18 Pros and Cons OEMs Must Know Before Adopting Equipment-as-a-Service Business Model
Updated: Oct 17, 2019
I think you’ll agree with me when I say:
It’s REALLY hard to decide if you should diversify your sales pipeline to include Equipment-as-a-Service (EaaS) as a potential business model.
How does one even begin making such a decision?
Well, it turns out, that you can better inform yourself by understanding the various benefits and drawbacks of adopting such pay-per-use models.
And in this post, I’m going to show you what those pros and cons are and how my team and I at linx4 can help you overcome the hurdles of adopting this service model.
But before I get started, let's briefly define this new payment method.
What is Equipment-as-a-Service (EaaS)?
Equipment-as-a-Service, or EaaS, is the act of renting machinery to manufacturers and periodically collecting payments on a usage basis.
In other words, you don´t sell your entire machine out-right, instead, your customers are happier as they enjoy more flexible payment options by paying you back for every unit they manufacture.
These variable payment structures are also known as:
Service-driven business models
...and the list goes on and on.
Whatever you decide to call it, we can thank the rise of the sharing economy, the internet of things (IoT), and various innovations within the industrial sector for its birth.
EaaS poises as the manufacturer's payment option of choice since they're now able to streamline their business operations remotely and more efficiently, all the while lowering their financial burdens.
But what's in it for you, OEMs?
Why Equipment-as-a-Service is essential for your business?
Pay-per-use models offer a plethora of benefits for your business and customers. This model serves as a win-win situation since you get to sell more equipment and make your customers happier with variable installments.
A pay-per-use model is a gateway for modernizing your current business operations and allowing new and existing customers to quickly and conveniently utilize your product offerings.
With that being said, let's dive right into the 11 benefits of adopting a pay-per-use model.
11 Pros of adopting an Equipment-as-a-Service Business Model
There are a plethora of benefits for integrating Equipment-as-a-Service into your business, 11 to be exact.
1. Continuous income streams from equipment sale
Thanks to unit-based pricing, you not only increase your revenues but also stabilize your financial liquidity through constant income streams from existing customers.
2. Adapt to treacherous economic cycles
Get compensated for what you don't earn during economic downtimes by leveraging stellar equipment performance during economic uptimes.
3. Diversify your business model
Meet the demands of different customers by modernizing their buying experience and providing more convenient methods to purchase your equipment.
4. Increase aftermarket service revenue
Upsell customers through ongoing service repairs and additional post-purchase features.
5. Switch from preventative to predictive maintenance checks
Accurately schedule maintenance services by collecting equipment usage-data and analyzing its performance to prevent future errors.
Any unforeseen equipment downtimes not only decrease your earnings but also hurts your customer's business.
6. Utilize full machine lifetime to unlock extended revenue growth
Extend your earnings beyond the typical seven to ten-year deprecation timeline by maximizing your equipment's performance till its actual final days.
7. Increase customer retention and Life Time Value
Customers will stay loyal to your company longer as pay-per-use agreements establish lower switching incentives and enable the opportunity for higher customer engagement.
8. Develop stronger customer relationships
As opposed to the traditional one-time purchase, OEMs have more opportunities to interact with their customers throughout their pay-per-use timeline.
9. Takeover new customer segments
Expose your business to new distribution channels and partnerships of previously untapped customers who require flexible payment options to operate their business.
10. Pay-per-use is a competitive USP
Be one of the early adopters in your industry to differentiate yourself from other equipment sellers by offering your customers flexible payment options.
11. Reduce pressure on cash flow
With EaaS, you can adopt new financing methods, such as usage-based financing, that allows you to instantly receive the amount from your equipment sale and shift your traditional payment risks to one of linx4's banking partners.
We've drawn these conclusions from the feedback of multiple clients that use our solution.
Keep in mind that these benefits are use case dependent; therefore, you may encounter new advantages depending on your product offering.
7 Cons of adopting an Equipment-as-a-Service Business Model
It's fair to say that with every new alteration to your current business model, there's bound to be some friction along the way.
Which brings me to my first point:
1. Most solution providers enforce full-scale adoption right away
Most OEMs are forced into implementing a system-wide change as opposed to testing the effects of pay-per-use in their business on a use-case basis.
As a result, your company ends up investing a lot just to see if your specific market segment even requires such a PPU model.
An aggressive transition is quite risky at first considering the uncertainty of success, time, money, and human capital spent on making this switch possible.
2. Difficulties with ensuring proper data management and information quality, security, and privacy
This industry, in general, has experienced issues with efficiently managing and securely harvesting equipment usage data.
The right solution provider must guarantee a reliable transfer of information and posses the proper infrastructure to store, manage, and display that data to create new actionable insights for your business.
3. Challenges with restructuring internal invoicing systems
Equipment-as-a-Service forces you to reimagine your current invoicing system. You can no longer apply traditional one-time invoicing for every machine you sell.
Instead, your billing department needs to implement a dynamic process where employees send periodic invoices of different amounts to the customer.
Unfortunately, due to the high costs associated with this repetitive task, you will need to find a solution that can automatically execute such requirements.
Furthermore, EaaS requires you to rethink your traditional action plan on how to deal with payment failures.
4. Risks associated if customers fail to payback
Without a doubt, there's always the probability that equipment buyers undergo hardships and can no longer meet payment expectations.
If and when this happens, OEMs suffer the most.
5. You bare the responsibility of servicing, maintaining, repairing, and replacing equipment
Depending on your service economics, this could either make or break the success of your EaaS model.
Additionally, you need to find a way to manage your equipment's availability.
Machinery must remain highly accessible at all times, otherwise, you risk losing money.
6. Sales teams having to adopt new commission structures
After relying so long on your company's current incentive system, sales teams might encounter initial frustration with having to adopt a new commission structure.
It might be tricky to calculate your earnings in the short run, but in the long term, sales teams have the potential to unlock higher returns.
7. Challenges with balancing your books
Periodic payments affect your financial statements as OEMs may encounter Issues with optimizing cash-flow, keeping working capital low, and overall managing their balance sheet.
Even though EaaS has its initial short-term hurdles, rest assured that these issues are opportunities to find the right solution provider who prioritizes a frictionless transition.
How can linx4 help your business overcome Equipment-as-a-Service adoption hurdles?
While the transition may seem daunting at first, the long-term benefits outweigh the short-term hurdles you may encounter when integrating such a model.
With linx4, our team and global financial partners can guide your business to ensure you have the necessary tools to determine whether or not Equipment-as-a-Service is right for you.
Overcome hurdle #1 by testing EaaS to see if it fits your business goals and meets your market demand
linx4 is your first step into entering a pay-per-use model. Your company can explore a service model without any internal change or taking any high risks.
At linx4, we've structured our business operations and partnered with the best financial institutions to ease any burdens you may encounter by allowing your business to test Equipment-as-a-Service. Our solution takes care of the entire PPU process so that you can immediately focus on evaluating your new business model in the market.
It's our priority to make sure you're satisfied with your new payment options before embracing the next steps into system-wide adoption.
Overcome hurdle #2 with software built by IoT and information security veterans
We understand your data needs.
That's why we built the most secure industrial IoT and data processing powerhouse. You can finally share machine usage data with third parties worry-free and without compromising quality thanks to linx4's end-to-end encrypted IoT and blockchain infrastructure.
Know exactly when, where, and by whom your data was viewed with the unique protocols we've laced throughout our entire backend.
Lastly, you can quickly visualize usage data in real-time and manage operations remotely with our front end solution.
Overcome hurdle #3 by automating invoices
Leave it up to linx4 and our financial partners to operate your invoicing system.
You can expect the most inner-network system efficiencies by relying on our data matchmaking algorithms, smart contract executions, and automatic invoicing calculations.
We can also backlink information to your ERP system.
Overcome hurdle #4 by shifting the financial risk from your company to linx4's banking partners
We've developed a unique financing strategy that compliments current EaaS methods; we call it usage-based financing.
With this method, you can forget about dealing with the liability associated with your customer's monthly installments.
Instead, linx4 ensures you get the full amount of your equipment sale while we shift all payment risks to our partner banks to manage your customer's periodic payments.
Overcome hurdle #5 with predictive maintenance and risk-free insurance
You can avoid machine downtown and reduce your service repair expenses by taking advantage of our predictive maintenance system.
Furthermore, approach your PPU model risk-free by receiving tailored insurance plans to combat any equipment troubles you run into in the future.
Overcome Con #6 with hands-on consulting by linx4
We've successfully helped multiple sales departments implement new reward systems.
Some of our methods consisted of accumulating a percentage of the manufacturer's monthly installments or reaping annual bonuses.
Our team can work directly with you to create a winning system that meets your organization's goals.
Overcome Con #7 with usage-based financing
This form of financing optimizes your cash flow and working capital.
When you offer usage-based financing to your customers, you shift the payment risks to linx4's financial partners to avoid comprising your balance sheet.
With the help of our team, we can make your transition into pay-per-use quite simple by mitigating any hurdles encountered along the way.
Rest assured that we understand these seven pain points quite well and it’s our priority to help you overcome them.
There's a lot to weigh when considering whether or not Equipment-as-a-Service is right for your business.
Hopefully, this extended pros and cons list deepened your insight as to what to expect if you proceed with offering pay-per-use options to your customers.
In any case, linx4 is here to help and support you along the entire process, from testing to financing.
Don't be a stranger. Feel free to reach out if you have any questions.