Usage-based models are one type of servitization model that is gaining popularity among OEMs. In this blog post, we will dive deeper into usage-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 Usage-Based Models?
Usage-based models are a type of servitization model that allows customers to pay based on their actual usage of a product or service. In this model, customers pay for the amount of product or service they use, rather than owning or renting the equipment for a defined period of time.
Usage-based models are typically enabled through the use of IoT sensors and other monitoring technologies that track the usage of the product or service. This data is then used to calculate the customer's usage and bill them accordingly.
Usage-based models can be used across a wide range of industries and products, including equipment such as HVAC systems, lighting systems, and generators, as well as services such as transportation and energy.
Successful Use Cases
There are several examples of companies that have successfully implemented usage-based models, including:
Signify: The company offers a lighting-as-a-service model that allows customers to pay based on the amount of light they use, rather than purchasing lighting fixtures outright.
GE Aviation: The company offers a usage-based model for its jet engines, where customers pay based on the number of flight hours, rather than owning the engines.
Shell Energy: The energy company offers a pay-as-you-go fuel program, where customers can pay for fuel based on the amount they use, rather than filling up their tanks and paying a fixed price.
This model provides customers with an affordable way to access the equipment or service they need, without committing to a large upfront investment.
Customers can adjust their usage of the product based on their needs, aligning cost with income creating a more stable profitability.
Customers can predict their costs more accurately because they only pay for what they use, and there are no unexpected costs for maintenance or repairs.
Customers do not need to invest in expensive equipment upfront, reducing their financial risk. Additionally, because the provider is responsible for maintenance and repairs, customers have less risk of downtime and lost productivity.
Potential for Increased Revenue
While subscription-based models provide a steady revenue stream, usage-based models have the potential for increased revenue as customers are willing to pay additionally for the value increase of flexibility of payment based on usage. Customers of usage-based models bare typically willing to pay more because they are paying for the value they receive from the product or service, rather than just the product itself. In general, customers may perceive usage-based models as providing more value and flexibility, which can justify higher pricing.
Better Capacity Planning
Usage-based models allow OEMs to better understand customer needs and usage patterns, which can inform capacity planning and help to ensure that equipment is available when and where it is needed.
Improved Asset Utilisation
Usage-based models can help OEMs to improve asset utilisation by ensuring that equipment is being used efficiently and effectively.
As the OEM retains ownership - or control if financed - of the equipment in usage-based models, they bear less risk than in subscription-based models. This is because of the alignment between usage (i.e. wear) and income, mitigating risks of customer over-using or misusing the equipment.
Usage-based models enable sustainability by promoting resource efficiency and reducing waste. With usage-based models, customers only pay for what they actually use, which incentivizes them to use resources more efficiently and avoid unnecessary waste. This can lead to reductions in energy consumption, material waste, and greenhouse gas emissions.
In addition, usage-based models can help extend the life of products and equipment by promoting better maintenance and repair practices. By closely monitoring usage data, OEMs can identify potential issues before they become major problems and perform preventative maintenance to prolong the lifespan of equipment.
Furthermore, usage-based models can also promote the development of more sustainable products and services. As OEMs gain better insights into customer needs and usage patterns, they can use this information to design more efficient and sustainable products and services that better meet customer needs. This can help to reduce the environmental impact of products and services over their entire lifecycle.
Overall, usage-based models can contribute to a more sustainable business model by promoting resource efficiency, reducing waste, and driving the development of more sustainable products and services.
Data is essential for the success of usage-based models as the revenue driver is tracking of usage.
Optimising delivery and equipment performance - 5/5
Data is essential for ensuring equipment is operating efficiently and reducing downtime and maintenance costs. Since the customer is paying based on usage, it's critical to have data to ensure accurate billing and monitor usage levels to prevent under-use.
Developing new products and services - 4/5
Data can provide insights into customer behaviour and usage patterns, which can inform the development of new products and services that better meet their needs. While data is valuable for product development, other sources of insight such as customer feedback can also be useful.
Improving commercial terms - 3/5
Data can help identify areas where customers may be over- or under-utilising equipment and adjust pricing or offerings accordingly. However, market demand and competitive pricing may also need to be considered in pricing decisions.
Reducing depreciation risks - 3/5
Data is essential for accurately predicting equipment lifespan and value, reducing depreciation risk. However, as usage is billed the depreciation risks stemming from over- and misuse are inherently mitigated in the model.
Reducing cost of service delivery - 5/5
Data is crucial for optimising maintenance schedules and identifying potential issues before they become costly problems, reducing the overall cost of service. Since the customer is paying based on usage, data can help monitor equipment performance and identify issues to reduce downtime and service costs.
In conclusion, data utilization is crucial for the success of usage-based models as it enables accurate billing, optimizes equipment performance, reduces downtime, and enhances customer satisfaction.
Data plays a critical role in optimizing delivery and equipment performance, reducing the cost of service delivery, and ensuring accurate billing based on usage. It also helps OEMs develop new products and services that better meet customer needs. While data can reduce depreciation risks, the usage-based model inherently mitigates these risks as the customer pays for usage.
OEMs must prioritize data collection and analysis capabilities to leverage the insights that data provides and make usage-based models profitable and sustainable in the long term.
Usage-based models also require financing for similar reasons to subscription-/rental-based models, but with some differences in emphasis.
Off-balance sheet financing
One key reason for OEMs to secure financing in a usage-based model is to remove the equipment from their balance sheet. Equipment on balance sheet can increase risk for the OEM, as they need to invest capital to produce the equipment upfront. By securing off-balance sheet financing, the OEM can reduce the impact on their balance sheet and free up capital for other investments.
Cash flow financing
Financing can also help OEMs manage cash flow in usage-based models. Since revenue is generated based on usage, there may be a delay between the upfront costs of producing the equipment and the revenue generated over time. Financing can help bridge this gap and ensure that the OEM has the necessary cash flow to sustain the model.
Overall, securing financing is an important consideration for OEMs in usage-based models, as it can help them manage cash flow, reduce the impact on their balance sheet, and ensure that the model is profitable and sustainable in the long term.
The type of financing needed will depend on the specific circumstances of the OEM, such as the amount of capital required, the expected revenue generated over time, and the length of the usage period.
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 usage-based models in servitization, securing above mentioned benefits such as flexible and affordable access to equipment or services for customers, increased revenue potential, better capacity planning, and improved asset utilisation for OEMs.
Data-driven billing is a crucial capability for successful implementation of usage-based models, but few OEMs have it today without significant investment. This is a key part of Valueport.io’s offering and by creating an independent "one-truth" for usage and billing amounts, OEMs can ensure accurate and transparent billing for customers.
In conclusion, usage-based models have emerged as a promising servitization model for OEMs in various industries. This model provides customers with flexible and affordable access to equipment or services, while OEMs benefit from increased revenue, better capacity planning, and improved asset utilisation. Moreover, usage-based models promote sustainability by reducing waste and extending the lifespan of equipment.
Data collection and analysis capabilities play a critical role in optimising equipment performance, reducing downtime, and ensuring accurate billing based on usage. Financing is also necessary for managing cash flow effectively and removing equipment from the OEM's balance sheet. By securing appropriate financing, OEMs can reduce financial risk and sustain the model in the long run.
Overall, usage-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 prioritising data collection and analysis capabilities and carefully considering financing options, OEMs can successfully implement this servitization model and meet the evolving needs of their customers in a sustainable and profitable way.