What are the benefits of Equipment-as-a-Service models and how can suppliers develop a winning proposition? We have identified seven key decisions that suppliers need to make so they achieve long-term, sustainable growth.
As economic conditions remain fragile, businesses must prepare to navigate market volatility. Many companies operate in markets with high exposure to a period of downturn. Those that can adapt quickly to new market conditions will be the winners.
This era of economic volatility is different to those before it. The Internet of Things (IoT), cloud computing, and advanced data analytics have taken hold in the industrials sector, accelerating our ability to adapt; Industry 4.0.
Businesses can now measure more datapoints than ever before. As a result, the relationship with customers is less transactional and more ongoing. Importantly, this new data can be used to determine the value provided to customers on a more granular level than ever before.
Revenue models too must shift from the transactional models of Industry 3.0 toward alternative, recurring revenue models. Under an Equipment-as-a-Service (EaaS) model, equipment is “subscribed to” or paid for on a regular recurring basis linked to ongoing performance, supported by continuous support and upgrades from the supplier to customers.
What are the benefits of Equipment-as-a-Service models?
- Ensures steady income through recurring revenue, leading to more predictable cash flow
- Increases customer touchpoints to increase the account value over its lifetime
- Increases the prospect pool as the initial financial barrier to purchase is reduced
- Shifts the budget from CAPEX to OPEX, which can simplify the sales/procurement process
- Predictive maintenance reduces reactive demand for 3rd party service technicians, and provides OEM’s a tighter control on service revenue stream
- Aligns costs to the value received from the equipment
- Enables smoother payments over time to manage cash flow
- De-risks the purchase as suppliers are incentivized to maintain performance over time
- Provides flexibility if need or usage changes over time
- Reduces downtime as equipment is serviced, repaired, or replaced as part of the agreement
Equipment-as-a-Service models case studies:
Earthmoving equipment: Customers access equipment needed to do a given job, instead of purchasing individual excavators, loaders, dozers, etc. outright. In this case, the service model reduced downtime by 30% via a swap-out agreement. Rather than paying for maintenance and suffering reduced productivity, suppliers continue to realize and pay for the equipment's value.
Marine equipment: Advances in shipboard sensors have enabled predictive maintenance of marine equipment. Often vessels are taken significant distances off course to undertake routine, in-person inspections. EaaS models enable maintenance at a suitable time and location for the vessel’s operator. Further to reducing unpaid downtime, this customer estimated that the model delivered up to 40 percent saving on fuel costs.
How to develop an Equipment-as-a-Service proposition?
A lot can be learned from the software industry’s SaaS (Software as a Service) model when defining packaging and pricing for your Equipment-as-a-Service (EaaS) model. Packages and prices should be designed using a customer-centric approach and tailored to customer lifetime value (not cost). Based on our extensive experience with SaaS and EaaS models, we have identified seven key decisions that suppliers need to make:
- Growth strategy: Will this be the foundation of your offer to market, or an alternative in certain competitive environments? Whatever the endgame, for incumbents our advice is to test and learn on a subset of the business and market before taking to scale.
- Price model: EaaS offerings can be priced on a fixed, recurring subscription through to more variable, outcome-based models. The latter is more tied to performance (i.e., value) and the burden of risk and benefit is shared. Hybrid models are also possible.
- Price metric: Should reflect how a customer realizes value, particularly important in performance-driven models. For example, rather than pricing a piece of earthmoving equipment, a price per ton dug or per hour of operation might better align to value delivered. Ability to accurately measure the data and agreeing to this as a basis for performance measurement is key.
- Price level: With a risk-sharing model, there should be some upside (and potential downside) compared to a traditional model. Ideally, any incremental innovation or benefit over the traditional model is automatically realized. That means on a like-for-like performance basis, the difference in revenue is nominal. If customers will extract higher performance due to e.g., predictive maintenance or spare part upgrades, then they should pay more than they do today.
- Product portfolio: More differentiated portfolios provide access to a greater range of customer segments and enable innovations to be monetized more consistently. Packages include, or scale access to, certain hard and soft benefits that customers self-select to determine a solution that meets their needs. New features can be introduced to premium packages or sold standalone to ensure that innovations continue to be monetized.
- Marketing: Communication and the value proposition for the new service will need to be adapted to reflect the new go-to-market strategy. Considerations should be given to whether the EaaS model should operate within the existing business or as a standalone brand.
- Sales: Selling a service is different to selling a piece of equipment. This requires different skills, incentives, and potentially a different sales structure. Budget sign-off to billing will be different, so the sales model needs to align to the new revenue model.
As companies increasingly rely on digital infrastructure, the demand for reliable and secure data storage has skyrocketed. One option for businesses is to use a colocation data center, where they can rent space and share resources with other companies. This approach can provide cost savings and flexibility compared to building and maintaining their own data centers. However, colocation data centers also require careful planning and management to ensure that the equipment and services meet the needs of all tenants.
Transitioning to Equipment-as-a-Service (EaaS) is not suitable for every company or situation e.g., those with highly customized solutions. However, in times of market volatility, transitioning to alternative revenue models can help unlock value from customers that may be delaying purchases or looking at cheaper alternatives. Equipment-as-a-Service (EaaS) models require a true partnership between supplier and customer. The joint effort to deliver and realize recurring value can deliver long-term, sustainable growth for both parties.