8 Strategies to Transition to a Product-as-a-Service Business Model

If you were to write a song and record it, you would own the rights to the music, and the studio that recorded it would own the rights to the recording. And whenever, say, a restaurant plays that song, they would have to pay royalties to both you and the studio.

The Internet of Things is helping kickstart a similar concept across industries, where payment is oriented toward services rather than physical goods. Whether it’s called “power by the hour” or a shift from a capital expenditure (Capex) to operational expenditure (Opex) model, or something else, the concept is taking off. “This whole topic of paying per use versus owning is a megatrend,” says Nils Herzberg, global GTM lead and senior vice-president in SAP’s IoT division. “Past generations wanted to own; future generations will just want to use.”

Richard Soley, co-chair of the Industrial Internet Consortium, shares that sentiment. “If you are not looking at new potential business models that are about leasing rather than selling, you are missing the point already,” he says.

Examples of companies that have made the leap with IoT technology seem to be popping up everywhere. For instance, there’s the air-pump company Kaeser Compressors, which is moving toward selling compressed air-as-a-service rather than pumps and compressors. And then there are jet engines, trains, elevators, turbines — all of which are available to rent rather than own.

“This concept is not new,” Herzberg says. Rolls-Royce trademarked the term “power by the hour”—coined in 1962—to refer to the notion of selling a turbojet engine as a service. Recently, the popularity of cloud computing and the software-as-a-service model, ride sharing and websites like Airbnb have further popularized the concept, as have printing companies such as Xerox, Lexmark and HP. “But now, it seems to be that one industry after another is going down that path,” Herzberg says. The Internet of Things is helping drive the trend.

“What is important to understand is that no customer buys IoT for the sake of IoT,” Herzberg stresses. “They buy IoT for the sake of better business outcomes—whatever that is,” he says. “The process starts with IoT, but ends with an invoice.”

Such a shift, however, is by no means straightforward and often requires that enterprise companies rethink product design and re-envision their entire organization. Here are seven factors to consider when making the transition.

1. Figure out the ROI

Power-by-the-hour business models may be formidable, but they don’t work for every application. For instance, Mark Patel, a McKinsey partner, explained in an IoT Institute article by Tom Kaneshige that power-by-hour arrangements may be trendy but that they don’t always make financial sense. McKinsey worked with the maker of an industrial-strength soap dispenser that wanted to switch to a razor/razorblade model. The idea was simple: Give away connected self-monitoring soap dispensers and make money on soap replenishment. But McKinsey found that the cost of adding sensors and connectivity to the soap dispensers was prohibitively expensive to warrant giving them away. “The consumption-based model appears to be pretty powerful for unlocking a lot of opportunities, but we have to be careful how we get to it,” Patel said.

When launching a product-as-a-service business model, business leaders should factor in the upfront costs, as well as other factors such as maintenance that can influence the total cost of ownership such as taxation and liability, says Kshitish Soman of KPMG Management Consulting.

2. Factor in Product Redesign 

Closely related to the ROI question is the need to incorporate new types of sensors into the product. Simply put: You can’t shift from delivering a product without a service without gauging how often that product is used. Clearly mapping out the type of data to be gathered, sensor location, and how often it will be analyzed are all crucial, as explained in the Harvard Business Review article “How Smart, Connected Products Are Transforming Companies.” “The design of the product itself has to change because of the fact that it’s collecting and talking data,” explains Kshitish Soman. Bsquare senior director of products Dave McCarthy agrees: “Usage data is just one piece of information that plays into building a better product and service,” he says. “Analyzing varied streams of data better informs the entire design process — from whether the product is being used as intended, to which components are likely to fail in the future, to boosting product performance and availability.”

3. Map Out All of the Relevant Business Impacts

The best power-by-the-hour pitches come with added benefits. General Electric, for instance, leases jet engines but also will help airlines optimize fuel consumption. “The way they are doing that is by taking data from the engine and using it to optimize maintenance and performance,” says Richard Soley of IIC. “They know more about General Electric engines than anyone else in the world, obviously. But they can use that knowledge to guarantee the quality and the uptime of the engine,” he says. “It is a huge disruption for the company—if for no other reason that the maintenance is now done by General Electric [rather] than by the airline.”

[Hear from 151 Advisors partner Steve Brumer and other IIoT experts at Enterprise IoT World on October 16–17 in Chicago.]

On the other hand, Steve Brumer, a partner at 151 Advisors LLC, counsels that enterprise companies also think carefully about potentially negative business outcomes from such arrangements.