Product-as-a-Service
Product-as-a-Service mimics the popular Software-as-a-Service model, giving access to a physical product on a recurring basis.
Business Models in Use
- Amazon
- Vivint
- Hitachi Trains
- Hilti
- Caterpillar
- Citibike
- GE Healthcare
- Nike Adventure Club
- Philips
- Quip
- Siemens
- Vigga
What Product-as-a-Service is not
Product-as-a-service is not SaaS. There are things, machines, devices, or sensors in the business model, so the core KPIs and assumptions are different particularly when tracking growth and key inflection point, and momentum metrics to decide investment stages.
Product companies take on added operational and supply chain complexity risk.
Device-as-a-service, hardware-as-a-service
Hardware, device, and product-as-a-service concepts are used interchangeably to describe the same model, based on how your industry describes itself. We define product-as-a-service having the widest net including not just tech-enabled hardware, but also recurring service models for non-connected products like replacement baby clothes, sneakers, and toothbrush heads.
Product-as-a-Service Evaluator
Valuable to Customer
Benefits
- Convenience greater than owning and buying, saves time
- Ideal when customer revenue is tied to usage (e.g. security systems monitoring)
- Get the latest upgrades based on your needs (Nike's kids shoe service model as child grows)
Challenges
- Lock-in
- May prefer to own and capitalize hardware on 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
- Total cost of ownership vs. alternative
- Investment aligned to business outcomes
Valuable to Business Offering Product-as-a-Service
Benefits
- High margins for business over time with profits built into recurring revenue and usage (as-a-service)
- Accelerates customer migration to cloud
- Stronger moat and lock-in with hardware, which is more difficult for SaaS new entrants to displace
Challenges
- Not as simple as offering a product with as-a-service billing; often requires complete reconfiguration of the value proposition on the service experience
- Difficult unit economics at scale, requires rigorous focus on contribution margin
- Often requires the company to keep and capitalize hardware on their balance sheet, or partner with a financing company
Key Performance Indicators
- Contribution margin
- Retention
- 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); 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.
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.
Challenges to the Product-as-a-Service Model
Works in a Hurricane
Many product-as-a-service 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 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 product-as-a-service firms 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.
Trends in the Product-as-a-Service Model
Financing Product-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.
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.
Key Product-as-a-Service Mechanisms to Test
Make sure you focus all experiment design on testing the as-a-service element, ensuring the customers value the long term deliver 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.
Before You Consider Product-as-a-Service
- Is the main value proposition connected to the ongoing service experience (using the tractor, monitoring security)?
- What are the current competitive dynamics. Can the company benefit from supply economies of scale?
- Is there true competitive advantage to your hardware; can it be replaced by a SaaS offering?
Testing the Model
- 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?
More on Product-as-a-Service
Creating A Successful Pricing Strategy As An IoT Business, Nathan Shin, Forbes, 2020.
4 Lessons Learned Investing in B2B Hardware-as-a-Service Startups. by Rodrigo Martinez, Medium, 2018.
From Product to Product-as-a-Service, A new business model shaping the future of industries, by Colette Aubertin, Medium, 2018.
What is Product-as-a-Service, Firmhouse.
How Hardware as a Service Will Save IOT, by Ajay Kulkami, Techcrunch, 2016
Hardware-as-a-Service by Manu Kumar, K9 Ventures, 2016
Software is Eating Hardware – Lessons for Building Magical Devices, First Round Capital
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 Carr, HBR, 2003.
