Hardware-as-a-Service Business Model

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.

How Hardware-as-a-Service Can Benefit Customers:

Jump over the hurdle of upfront costs

Consumers do not need to finance or save to buy a car (Zipcar) or security system (Vinit); 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 costs as an operating expense.

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 Aligned to Actual Needs, Rather than Bells and 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 that they never use.

How Hardware-as-a-Service Can Benefit the Company Running the Business Model:

Higher Lifetime Value

Traditional hardware businesses have a “one and done” model.  You go to Target or Best Buy, purchase your home security device, and pay for it once. The lifetime value often ends there – with the purchase of the device, with no further recurring revenue.

When it works well, the hardware-as-a-service model results in better total lifetime value and predictable streams of revenue for the company. Pricing is based on value to the customer, rather than the latest features. Customers are “locked-in” to longer term services contracts.

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.

Remote Monitoring:

This model works best when 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.

Customer Friction in the Hardware-as-a-Service Model:

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.

Company Challenges in Managing a Hardware-as-a-Service Model:

Adopting a Software and 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 the flows through a connected system of things (aka the Internet of Things).

Balance Sheet and Cash Flow Burden

Many a startup hardware-as-a-service firm 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.

The business model mechanisms to test:

Mechanism to test Metrics to measure
Does the customer perceive the cost of services to be of higher value than the cost to own? Conversion rate or price comparison testing
Do we have greater lifetime value as the result of an ongoing continuous relationship? Life time value, average revenue per user, churn rates
Do our unit economics support growth? For every sale that we make, can we support cash flow as hardware stays on our balance sheet? Life time value to cost of customer acquisition ratio supports growth (CAC < LTV)

Emerging Trends:

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.

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.

 

Deeper Dives on the Hardware-as-a-Service Business Model

How Hardware as a Service Will Save IOT, by Ajay Kulkami, Techcrunch, 2016

Hardware-as-a-Service by Manu Kumar, K9 Ventures, 2016

Hardware-as-a-Service by Yuval Shavit,, Search IT Channel, 2007

Why Amazon’s HaaS (Hardware as a Service) Strategy is a Winner,  by Emre Sokullu, ReadWriteWeb, 2008

IT Doesn’t Matter, by Nicholas Car, HBR, 2003. 

What do you think about the Hardware-as-a-Service model? Do you work in a company that has tried this approach? Do you have other resources or company suggestions we should source? Share your comments or suggest another business model to add to our library. 

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