it must be taken into account that customers do not always want to give up the feeling of ownership over their heating. In a home, the willingness to do so is probably lower than in a commercial installation, and higher for an easily replaceable smart thermostat than for an underfloor heating system that is firmly tied to the building.
In the end, it always depends on the clientele and the application. For a large fresh water cascade or a multi-zone control for an office building, a monitoring service or a maintenance contract would certainly be a good fit. A promising sign also for the service business with private customers: according to the pan-European market researchers from LCP Delta, the existing willingness to pay for ongoing service fees among customers of connected heating systems  is already becoming apparent – the opportunity for the industry to take a first step forward in the change of revenue sources.
Data as design material
The falling costs of electronic sensors and connectivity mean that data acquisition is becoming a core capability of more and more products – from large-scale system engineering to small subcomponents. Computer scientist and management consultant Dr Carsten Hentrich summed it up like this:
„The pure product will be devalued sooner or later –
if one does not recognise its potential as a data machine“ 
Instead of thinking of a surveillance camera as just part of a security system, for example, it can also be seen as a medium for recording data that it frees up for alternative uses, such as tending a baby or learning the pet’s feeding habits.
And HVAC systems? What data is available in your heating system, what data could be generated? Many underestimate the amount and range of data that a heating or cooling system can directly collect or plausibly derive.
By classifying the following data types, the wide range of data potential becomes clear:
The consideration of which data your system should collect or derive is increasingly becoming a design decision that should be part of the product concept from the beginning. As with all software-based products, however, the data concept can also constantly evolve and is thus open to later ideas for use – the appetite sometimes only grows while eating.
How data is turned into benefits
Three tips for creating value from data:
1. Aggregate data.
This means the linking of data from many installations. The more connected products you bring into the field, the greater the added value of the aggregated data they generate. The data from a single car can already be useful for the driver, for example by showing him his current position live on a map or predicting his energy consumption. But it is only when data from many cars are aggregated that the potential benefits multiply: indications of traffic density are obtained and the best route and predicted driving time can be derived, or a driver’s fuel consumption can be classified as comparatively economical or wasteful.
Analogy for heating technology: The data from a single test stand or pilot installation provides insights into later field performance for product development only as a snapshot. But live data from all real installations offer dynamic, empirical and statistically validated insights into a product’s strengths, weaknesses and performance, which can be broken down by use case or product revision number, by the moment or as a time series, etc. Those who extract data from every installation of their product and collect it on a data server are, in a sense, operating a gigantic research laboratory with unimagined potential for improving their products.
2. Focus on user goals.
The user group of the data that you can generate with your HVAC systems can be external or internal. An external user is, for example, the end customer who wants to save energy, the system planner who wants to correctly design his calculations or the installer who wants to commission a functioning system with little effort. The more data, the better these customer groups can benefit.
But data can also be used internally: Quality assurance wants to use data to reduce the complaint rate, product development wants to improve temperature stability, or sales wants to identify cross-selling potential.
The way data is used should always focus on the goals of the most relevant user groups.
“Focus on the user and all else will follow” . More on usability of connected HVAC systems can be read here.
3. Stimulate action. A pile of data by itself does not create action. The real value of data is based on how to act differently thanks to the insights gained. For this, the correct data must be collected, the data must be collected correctly (which is not the same thing!), and it must be easy to process. What other things need to be done in data science, i.e. the extraction of knowledge from data, can be read here.
Wherever value is created, money can be made. This can be on the revenue side when intelligent use of data is used to promote sales. Likewise, data intelligence can streamline processes by increasing efficiency in after-sales support or product development, saving time and budget. For product development, the use of data can also help strategically to achieve competitive advantages that are difficult to copy. The article “Things to consider before developing a data-driven HVAC product” describes what has to be taken into account for this.