Hardware-as-a-Service
Hardware-as-a-Service mimics the popular Software-as-a-Service model, giving access to hardware along with accompanying software, maintenance, installation, and upgrades.
The core assumption is that customers pay for the value provided by the service, rather than the underlying hardware, or thing.
Device-as-a-Service, Hardware-as-a-Service
Both names are used interchangeably to describe the same model, based on how your industry describes itself. Based on our web stats, hardware-as-a-service outperforms device-as-a-service 20-1 in terms of interest. The same principles apply.
HaaS vs. SaaS and Pure Hardware
HaaS is not SaaS. There are things, machines, devices, or sensors in the business model, so the core KPIs or Key Performance Indicators and assumptions are different, particularly when tracking growth and key inflection points and momentum metrics to decide investment stages. Hardware companies take on added operational complexity risk.
Operating a HaaS business is also substantially different from a hardware-only business, also with different core KPIs and investment expectations for payback. What keeps a hardware business executive up at night is a different set of metrics than what causes anxiety for an operator of a growing HaaS offering.
The muscle memory of hardware investors, executives, and their financial analysts are often not prepared to model and operate a hardware-as-a-service model, and the same is often true of SaaS purist investors and execs.
Example Firms and Links to Cases
Amazon | Axon | Big Belly | Hitachi Trains | British Gas | Hilti | HP | Caterpillar | Citibike | Fenix International | GE Healthcare | Henry Schein | Microsoft Surface | M-PESA | Philips | Sigtuple | Vivint | Zipcar | Siemens
Is a Hardware-as-a-Service model the right fit for your customers and your company?
CUSTOMER PERSPECTIVE
Benefits
- Lower upfront cost to get service, shifting from Capex to Opex
- Ideal when customer revenue is tied to usage (e.g. security systems monitoring)
- Prepares for a shift to outcomes-based business models
Challenges
- Frustration with hardware lock-in, difficult to change
- May prefer to own and capitalize hardware on the balance sheet rather than have it be owned by the seller (carpets, hospital equipment)
- Inability to fix and repair without permission from hardware owner (Caterpillar tractors)
Key Performance Indicators
- The total cost of ownership vs. alternative
- Investment aligned to business outcomes
COMPANY PERSPECTIVE
Benefits
- High margins for business over time with profits built into recurring revenue and usage (as-a-service)
- Accelerates customer migration to the cloud
- Stronger moat and lock-in with hardware, which is more difficult for SaaS new entrants to displace
Challenges
- Often requires a complete reconfiguration of the value proposition of the service experience
- Difficult unit economics at scale requires rigorous focus on contribution margin
- Complex financing and capitalization considerations
Key Performance Indicators
- Contribution margin
- Retention
- Lifetime value
- Net Promoter Score
When it Works Well
Jump over the hurdle of upfront costs
Consumers do not need to finance or save to buy a car (Zipcar) or security system (Vinit) or pay for backyard solar (M-Pesa); they buy what they need and they pay a subscription and/or usage fee when they use the service.
For business customers, it may make more economic sense to not own an asset. Businesses can take assets off of their balance sheet and manage these costs as operating expenses.
Higher lifetime value
Traditional hardware businesses have a “one and done” model. As a mere consumer, you go to Target or Best Buy, purchase your home security device, and pay for it once. As a company, you procure hardware, often focused on a cost/performance analysis. For the seller of that device, the lifetime value often ends there: with the purchase of the device, with no further recurring revenue.
hte hardware-as-a-service model results in better total lifetime value and predictable streams of revenue for the company because the customer continues to pay. Pricing is based on value to the customer, rather than the latest features. Customers are “locked-in” to longer-term services contracts. If the as-a-service value outweighs the benefits of ownership, customers may be willing to pay substantially more over the cost of the original hardware or device.
Resolves deeper jobs-to-be-done
When exploring the possibility space of a new hardware-as-a-service, business designers often discover deep unmet needs that were never resolved and were sometimes created by the standard ownership model of hardware.
New jobs-to-be-done can be uncovered and designed into the as-a-service elements, like training, transparency, remote monitoring, or achieving key sustainability targets. See the Philips case as an example of radically improving customer satisfaction after a HaaS business model transformation)
Deeper customer understanding
In a traditional hardware sale, all customer focus is front-loaded in the marketing and selling process. Once the product ships, there is little connection to the customer. In hardware-as-a-service, the company manages multiple customer interactions over time. Ideally, the company creates listening feedback loops to continuously improve service offerings.
Avoid tech FOMO
As hardware and components become obsolete at a more accelerated rate, and new technologies arrive at a faster pace, customers are often left with a sense of technical FOMO (fear of missing out). By providing these assets as a service, it’s up to the company to upgrade, update, and replace hardware rather than the customer.
Value to need / bells & whistles
For customers, hardware-as-a-service solutions must be built around real customer needs, and more closely aligned to solve customer problems. Customers get out of the trap of over-purchasing a solution with features, bells, and whistles they never use.
Challenges to Hardware-as-a-Service
Works in a hurricane
Many hardware-as-a-services startups do not pass the power outage or hurricane test. If the hardware provides a service essential to basic living, like a digitally-enabled house lock, customers will likely opt for the status quo.
Greater total lifetime cost
Both consumers and business customers can benefit from owning and maintaining hardware beyond its planned life. If the customer can afford the cash burden to purchase hardware upfront, the option to use the hardware as a service may be less intriguing. The total cost of usage may be considerably increased in comparison to the cost of owning.
Adopting a services mindset
For a traditional hardware company, the shift to a service model is hard. New capacities in software and service deployment must be developed. The customer experience must be redesigned around service, rather than the product or thing. Companies must also learn how to build value through all of the data that flows through a connected system of things (a. k. a. the Internet of Things).
Balance sheet and cash flow burden
Many startup hardware-as-a-service designers realize too late in the planning stage that they will need to raise a substantial amount of capital to afford this model.
The core costs of physical goods – the “bill of materials” or factory costs – move to the balance sheet once a sale is made and stay there as a fixed asset. A fixed asset, simply speaking, is an acquisition that provides a long-term economic benefit to the business. These costs do not move through the income statement until the hardware is depreciated or decommissioned.
Right to repair conflict
Companies that have designed strong lock-in with little alternatives, like John Deere’s hardware-as-service offerings, prohibited tractor riders, and users from fixing the tractors they used. Many farmers and tech activists lobbied regulators to insist on right-to-repair laws have been passed in the EU and in states like Massachusetts. Instead, HaaS design can be an opportunity to design around the creative capacities of humans who use and depend on hardware for their livelihood, and the best HaaS models plan for capability building inside the firm, while also cultivating dignified work amongst their customers.
Remote shut-down uncertainty
If you’ve ever had your cellphone shut off for remote service after not paying your bill, you’ve experienced the “stick” of HaaS. Companies like M-Pesa financing and solar and Fenix International tractors help build credit ratings for customers historically excluded from credit markets. But when customers fail to pay, inability to access to critical solar charging and factory technology may disrupt the livelihood they’ve come to depend on.
Trends in Hardware-as-a-Service
Financing Hardware-as-a-Service
In the Managed Service Provider business model, clients often have a hard time paying for the cost of on-premises servers and equipment upfront. A newer trend is to provide financing and leasing structures for clients who don’t want to own hardware, but who want the full benefits that certain hardware provides.
Alternatives to Leasing
Not all HaaS is sold on a leasing basis. Some disruptive startups have capitalized hardware on their own balance sheet and simply own the hardware within the offering, granting access and use to their customers. This enables similarly disruptive pricing opportunities, as investors have been occasionally willing to subsidize adoption in the short term in order to benefit from long-term lifetime value.
Other HaaS companies are taking advance of new special-purpose financing (debt) vehicles from investors who seek a predictable stream of returns based on predictable customer retention behavior.
Commoditization of IT
The commoditization of information technology is an ongoing trend, as small and medium-sized businesses gain access to sophisticated technical equipment and infrastructure without having to build it themselves.
Remote monitoring
This model works best when the hardware can be managed and monitored from afar, and upgrades, updates, and patches can be deployed through internet protocols. Systems are automatically updated through network upgrades, making them compatible with software.
Linear to circular transitions
For companies, sectors, and countries migrating from linear to circular models of operating, HaaS is often an essential critical step to building value streams around service, use, repair, and refurbishment. Designing a HaaS model may also require partnership with complimentary service and financing providers.
Key HaaS Mechanisms to Test
Make sure you focus all experiment design on testing the as-a-service element, ensuring the customers value the long-term delivery of service (vs. hardware). What can be turned into software vs. what has to be hardware – these are critical choices at the start and create opportunities for disruptive pricing.
Hardware-as-a-Service KPIs
Hardware-as-a-Service shares the retention and recurring revenue benefits of SaaS but does not share the near-zero marginal costs to scale, so beware.
KPIs are based on the stage of growth in the business. Seed stage organizations are focused on discovering and solving pain points and reestablishing the promise/benefit connection. The alpha stage, or pre-scale stage, ensures that the design of the HaaS model actually achieved lead generation and high retention rates. How high? Run some cost of customer acquisition and lifetime value math to check. The key: you don’t want to spend into growth until you have a high retention rate, because you may have negative unit economics.
For help figuring out your HaaS KPIs, we’ve found that this needs to be customized to the company, the hardware, and the regional and cultural context. We specialize in HaaS KPIs so please do reach out for an early assessment.
Before You Consider Hardware-as-a-Service
- Is the main value proposition connected to the ongoing service experience (using the tractor, monitoring security)?
- Have we discovered the true cost of ownership and new jobs to be done we can now address in an as-a-service model?
- What are the current competitive and complementary partner dynamics? Can the company benefit from supply economies of scale?
- Is there a true competitive advantage to your hardware; can it be replaced by a SaaS offering?
Exploring Hardware-as-a-Service
- What is the total cost of ownership of comparable solutions?
- Arrange features, services, and benefits into key elements of your offer and have the potential customer arrange the elements of the larger solution in order of priority. Then take away the lesser priority elements until you determine what would make an MVP (minimum viable product).
- Determine the minimal offering that would be compelling enough to have the customer pay for the offering.
- Can you design an MVP that has high usage and engagement with a minimal feature set?
- Is there a user proposition that does not require sign-off from IT or a long buying cycle?