Why Hardware Manufacturers Should Transition from One-Time Product Sales to New Hardware-as-a-Service Business Models
Next to the apartment I moved to in early 2008, there was a Blockbuster store. Six months later, it shut down. Only two years later, the company that was once the name in home video went bankrupt when its industry started to pivot toward subscription-based business models.
Instead of moving with the times, Blockbuster decided to maintain its focus on physical rentals. As a result, the company went out of business, and its customers all swapped their Blockbuster cards for Netflix subscriptions.
In recent years, we’ve all become accustomed to purchasing everything as a service – from media (Netflix, Disney+, Apple Music, Spotify) to eCommerce memberships (Amazon Prime) to fitness solutions (Apple Fitness+, Peloton), books (Kindle, Audible), and even coffee. However, this is not yet the case for most hardware devices.
Even though Hardware-as-a-Service encapsulates tremendous opportunities for hardware manufacturers, so far only a handful of companies have successfully introduced new HaaS/HWaaS business models. This is surprising – after all, no one wants to be the Blockbuster of their industry.
What Is HaaS?
While many believe that HaaS is mostly a new way of selling hardware, effectively by leasing customers the equipment, there is nothing further from the truth. Swapping an up-front cost for a monthly or annual fee might create some short-term value and attract customers by allowing them to cut back on CapEx and utilize their OpEx budgets instead, but a true HaaS business model requires a complete paradigm shift – from selling products to selling services that are based on hardware devices.
Consider a company that manufactures collaboration touch displays for conference spaces as an example: shifting to HaaS would mean offering collaboration touch services, rather than selling the displays. While this might sound like a minor change, it actually encapsulates a completely different way of thinking about one’s business, value proposition, pricing structure, and customers.
So how does HaaS differ from traditional product sales? While product sales is mostly a linear process, where at the end the customer gets a product and (barring potential repeat purchases) the relationship ends there, selling services is a circular, ongoing process with the customer at its center. As-a-Service business models rely on a set of concepts that are crucial to understand when shifting to this new approach: Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV or LTV), and the ratio between the two (LTV:CAC).
Customer Acquisition Cost (CAC)
is the cost of winning a customer by persuading them to purchase a product/service. It encompasses the money spent on marketing, salaries, and other elements involved in efforts to acquire a customer.
Customer Lifetime Value (LTV or CLV)
is an estimate of the net profit potential of the entire future relationship with a customer.
In a business model that focuses exclusively on product sales, the full LTV of the customer is realized instantly. But with services, the total LTV of a customer is defined by how long the customer continues paying for those services, and the upsell opportunities we are able to capture following the initial sell. The length of time the customer keeps using (and paying for) our services has an effect on the LTV, and the LTV:CAC ratio. If the customer churns early, with an LTV:CAC<1, practically speaking we have lost money, since we have invested more in acquiring this customer than the total revenue we have gained. However, the longer the customer stays with the service, the more revenue we make.
HaaS - A Completely New Retention Game
Once we understand that maximizing customers’ LTV is a top priority for service providers, it’s easier to see that a new playbook is required – one that is focused on customer retention rather than just on customer acquisition.
While acquiring new customers is definitely important, what really defines success is our ability to keep them with the service and extend their LTV (and even better, create and capitalize on upsell opportunities).
To conclude, while there are many growth opportunities for hardware manufacturers today, none offers more potential than HaaS. Successfully capturing this opportunity requires a different perspective on business, as well as the right set of tools to support it. Start by defining the business case for your company’s needs, and adjust it as you progress.