1. Servitization for OEMs: Subscription-Based Models
Opdateret: 29. mar.
Subscription- and rental-based models are one type of servitization model that is gaining popularity among OEMs. In this blog post, we will dive deeper into subscription- and rental-based models, exploring what they are, successful use cases, benefits for customers and OEMs, and how they can enable sustainability.
This post is part of our series on equipment-based servitization models for Original Equipment Manufacturers (OEMs) and Value-Adding Resellers (VARs).
What are Subscription-and rental-based models?
Subscription- and rental-based models are a type of equipment-based servitization model that allows customers to pay a regular fee for access to a product or service for a defined period of time, often ranging from weeks to years. In this model, customers do not own the equipment, but rather pay for its use over a period of time.
Subscription-based models often involve a recurring payment schedule, such as monthly or annually. Rental-based models, on the other hand, involve a fixed rental period, such as weekly or monthly.
In both cases, the OEM typically retains ownership of the equipment or offers alternative financing options through a financier. This allows the OEM to maintain control over the equipment and ensure that it is properly maintained and serviced over time. The customer benefits from the use of the equipment without having to commit to a large upfront investment.
Subscription- and rental-based models can be used across a wide range of industries and products, including equipment such as construction machinery, medical devices, and printing equipment, as well as services such as car sharing and software.
For simplicity, we will refer to both subscription-based models and rental-based models under the term subscription-based models.
Successful Use Cases
There are several examples of companies that have successfully implemented subscription-based models.
A well know case is the "Heidelberg Subscription": Heidelberg Druckmaschinen AG is a German-based company that produces printing equipment and services. In 2018, the company launched a subscription-based service called "Heidelberg Subscription," which provides customers with access to the company's printing equipment, maintenance services, and consumables for a monthly fee.
Under the Heidelberg Subscription model, customers can choose from a range of printing equipment, including digital and offset printing presses, as well as prepress and postpress equipment. The monthly subscription fee covers the use of the equipment, as well as ongoing maintenance and support services, such as technical assistance and replacement of worn-out parts.
The Heidelberg Subscription model offers several benefits to customers, including a predictable cost structure, access to the latest printing technology without large upfront investments, and the ability to easily scale up or down their printing capabilities as needed. Additionally, the subscription model provides Heidelberg with a steady stream of revenue, rather than relying on sporadic sales of printing equipment.
Other notable cases:
Xerox: The company offers a subscription-based service called "Xerox Managed Print Services", which provides customers with access to a range of printing and document management equipment, as well as maintenance and support services.
Caterpillar: The company offers a rental service that provides customers with access to a wide range of construction equipment, from excavators to bulldozers, for a defined period of time.
Subscription-based models have also been used in the medical industry, where medical equipment is provided to customers on a subscription basis, allowing healthcare providers to access expensive equipment such as MRIs, CT scanners, and ultrasound machines without the need for large upfront investments.
Benefits
Most models of servitization offer similar core benefits. In this series, we aim to highlight the unique benefits of each model. Subscription-based models are the most prevalent type of equipment-based servitization, and therefore, this post will focus on their core benefits.
Customer Benefits
Flexibility
Subscription-based models provide customers with a more flexible way to access products and services, without making a large capital investment upfront.
Affordability
This model provides customers with an affordable way to access the equipment or service they need, without committing to a large upfront investment.
Maintenance and Upgrades
The OEM is responsible for maintaining and upgrading the equipment or service, which can help to reduce the burden on customers.
Access to Latest Technology
As equipment is upgraded by the OEM over time, customers have access to the latest technology without the need to purchase new equipment.
OEM Benefits
Predictable Revenue Streams
The subscription-based model provides a steady stream of revenue for the OEM, as customers pay a regular fee for access to the product or service.
Increased Customer Loyalty
The subscription-based model can help to build long-term relationships with customers, as they become accustomed to using the OEM's products or services.
Ownership Retention
The OEM retains ownership of the equipment, which can be valuable for both insurance and tax purposes.
Upselling Opportunities
As the OEM develops new products and services, there is potential to upsell customers to higher-value subscription-based models.
Sustainability
Subscription-based models can enable sustainability by promoting the reuse of products and reducing waste. By retaining ownership of the equipment, OEMs can ensure that it is maintained and upgraded properly, extending its lifespan and reducing the need for new equipment to be produced.
Additionally, subscription-based models can help to reduce overproduction and excess inventory, as OEMs can more accurately predict demand and adjust production accordingly. This can lead to reduced waste and increased resource efficiency.
Data utilisation
Subscription-based models rely heavily on data to optimise performance and provide value to both customers and OEMs.
Optimizing delivery and equipment performance - 5/5
Data is critical in ensuring that equipment is operating at peak efficiency, which can help reduce downtime and maintenance costs. A score of 5 is appropriate because data is essential for identifying issues and inefficiencies in equipment performance, which can lead to significant cost savings and improve customer satisfaction.
Developing new products and services - 4/5
Data can provide insights into customer behavior and usage patterns, which can inform the development of new products and services that better meet their needs. A score of 4 is appropriate because while data is valuable for product development, it is not always necessary, and other sources of insight, such as customer feedback, can also be valuable.
Improving commercial terms - 3/5
Data can help identify areas where customers may be over- or under-utilizing equipment, and adjust pricing or offerings accordingly. A score of 3 is appropriate because while data can be useful for optimizing pricing, other factors, such as market demand and competitive pricing, may also need to be considered.
Reducing depreciation risks - 4/5
Data can be used to track the residual value of equipment, which can help reduce depreciation risk. A score of 4 is appropriate because data is essential for accurately predicting equipment lifespan and value, which can reduce risk for OEMs.
Reducing cost of service delivery - 5/5
Data can help optimize maintenance schedules and identify potential issues before they become costly problems, reducing the overall cost of service. A score of 5 is appropriate because data is essential for optimizing maintenance practices and reducing costs associated with equipment downtime and repairs
While it is possible to offer subscription-based models without data from equipment, it is difficult to make these models profitable without leveraging the insights that data can provide. As such, data collection and analysis capabilities are important for OEMs as they explore this servitization model.
Financing need
Subscription-based models typically require financing for two main reasons:
Off-balance sheet financing
One key reason for OEMs to secure financing in a subscription-based model is to achieve a true sale and remove the equipment from their balance sheet. This also avoid tying up that could be used for other investments. At the same time, by retaining ownership of the equipment, OEMs may face increased depreciation risks, such as negative residual value risk and impairment risk.
Cash flow financing
Additionally, financing can help OEMs manage cash flow. Subscription-based models typically provide a steady stream of revenue over a defined period of time, but this revenue may not cover the upfront costs of producing the equipment or services. Financing can bridge the gap between the upfront costs and the revenue generated over time, ensuring that the OEM has the necessary cash flow to sustain the model.
Overall, securing financing is an important consideration for OEMs in subscription--based models, as it can help them achieve a true sale, remove equipment from their balance sheet, and manage cash flow effectively.
The type of financing needed will depend on the specific circumstances of the OEM, such as the amount of capital required, the length of the subscription period, and the expected revenue generated over time. Financing options may include bank loans, leasing arrangements, captive finance companies, or other sources of funding. OEMs must carefully consider the costs and benefits of each financing option to ensure that the model is profitable and sustainable in the long term.
Additionally, OEMs must ensure that financing arrangements comply with applicable regulations and accounting standards.
Succeeding with Valueport.io
Valueport.io's EaaS capabilities can help OEMs successfully implement subscription- and rental-based models in servitization, securing above mentioned benefits such as increased customer satisfaction and loyalty, predictable revenue streams, and a more sustainable business model.
One key capability, important for subscription-based models, is tracking the residual value of equipment to reduce depreciation risk. Depreciation risks are particularly significant in this model because the fixed payment nature can result in a disconnect between usage (i.e. wear & tear) and customer payment. Specifically, negative residual value risk and impairment risk can be substantial in this model.
In a future blog post series, we will cover different risk types associated with equipment-based servitization. Stay tuned!
Conclusion
In conclusion, subscription-based models are a promising servitization model for OEMs across a wide range of industries and products.
Customers benefit from the flexibility, affordability, and access to the latest technology without having to make a large upfront investment. OEMs benefit from predictable revenue streams, increased customer loyalty, ownership retention, and upselling opportunities.
Subscription-based models can also promote sustainability by reducing waste and extending the lifespan of equipment, which can be achieved through proper maintenance and upgrades. Additionally, data collection and analysis capabilities are crucial for OEMs to optimize equipment performance, reduce downtime, and identify areas for improvement.
Financing is essential to acquire necessary equipment or services and to manage cash flow effectively, and OEMs must carefully consider the costs and benefits of different financing options.
Overall, subscription-based models provide a win-win situation for both customers and OEMs, and have the potential to transform industries across a wide range of products and services. By leveraging data and financing options, OEMs can successfully implement this servitization model and meet the evolving needs of their customers in a sustainable and profitable way.