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by Thomas Fitzgerald, January 25, 2022

Equipment-as-a-Service: How to Swallow the Fish Faster with CPQ

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Equipment-as-a-Service is set to skyrocket in popularity over the coming decade as technologies like the Industrial Internet of Things (IIoT) make it scalable. Estimated to be worth $22 billion in 2019, the Equipment-as-a-Service market is forecast to reach $131 billion by 2025. And we’re only just getting started.

The popularity of Equipment-as-a-Service comes as no surprise when you consider the benefits of this innovative business model to all parties: Buyers can access the latest equipment without risky capital expenditure, while vendors gain larger, more reliable revenue streams.

To succeed at Equipment-as-a-Service, vendors must have outstanding products (the assets being sold) and the infrastructure, personnel, and expertise required to operate and maintain them. But they also need the right software.

equipment-as-a-service

CPQ provides Equipment-as-a-Service manufacturers with an all-in-one solution for configuring their products and deals. It eliminates errors in the sales process, automates tricky Equipment-as-a-Service pricing calculations, and reduces sales cycle duration from weeks to minutes in many cases.

With CPQ, sellers can transition painlessly from traditional sales to an Equipment-as-a-Service model. They can “swallow the fish” more quickly, moving beyond an inevitable period of lower revenues and increased costs on the path to increased profitability.

To find out more about equipment-as-a-service, the benefits, the risks, how CPQ makes it straightforward, and what it means to “swallow the fish,” read on as we answer the following questions:

What Is Equipment as a Service?

Equipment as a Service involves “renting out” equipment to end-users rather than selling it. The vendor collects payment for the use of the equipment with prices determined by either outcome (i.e., how much power the equipment generates) or, more commonly, time (i.e., how long the subscriber uses the equipment.)

Deloitte describes it in terms of “a shift from one-off sales of capital goods (CapEx) to recurring revenue streams based on equipment outcome or usage time (OpEx).” Equipment-as-a-Service requires extensive digital transformation but provides increased profitability over the long term.

Different Pricing Models

Outcome-Based Asset Equipment-as-a-Service Contracts

  • Good for machinery that performs a discrete task, such as robots that do one specific job (i.e., picks and packs e-commerce orders).
  • Bad if outcomes are hard to measure and customers fail to share their operational data reliably. Potential for a dispute over the value of outcomes.

Time-Based Asset Equipment-as-a-Service Contracts

  • Good for vendors that struggle to calculate the value of using their equipment or how to measure it.
  • Bad for products where a more value-based approach, such as charging for financial outcomes, would be more profitable.

What’s Driving the Meteoric Rise of Equipment as a Service?

The emergence of Industry 4.0 technologies such as 5G, the Cloud, Big Data, and, most importantly, the Industrial Internet of Things is fuelling its growth. Now, for the first time, sellers in the machinery industry can gain instant access to the performance and asset usage data they need to charge customers accordingly.

The rise of Equipment-as-a-Service has come on the back of a marketwide transition from on-prem to SaaS software solutions (the number of public SaaS companies has swelled from five in 2011 to more than 100 today with additional 15,000-plus private vendors.) Manufacturers leveraging SaaS have achieved greater flexibility, cost-savings, scalability, and corporate agility, fuelling strong customer demand for the contracts which provide comparable benefits.

The Advantages of the Equipment-as-a-Service model

Below are the reasons why the Equipment-as-a-Service market is set to 6X from 2019-2025.

Benefits to the Vendor:

  • Delivers reliable revenue streams.
  • Captures more revenue over the long term than a traditional one-and-done transaction (50% as opposed to 20%).
  • Helps stem a widespread decline in equipment margin.
  • Generates IIoT data manufacturers can use to improve machines, operations, and customer experience.
  • Increases opportunities to upsell consumables and services like maintenance and support.
  • Retains ownership of equipment.
  • Appeals to a far larger group of customers, including those who can’t afford a considerable up-front cost.

Benefits to the Buyer:

  • Reduces capital and operational expenditure (buyers can share the risk with the vendor).
  • Makes it easier to forecast cash flow as costs are predictable.
  • Provides flexibility to spend on other parts of the business.
  • Eliminates unexpected costs (repairs, spare parts, maintenance, and theft).
  • Provides access to the latest equipment without needing to upgrade.
  • Increases reliability through performance guarantees.
  • Always-on (no downtime and disruptions).
  • Provides immediate access–no delivery or installation time and little training required.
  • Lets buyers try before they buy.

But, There Are Risks to Consider (Time to Swallow That Fish)

Equipment-as-a-Service promises manufacturers more significant, more reliable returns in the machinery industry, but not without increased risk. Transitioning to a service model requires “swallowing the fish”–dealing with an initial period of dramatically reduced profits that gets substantially worse before it gets better.

Although the shape and size of the fish differ for each company, manufacturers generally pass through 4 stages on their path to greater profits:

  1. Status Quo: Your business as it operates today.
  2. Early Transition: Revenues drop as big upfront contracts are replaced by smaller monthly fees. Costs increase as you invest in new equipment and the capabilities and infrastructure to serve Equipment-as-a-Service customers.
  3. Late Transition: Equipment-as-a-Service revenue increases and costs fall due to economies of scale.
  4. End State: Equipment-as-a-Service revenues overtake costs. Profits increase to above pre-transition numbers.

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