Editor’s note: Although vendors selling such hardware as gaming machines or industrial equipment transitioned from a traditional perpetual model to a recurring revenue business model a decade ago, many device vendors are just now in the early adoption phase of this transformation. And many have encountered challenges from trying to handle the transformation on their own. In this interview, Laila Arad-Allan, director of Product Management, Software Monetization, at Gemalto discusses the trend of transforming from shipping hardware devices to selling value and the optimal way to address the transition challenges.
Making the switch to selling “value” instead of shipping devices has evolved over the past several years. What is driving device vendors in the early phase of this transition to make the change now?
Laila Arad-Allan: There are quite a lot of instigators driving this transition to selling value.
Revenue for device vendors has traditionally come from selling physical devices. Today, devices are cheaper and becoming a commodity; so they’re dealing with pricing pressures and lower margins. Hardware vendors spend over 70 percent of their development effort in the software that’s embedded in the devices. The software is becoming the USP of devices, providing the value. But actually device vendors gain no revenue from it if they don’t charge for and license the software.
End customers are also influencing this transformation: they’re demanding a frictionless customer experience, more budget-friendly ways to purchase, and easy to access upgrades. Therefore, device vendors are looking for ways to offer the capabilities and functionalities that their customers value and are willing to pay for – while providing the best possible customer experience.
Another driver is the challenge hardware vendors have with large inventories. Because the software and various features in the devices are hardcoded, the vendors have to keep multiple variants of their product. For the same device, they need to maintain numerous models with different features. They then have to stock a reasonable supply of the units and configure them in advance according to the different market needs so that they can quickly ship them as needed. For instance, there may be a model for the American market and another for the French market because these markets have different requirements with regard to the devices’ functionalities. Embedded software with features turned on or off through licensing can significantly reduce SKUs.
Also driving the transformation is the fact that as devices are becoming more standardized gray market trade can be performed more easily. Device demo models, for example, find their way into the gray markets through all sorts of channels that sell used equipment. These devices are running improper software, and in many cases they don’t function correctly. This carries serious threats to vendors’ revenue, the reliability of the device and the customer experience; and it erodes the device’s brand name.
Then there’s the issue of what I call refresh cycles. Hardware vendors don’t make a lot of money until there is a technology refresh cycle. This can be a real problem if a vendor sells really good products with very long useful lifespans. So device vendors are looking for after-sale options and ways to guarantee business continuity. They can do this by transitioning to models such as paid upgrades, pay-per-use and time-based business models relating to the software on the device.
What about customer preferences? How does their perception of value impact what’s happening in the way devices are sold?
Laila Arad-Allan: We’re in a very competitive business environment, and end customers are becoming more and more demanding. They want more flexible pricing models, easy access to feature upgrades and the best possible customer experience. So device vendors are looking for ways to sell capabilities and functionalities that customers value and are willing to pay for.
I’m not just talking about the consumer market. Customer preferences also impact other markets. Think of a plant that manufactures cars and buys robots that assemble those cars. When one of the robots breaks down or requires maintenance, this has a huge cost and downtime impact on the car plant. So we’re seeing robotic device companies addressing this challenge by shipping extra robots. Only the first robot is paid for and active. When it goes down, one of the other extra robots is activated and is substituted while the first robot undergoes maintenance. All of this is accomplished through new software and licensing models.
Customers also want the ability to scale up or down based on demand or capacity of their device use. To give you an example, think of a vendor that sells woodcutting machines. The machines have embedded software that controls the actual design and how the wood is cut. In some cases, the software also includes different features such as simulation. But not all of the woodcutter vendor’s customers may need simulation capability. And those that do may need it in different capacities or at different peak times. Enabling end-customers to pay for what they value, what they need and when they need it increases their satisfaction and gives the vendor a competitive advantage.
What about the Internet of Things? As it evolves, how is it impacting the sale of devices?
Laila Arad-Allan: Connectivity and the IoT are major influencers in this transition. Connectivity enables many new business models such as subscription, and makes it much easier to manage. Subscriptions, renewals and updates can be automated. Connectivity eliminates much of the overhead that for many years has discouraged vendors from adopting a subscription model in the first place. From an IoT perspective, vendors are realizing that devices are also “vehicles” for selling additional value either to their direct customers or to third parties. Here I’m talking more about the data that’s being transferred and used by these devices.
What are the constraints for transitioning to these value-selling models?
Laila Arad-Allan: There are many challenges in making the transition. Device vendors know how to sell hardware and equipment. Their business models and their go-to-market strategies are structured around the sale of a physical device. They often discount or give away the software as a piece of the larger device sale. They should change their mindset and look at the device as a solution. That’s very difficult because the entire organization needs to change and go through this transition. It needs to start at the top and there needs to be a strategic-level decision which is then translated into an execution plan. Every department in the organization has to go through the transformation and understand what it means for them.
For example, it involves major change in customer support. Because everything is connected today, customers expect quicker support, especially when they’re buying software, even if it’s in a device. They expect a much quicker return on their issues. If the device vendor is not well prepared for that or not equipped in terms of their support teams to adjust to these needs, they will fail.
So this is much more than just changing their sales and marketing processes.
Laila Arad-Allan: Yes, and in many cases, vendors don’t understand that the unique selling point of the hardware needs to depend much more on the software and that what actually differentiates a piece of equipment from another is the software. Hardware vendors don’t always understand the value of the software. And even if they do, they don’t always know how to articulate it, how to communicate the value to customers.
Normally device vendors address customer needs in a reactive manner. To sell value, they need to be much more proactive in identifying and addressing customer needs. Hardware vendors usually just sell equipment, where there is no real relationship with the customer. But when you are selling software value, you need an intimate customer relationship in order to understand their needs and where to enhance the product and continually bring more value.
In many cases, the organization needs to change in terms of how salespeople are being compensated. If they are compensated only for the sale of the device, and not for recurring sales to that customer, then the transformation won’t be successful.
Another huge challenge is pricing. Device vendors are used to selling their devices on a per unit basis. Transitioning to recurring revenue business models and revenue recognition around selling software and value is not simple.
What is the biggest pitfall that vendors need to avoid when transitioning to selling value?
Laila Arad-Allan: The biggest pitfall is vendors trying to go through this transition on their own. Vendors need technology that can help drive the value by monetizing it. Some device companies try to develop their monetization or licensing in-house, instead of focusing on their core competencies and their products. Not only does this drain their resources but the outcome is usually a very poor solution in terms of securing and protecting the software, licensing it, entitling afterward, and managing the life cycle of the license.
Can you share an example of what could go wrong if they try to do it themselves?
Laila Arad-Allan: The licensing won’t be flexible enough to be effective – not offering any advantages over a standard purchase model. For example, if the subscription ties a customer in for several years or doesn’t allow the subscription to be scaled up or down, then it defeats the whole purpose of rolling out a subscription model in the first place.
So device vendors need a provider that delivers a technology solution for the monetization, security protection and licensing lifecycle management.
What do you think is the top criterion for selecting a solution provider?
Laila Arad-Allan: Keep in mind that all the device vendor’s business processes change once it makes this transformation. So the provider needs to be a trusted solution partner. Along with experience and field-proven monetization technology, a lot of the solution relates to business strategy and process. The trusted partner must act as a reliable and credible business consultant that’s able to meet with all departmental stakeholders to understand their current business processes and goals and then put together a monetization and implementation plan to help accomplish those goals.
It’s also important to choose a solution provider that has a proven track record of successful implementations specifically tailored end to end.
Laila Arad-Allan is director of product management, software monetization at Gemalto. She leads all product-related activities including product and go-to-market strategies and aligning product development with emerging market trends. Prior to Gemalto, she was VP products at Visonic, where she led design and implementation of groundbreaking wireless technology for alarm systems. Before Visonic, Laila was VP digital rights management at Aladdin Knowledge Systems, contributing to bringing Aladdin to be the world leader in its field.