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by Zachary Kimball on May 23, 2023
As hardware-as-a-service (HaaS) business models see success across a range of industries, equipment manufacturers are catching on to the opportunity that HaaS represents. Finance, sales, and operations leaders are asking themselves whether the model supports their equipment and their customers’ use cases. As a hardware manufacturer, why offer HaaS? What are the pros and cons of moving to—or including—a subscription model in a hardware offering? And how can a business determine whether its product can or should evolve to adopt the model?
When should a manufacturer offer its hardware as a subscription?
HaaS is the right business model under a handful of conditions:
- When a manufacturer produces a high-value asset with justifiable ongoing value to the customer (e.g., complex hardware with ongoing value delivery from a software layer)
- When it does not make financial sense for the buyer to own hardware outright (e.g., when upfront costs would be too high, or the equipment would sit dormant for long stretches of time)
- When the primary value proposition is connected as much or more to the ongoing service as to the hardware (e.g., buyer continuously engages manufacturer because buyer doesn't have knowledge, training, or components to maintain proprietary hardware)
- When the hardware can be monitored, managed, or enabled remotely (e.g., upgrades and updates can be deployed over the air, with usage and performance data shared from the equipment back to the manufacturer)
Equipment manufacturers interested in offering HaaS must be prepared to offer a unified solution with a range of services—installation, training, monitoring, and maintaining the equipment, for example. This range is inevitably comprised of the eight categories that can make up a HaaS solution.
In every case, bundling proprietary software with proprietary hardware—which then requires proprietary service—is what makes a complete offering: in HaaS, software and hardware go hand-in-hand. No buyer has the in-house expertise to maintain complex proprietary equipment on their own, whether it’s an autonomous security robot or a jet engine. So the HaaS model delivers technical expertise as a critical part of an end-to-end solution, with hardware at the core.
The advantages of HaaS for equipment manufacturers and vendors
If the conditions are right for a manufacturer or integrator to consider a hardware-as-a-service model, there are three major benefits to weigh:
Increased customer loyalty
Offering an entire end-to-end service rather than equipment alone increases stickiness because customers rely on service providers for everything from maintenance to consumables. Because they’ll always have the most up-to-date, optimized version of the manufacturer’s hardware, customers are more content with their equipment and its productivity. And given the nature of usage-based billing models that drive some HaaS programs (buyers pay for what they consume, whether that’s time-based, utilization-based, or output-based), billing for such customers are aligned to value creation.
Recurring, predictable revenue
Consistent revenue is built into the HaaS model, giving providers more predictable income than they’d have under a traditional capex model—not to mention better visibility into revenue and supply-and-demand predictions. Customers’ smaller up-front investment tends to mean a faster budget-approval process, so new customers onboard more quickly, and sign up for more adjacent services. This is also a win for revenue and attach rate—and often margins as well.
Higher profitability over time
Service providers ultimately benefit from HaaS by capturing more of the total value that equipment creates. HaaS models do increase the time it takes for a manufacturer to recover the costs of building a piece of equipment, but they recover more dollars—and make more profit—over the lifetime of the machine than they would if they sold that machine outright.
The disadvantages of HaaS for equipment manufacturers and vendors
Naturally, there are also some downsides to the HaaS model. Knowing the added risks will help equipment manufacturers make the most informed decision about whether to evolve a subscription model for their hardware.
Funding BOM costs
The biggest disadvantage of the HaaS model for manufacturers and service providers is that they don’t cover the cost of the asset up front. Providers have to float those costs of the hardware for the entire payback period—months or sometimes years—before they’re paid back in full and start to see a net return on investment. It can also be complicated to account for these costs so the math surrounding payback periods is often unintuitive, incomplete, or incorrect.
Sales friction
HaaS is also a newer business model on the market, so it can sometimes require more explaining, and more proof points, to make potential buyers comfortable. These barriers are falling fast. Some industries—like robotics and additive manufacturing—are already comfortable with RaaS or 3DaaS models. Others, such as IT equipment, have been more familiar with device-as-a-service (DaaS) models. But in every industry there are still holdouts, and many legacy industries are slower to adopt or are resistant to the pitch for machine-as-a-service (MaaS) models.
What equipment manufacturers need to consider about the HaaS model
So what’s an equipment business to decide? How to best monetize hardware to see returns? There’s no “right” answer, given different assets and different verticals have different customer assumptions, expectations, and pressures. But there are three things worth doing:
Consider the hardware itself
Is the hardware a high-value asset with high-stakes outcomes? Does it make economic sense for the buyer not to own the hardware outright? A HaaS model will cease to make sense when the combined cost of the hardware and its accompanying services becomes so high that it’s better for the buyer to purchase—or otherwise produce—their own solution.
Consider the entire end-to-end solution
Is the solution built around real customer needs, and does it solve for real customer pain points? In a HaaS model, customers pay as much or more for the ongoing service as they do for the hardware. Manufacturers considering a transition to HaaS need to realistically assess how much value those services provide give the ongoing costs, and how much it will be worth to customers.
Consider the company’s resources
Does the business have resources to finance both the hardware and the proprietary software that enables an ongoing managed solution? If leadership is not prepared to stomach the wait—perhaps for a long time—to see a solid return on investment, then the financial model will not be successful.
Continued successes of the hardware-as-a-service model
Perhaps the earliest example of HaaS was Rolls-Royce’s 1962 pioneering “power by the hour” model, in which the exhaustive jet engine maintenance and replacement services were offered at a fixed cost per flight hour. The model meant that both Rolls-Royce and the jet operator only profited when the engines performed well—which led to optimal risk-sharing and interest-alignment.
HaaS models incentivize manufacturers to design, build, maintain, and consistently improve high-quality hardware in a way that the traditional one-off sales model does not. Which means HaaS providers are ultimately going to have better solutions than competing vendors who adhere to the capex model. Hardware such as 3D printers, forklifts, tractors, commercial robots, and sensors have all borne out advantageous HaaS models. As a Senior Partner at McKinsey & Company asserts: “If you have high-value assets with defensible value to the customer, you should be figuring out how to further monetize that hardware with services.”
In recent years, the growing HaaS model has highlighted more such successes. Take Knightscope, a leading developer of fully-autonomous security robots that the company leases at a flat hourly rate. Its flexible subscriptions include setup, configuration and training, 24/7 support, parts and repairs, unlimited software upgrades, and more. Similarly, Bear Flag Robotics, which operates autonomous agricultural tractors, retrofits existing tractors with patented AI technology then leases them out at a straightforward price per acre. The company's success led to its acquisition by John Deere for in 2021 for $250 million.
Despite these successes, shifting from a traditional capex to a full-scale opex model can be an arduous undertaking. Moving to a hybrid HaaS sales model is one way equipment manufacturers can start the transition to a full subscription program. A hybrid model allows a manufacturer to start small, run HaaS alongside the existing business, and create additional value over time through added software and services. Eventually, as the model proves out and program metrics such as payback become clear, the business can move toward a full subscription-based sales model.
