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.

1. Business Model for NEST Labs-
Smart Thermostat
We’re Nest. We reinvent things.
“Saving Energy is a beautiful thing”

2. Archit Anusha Deepak
Ramanan Santhosh
Business Analysts

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. CONTEXT SETTING

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. 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. 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. 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. 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. 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. 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. 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. VALUE PROPOSITION

14. Product and Features Context
Setting
Value
Proposition
Customer
Selection
Value
Capture
Scope of
Activities
Strategic
Control

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. 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. • 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. 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. 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. Source: http://programmable-thermostats-review.toptenreviews.com/
Context
Setting
Value
Proposition
Customer
Selection
Value
Capture
Scope of
Activities
Strategic
Control
Comparison with competition

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. Awards and Recognitions Context
Setting
Value
Proposition
Customer
Selection
Value
Capture
Scope of
Activities
Strategic
Control

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. CUSTOMER SELECTION

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. 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. 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. 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. 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. VALUE CAPTURE

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. 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. 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. SCOPE OF ACTIVITIES

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. 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. 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. STRATEGIC CONTROL

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. 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. 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.  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. Thank You