IoT Pay-Per-Use Models: The New Revenue Stream?
IoT is the Driving Force Behind the Product-as-a-Service Economy
The rise of the data-driven economy has led to the emergence of new business models defined as Product-as-a-service (PaaS), Equipment-as-a-service (EaaS), or servitization. Across various industry sectors, companies are transitioning from selling products to selling services.
Pay-per-use is one such servitization model that deserves the spotlight. Pay-per-use is the concept whereby a consumer pays for the mere usage of the product rather than buying the actual product itself. It represents a fully servitized model where product revenue is essentially done away with since the product is not being sold, and is instead replaced with usage-based or result-driven revenue since it’s the product’s capabilities that drive the revenue stream.
While the concept of aligning product price with its use is nothing new; technological advances in IoT have made tracking the usage of products easier and more accurate, making it a more viable option for a wider variety of industries. This model delivers multiple benefits for both enterprises and consumers.
Connecting products leads to greater insight into how customers use the product, allowing for product development and personalization.
Uncovers New Customer Segments
With lower capital costs, a pay-per-use model could expose businesses to new customer segments. This could potentially include customers who previously could not afford the high initial investment of buying a machine outright, or perhaps customers who would only require the use of a certain item on an irregular basis.
Improves Customer Relationships
The nature of the relationship changes to a more long-term service-centered approach as opposed to a one-time transactional process. The close proximity of the relationship between business and consumer heightens barriers to entry for competitors, making it more difficult for the competition to gain sufficient market share.
Enables Cost Savings and Higher Margins
Delivering services over the lifecycle of equipment can reap larger financial rewards for an original equipment manufacturer (OEM) rather than a one-off payment. According to a McKinsey report, when compared to new product sales margins of 10%, the aftermarket service margin averages 25%.
Like many of its competitors, BASF used to sell car paint at a price per gallon to OEMs and automotive dealerships. Quite naturally, workshops wanted to keep paint consumption at a minimum to reduce costs, which led to lower-quality paint jobs, reflecting poorly on the customer and, by extension, on BASF. The company decided to go from being a paint supplier for automotive OEMs to a solutions partner with its customers to improve the final product. As a result, BASF moved from price per gallon to price per painted car. With the new pricing model, BASF reduced paint consumption per car by 20% and saw a 20% higher margin, as well as a 40% increase in European market share.
Promotes Differentiation and Competitive Edge
Pay-per-use models offer differentiation in a commoditized market. Instead of competing purely on hardware features, business parameters for differentiation are expanded to include software, installation, maintenance, and support. Consumer insights gathered again allows for further product differentiation and customization.
Operational risk is transferred to the equipment manufacturer who then becomes responsible for maintenance as part of the service offering.
For the customer, billing becomes more affordable since there is no longer an upfront, large fixed cost but rather a flexible price adjusted to usage and spread over the usage period. Billing becomes more transparent as the customer knows exactly what services they are paying for.
Reduced Barriers to Entry
Companies that could previously not afford to invest upfront capital in purchasing an expensive item such as a factory machine can now afford to lease a product by paying for its services on an operational basis. Challenging economic times increases the consumer’s desire to avoid upfront payments.
With a product-based model, the customer buys ownership of the product and the supplier has little incentive to improve and update the product. With a connected pay-per-use approach, the supplier is incentivized to ensure that the asset is technologically up to date and optimally maintained in order to maximize the lifecycle of the product and ensure continued revenue from customer usage.
Implementing such a model requires a business transformation that impacts the whole organization and certain processes. In order to successfully transition to a pay-per-use model, a clear strategy needs to be in place to address specified business challenges.
Cash Flow Considerations
Enterprises need to consider the cash flow impact of moving from a product to an “as-a-service” model. In the traditional business model, larger payments are received upfront. Moving from this to smaller payments over a period of time can present cash flow issues that need to be managed. However, in the long term, it can deliver a more consistent revenue stream.
Understanding the New Customer Base
One of the biggest advantages of the product-as-a-service model is that the barrier to entry for customers is reduced. This means that companies who could previously not afford large upfront investments can now participate in the market with access to an entirely new customer base.
Before transitioning, the business needs to understand exactly who the new customer segments are and how they will adapt processes and strategies to target these segments.
PaaS Product Development
From the very beginning, products need to collect and send relevant data to measure agreed-upon outcomes to detect any equipment issue or failure. Connecting products leads to greater insights on how customers use the product, allowing for product development and enhancements based on these insights. In order to act on these insights and provide value to the consumer, R&D functions will need to be sufficiently equipped to handle continuous product evolution at optimal speed and scale.
Sales and Marketing
Sales and marketing will be transformed by access to real-time insights into customer behaviors and product performance.
Sales teams will require a shift in their activities since they are no longer just selling a product, but also the services such as installation, maintenance, repair, and customer support service that come along with it. Marketing teams will benefit from access to real-time insights into customer behaviors and product performance that will guide strategic and promotional activities. The messaging approach will have to be redefined since the unique selling point (USP) is no longer solely product-focused.
The integration of the right technology to track and report accurate data and correctly bill consumers is crucial in order to ensure a working model. This may involve multiple aspects such as sensors, an IoT platform, and integrated billing and reporting systems. The security aspect relating to all of this new, captured data should be a key consideration when selecting which technology is best suited for implementation.
Industry Use Cases
Manufacturing and Industrial
A pay-per-use business model is particularly well suited to large and expensive assets with long life cycles such as those found within the industrial sector. More and more manufacturing companies are utilizing this model for their equipment and machines. IoT Analytics predicts the growth of 54% in the industrial machinery sector will come from increased adoption of EaaS business models especially in areas like machine tools and compressors.
With an aging population and a decreasing number of qualified healthcare professionals, the healthcare industry is urged to rethink its business model to reduce costs and optimize resources. Medical equipment such as MRI machines can be extremely expensive to purchase; migrating to a pay-per-use model allows capital to be allocated where it will be most impactful to patients – instead of tying up funds in depreciating assets.
Farmers already have many things to consider beyond crop yields such as regulatory compliance, environmental concerns, and quality issues. Having to deal with machine maintenance concerns further distracts them from their core business focus. This is why servitization within agriculture has huge potential as it provides access to state of the art equipment as and when needed based on changing seasonal needs. This is incredibly beneficial to the farmer as it shifts the maintenance responsibilities to the supplier.
Energy and Utilities
Although pay-per-use is not a new concept within the utility sector, environmental changes are highlighting the need for sophisticated technology which will allow for better usage monitoring and more efficient use of resources. High-cost equipment such as solar panels can also be alleviated through a pay-per-use model, making energy efficiency available to customers who may otherwise not have had the necessary capital before.
Automotive & Transport
If we think about the cost of buying and maintaining ownership of cars, for occasional drivers or those that have low-mileage usage, this cost commitment may not be worthwhile. It’s easy to see how a pay-per-use model could be beneficial in this case. We have seen this model adopted for the usage of cars, bicycles, and even more recently, scooters. As fleets grow, keeping track of maintenance needs, performance, and operations via IoT connectivity will play a key role in successful pay-per-use applications.
Pay-Per-Use: A New Service Economy
The proliferation of IoT is generating new data-driven business models that allow companies to react to customer needs in real-time, open up new market segments, and deliver benefits beyond product features. However, shifting successfully from a product to a service-orientated model represents a number of challenges and changes that need to be planned for. Every process – sales, finance, logistics, servicing, etc. – needs to be reimagined to fit in this new business model.
In a recent PWC Strategy& survey of technology leaders' response to the COVID-19 crisis, two of the top business priorities for CIO’s in 2020 and 2021 are to invest in digital customer experience requirements and invest in new technology-enabled business models. It’s clear that we are seeing a shift in focus from a more traditional business model to a more digitized consumer-focused approach, which is imperative if companies wish to remain innovative and competitive in an increasingly commoditized market.
Product Marketing Manager at Weeve.