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Over the past 10-15 years, tech companies have leveraged the power of the cloud to introduce the Software as a Service business model. Rather than selling long-term licenses to products that then need to be deployed within the customer’s infrastructure, customers can stream the software online, so they only pay for what they use, when they use it. Instead of a major purchase decision involving a large team and months of evaluation, the customer can distribute the decision down to the team level to determine if another license is beneficial, increasing and decreasing usage (and corresponding costs) to business fluctuations. The advantage to the seller is a more predictable revenue stream based on recurring subscription costs. The advantage to the buyer is a cost structure more aligned with their actual usage of the products. Thanks to the development of new smart connected products, the market for equipment and equipment services is going through a similar paradigm shift.
Equipment as a Service (EaaS) combines hardware and software into a single equipment plus services package that centers around charging customers based on their usage of a product, rather than selling the product itself. This business model significantly lowers the total cost of ownership and offers elastic equipment costs that can be tuned in line with demand. More importantly, it eliminates the risk to the customer of overbuying equipment, since they are paying for outcomes rather than infrastructure.
EaaS helps equipment manufacturers to move their reliance away from shrinking hardware margins to highly profitable after-sale services and parts. According to the Technology and Services Industry Association1, service margins were higher than product margins for the first time in its index’s history in the second quarter of 2022. It has seen digital transformation commoditize products and act as an enabler for valuable service offerings.
The gap in the market was spotted by Rolls-Royce back in 1997 when it let airlines pay for their engines based on flying hours as opposed to buying them outright. Its TotalCare Program flipped the transactional-based approach on its head. The multinational now signs around 90% of its new engines through its TotalCare program. It has helped the company build long-term, solid relationships with its customers and better align the engine manufacturer’s goals with those of the airlines.2
EaaS business models demand accurate measurement of equipment usage and/or performance. The emergence of IoT and data analytics has made this possible at a granular level. This is important, because part of offering EaaS means the equipment provider is taking ownership of successful operation of the asset at the customer site. According to IoT Analytics, it is little surprise that the EaaS market is predicted to be worth $131 billion by 2025.3
EaaS is fast becoming a strategic business imperative
EaaS is now seen as the last step on the IoT maturity curve for equipment manufacturers as it requires a significant shift away from the traditional sales of capital-intensive equipment. With margins on new equipment sliding, many equipment manufacturers have already started on their EaaS journey to enable a reliable source of income and future-proof their businesses.
At the same time, equipment manufacturers are under growing pressure to provide their customers with more flexible models. In a recent survey4, 67% of equipment suppliers said they are evaluating, planning on, or currently offering EaaS. This trend has been exacerbated by the availability of IoT, 5G, cloud, and big data analytics that are making EaaS models widely available.
Equipment manufacturers have much to gain from EaaS
Equipment manufacturers have much to gain from the EaaS model. As well as increased revenue streams, data collected from IoT devices can be analyzed to improve overall equipment design. This enables data-driven improvements in terms of features and performance.
As well as reducing the cost of entry points for customers and driving innovation, EaaS enables manufacturers to stay connected with customers, inspiring customer loyalty, generating greater value by expanding profitable after-sales services, providing benchmark data to manufacturers to increase machine reliability and productivity, and lower operating costs.
In addition, it can help equipment manufacturers to move idle inventory. For example, machines that have never been sold can be deployed with EaaS on lease agreements.
Kickstarting an EaaS initiative
Any EaaS program that will be successful at scale must be carefully thought out. Failures happen because companies overestimate their maturity levels, fail to prepare technicians for their new responsibilities, and expect customers to have the same regard for machines they have purchased outright compared to EaaS solutions, according to Deloitte.5
In addition, EaaS comes with its inherent challenges; pricing EaaS contracts can be complex. Real-time device management and trusted metrics need to be created for areas such as accurate and automated billing. EaaS suppliers also need to take on risks that the customer formerly absorbed, such as environmental factors like humidity and dust levels.
To scale up an EaaS program, Deloitte recommends that companies evaluate four core areas. Firstly, look at which specific services should be part of the EaaS program and how they will be provided, what type of leasing and finance model should be adopted, how will IoT scenarios such as predictive maintenance be integrated into machines, and lastly what type of billing system works best for customers.
Differentiating with EaaS
A pay-as-you-use model can reduce EaaS customers’ up-front cost, and it can also make a great differentiator. With greater insight and control over equipment, it is easier to enhance uptime and innovate new services.
WAINS GmbH is in the business of digital pest control and leverages smart technology to address a niche gap in the market. In the past, pest control was primarily handled in a traditional way in logistics, gastronomy, food and pharmaceutical businesses, meaning that traps were set and checked at regular intervals. This could be very costly and time-consuming—with staff being especially scarce in this industry.
The company uses Cumulocity IoT for its products, traptice® insect and traptice rodent, to monitor insect and rodent infestations and implement countermeasures quickly. WAINS offers traptice in a leasing model at attractive prices. Beginners can try out the devices and subscribe to flexible options including an all-inclusive package. Pest controllers can use the time saved by traptice to proactively improve their customer relationships and develop preventative measures or invest in recruiting personnel. WAINS customers can deploy as few or as many traps as they need to monitor their facility.
EaaS is changing the way businesses operate
EaaS is moving from a nice-to-have to a business imperative for equipment manufacturers—changing the way they operate, opening new revenue streams, providing opportunities to improve customer service, and innovating to differentiate.
While EaaS may not work for every asset category, it has incredible potential for equipment manufacturers looking to carve out their share of the digital economy. If you haven’t begun the process of putting EaaS plans in place, now is the time. EaaS transformations are already underway, and the competition will beat you to the finish line.
