Hardware-as-a-service (HaaS) is the future of hardware sales. HaaS models are growing in prevalence and popularity for good reason. HaaS creates recurring revenue, stickier relationships with customers, and the opportunity to sell to a new customer base. Manufacturers frequently ask about what makes a hardware-as-a-service model, as well as what the pieces are that define a HaaS solution. But what is the sales structure that defines HaaS?
HaaS is actually broader than most people think—an OEM doesn’t need a full-blown pay-by-the-hour implementation to be on the path to HaaS. Several different business models fall clearly on this path.
The first thing to consider is the decision around which sales model to use, sometimes called the “capex vs opex” tradeoff—this is how the entire offering will be sold. For each model, there are 2 key questions to consider. First, who retains ownership of the asset? Second, are there any recurring fees?
There are 3 general sales models used in the equipment industry:
The next thing to consider is the decision around which billing model to use, sometimes called the pricing structure. This decision focuses on how individual pieces of the offering will be charged for. Figuring out how to select the right price for your solution is another topic altogether.
There are 3 general billing models used to structure HaaS contracts. All 3 of these models only apply to hybrid recurring and to full subscription sales models.
The hardware industry today is on a similar trajectory to the journey that the software industry took with software-as-a-service (SaaS). HaaS is increasing in popularity, with movement towards subscriptions and away from the legacy sales model. But hardware sellers are still learning how to sell a HaaS deal, and buyers are still adjusting to how and why to buy HaaS. In many cases, sellers are fumbling the pitch and buyers are protesting the recurring model! This transition parallels the growing pains of the SaaS transition, as well as the early days of the first HaaS product lines in IT managed services.
Most of the hardware market currently operates a legacy equipment sales model. Companies are motivated to move to full subscription due to the economic benefits, customer value creation, product stickiness, and opportunity for improved equity multiples. But the jump from a legacy model to a full subscription model is a big one, so most manufacturers start with a hybrid recurring model. This is easier for a manufacturer to stomach because of the upfront revenue and cash associated with a hardware sale. Once that hybrid recurring model gains traction, it becomes more straightforward for the manufacturer to transition their business to a full subscription model.
For companies launching a new business, or even a new product line, starting with a subscription-only business model can be beneficial. This avoids establishing a baseline of capex sales in the market, which can be hard to overcome later. This is especially true for companies that sell to very large enterprises, which have the balance sheet to support large capex and also have slow-moving procurement teams that are unfamiliar with or resistant to HaaS.
The move from legacy sales to hybrid recurring is often executed with home-grown data solutions and a flurry of spreadsheets and time spent on overhead. This is always frustrating but often achievable for manufacturers. On the other hand, the move to full subscription is more challenging and is not usually attempted without software support.
A majority of hardware manufacturers that adopt HaaS initially opt for fixed-fee billing, usually because it is the easiest model to understand and the easiest to execute. It is also the most straightforward to articulate to customers and the most "familiar" for skeptical buyers.
Scale-based billing is less common, as it requires periodic scoping and assessment. This type of measurement and audit creates an additional overhead and an additional risk for the vendor. Companies that utilize a scale-based billing model must be more dialed in to their customers's needs and activities. However, scale-based billing offers the opportunity to improve margin if optimized correctly, paired with a stronger connection to high-value customers. So it is becoming more common in well-run organizations that can manage the consultative sales aspect.
Usage-based billing is least common today, although it is one of the most popular topics of discussion amongst forward-thinking hardware manufacturers! It is significantly less common because of the complexity involved in executing these models. Pay-per-use requires near-real-time data feeds synced from IoT systems on a regular basis, shared between systems, and summarized for both internal and customer-facing reports. Most providers do not have the appropriate billing or reporting systems to handle these integrated models. Depending on the pricing structure, accounting complexity goes up dramatically as well.
As more and more hardware businesses seek to make the move to HaaS, they require better software to manage the complexity. Even utilizing fixed-fee billing can create significant overhead based on equipment leasing rules. Moving from fixed-fee to scale-based billing is possible with manual systems, although those introduce new risks for mis-billing, revenue recognition, and reporting accuracy. The move to usage-based requires even more overhead.
These challenges are what Hardfin does best. The Hardfin platform is purpose-built to streamline financial operations for modern hardware manufacturers. A common hardware intelligence (CHI) layer ensures consistent process and creates a single pane of glass to view the business across teams: sales, manufacturing, finance, and operations. Companies looking to make the move to HaaS should ensure they have the right operational planning in place and appropriate software support to ensure success.
| As HaaS business models evolve, technology is evolving to support it. That’s where Hardfin comes in: manage, operate, and report on your hardware, regardless of the complexity of your business model. Want to know more? | ||
1. Note: the most successful HaaS companies have launched right out of the gate — either as a company or a new product line — with a subscription-only business model. This avoids establishing a capex baseline in the market, which can be hard to overcome later, especially with very big buyers. However, for existing providers this can be much more difficult to do. Hence why it often makes sense to transition from “legacy” to a “hybrid” model first, and only then to transition to “subscription.”