PLM revenue model comparison

PLM revenue model comparison

plm-revenue-models

These days,  innovation is coming not only in technologies and products, but also to business models. We are observing one of the most significant shakeouts of business models in enterprise software. Companies want to buy software differently and it is obviously raising many questions in front of established PLM vendors and startup companies. What is the right revenue model? How to sell PLM software tomorrow?

I want to refer to some of my earlier blog post related to PLM, licensing and software models – Faltered licenses and future PLM business models; PLM innovation and packaging trajectories; ‘Alte Zachen’ PLM and New Business Models and The future battle for upfront PLM cost.

The demand of customers is faster ROI. It clearly impacts the transformation of business models. In addition to that, in a modern dynamic business environment, customers are looking how to predict cost of future growth or shrinkage in software licenses usage. It brings a question about sustainable “usage based” business models. The variety of business models is much larger these days. Many of new models are coming from internet companies, SaaS business models and consumer applications.It made me think about possible revenue models and the way PLM vendors are using them today. So, here is my list of 8 revenue models and analysis of their usage in the industry. I tried to order them based on how I see adoption of these revenue models in engineering and manufacturing software.

1- Value

In my view, this is the most widely accepted revenue model for PLM products these days. The fundamental assumption in the fact PLM brings significant value. So, vendors are charging customers with the assumption usage of PLM products brings significant cost saving or PLM product is mission critical to customer, so customer has to buy it.

2- Product lines

This is another widely adopted revenue model in PLM (and enterprise software) world. Customer is buying multiple products together. The objective of the vendor is to maximize total revenue. In such situation the combination and revenue from specific products can be irrelevant.

3- Volume revenues

This model is mostly relevant in large PLM deals. When a large OEM is buying 1000s of licenses,  vendor is typically using a special “volume prices”. The name of this model is different in every case, but the fundamental assumption is the same – to provide discount for customers paying a significant amount of money. Sometimes, vendors are using floating licensing to limit the number of concurrent users in the system.

4- Services

The fundamentals of this model – product is free. Customer pays for services – installation, setup, configuration, implementation, data import and many others. This system is mostly used with a combination of previous models and rarely used a main revenue model for PLM vendor.

5- Features

This is a revenue model in which customer is paying for “specific features”. In the past, such revenue model used for enterprise software with high and very diversified features set. I can see less usage of such model nowadays – most of vendors are trying to avoid the complexity of packaging and pricing related to such model

6- Subscription

This is growing revenue model these days. After huge popularity among internet companies, the adoption of subscription models is growing in enterprise software and PLM as well. Typically customers are paying subscription fees on annual basis. The customer advantage is low entry cost. The vendor challenge is slow revenue growth compared to traditional licensing.

7- Freemium

This is a variation of free model. In freemium model, customer is getting part of product for free and pay for premium part of the product. Even this model is heavily associated with modern internet startup and SaaS products, I can see elements of this model in existing PLM product offerings. The most widely adopted is when PLM vendor is providing “read-only” part of PLM product for free and charge only for licenses that allowing to user to “enter” or “edit” data.

8- Product is free, revenues from advertising

The most common model used by internet startups and companies. Facebook and Google are probably on the top of the list using such model. I’m not aware about PLM vendors using such model. However, I can think (probably) about some vendors in the business of product catalogs providing their online services for free and charging for ads.

What is my conclusion? In today’s world of PLM software vendors are looking for new business models. One of the reasons – customers are looking how to buy PLM differently. The perception in the market – PLM is too expensive. Current revenue and business model was developed to satisfy needs of large customers back in the days vendors were selling huge packages of PLM software that required multi-year implementation contracts, support and maintenance. The today’s reality is different. Customers are looking how to solve their business problem using agile software and business models with fast ROI. At the same time, PLM requires significant investment in process organization and company transformation. Because of that, customers are looking for “predictable” licensing models that will allow them to grow PLM implementation in the future. It is an interesting time to be on both sides and I can see lot of changes in the future PLM business and revenue models.  Just my thoughts…

Best, Oleg

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  • As a PLM strategist and management consultant, I had the unfortunate job of auditing PLM implementations over the years. My conclusion (and no one wants to hear this), PLM does not ever result in the projected return on investment. The PLM business cases would have lofty forecasts of hundreds of millions of dollars in ROI but when I looked for the results… I couldn’t find or measure them. This is why business leaders are looking for new business models. I heard about one PLM business case presentation where the CEO cutoff the presenter and said, “this is all foofoo (his word). There are two things that matter to me, belly buttons out the door and/or material cost reduction. Period.”

    That being said, I did work for one company were a business project used IT to deliver $2.6B in free cash flow over 2 years. We used free cash flow because it is a measurable outcome that can be seen on the bottom line. Most PLM business cases rely on productivity improvement or inventory reduction. How do you measure productivity improvement? You got me…

    Material cost reduction does result in measurable savings for a company. In some ways PLM does contribute to material cost reduction but there are much better approaches to reducing costs. PLM can be used to sustain the cost reduction but PLM is an inappropriate tool to get the cost reduction. IMHO this is why business leaders want a new PLM business model.

  • beyondplm

    Dana, thanks for your comments and information sharing! I have to admit that a story of PLM ROI is not a simple one. I posted about it few months ago here –Why hard to sell PLM ROI? – http://beyondplm.com/2014/05/24/why-hard-to-sell-plm-roi/

    You are right- in most of situations PLM ROI (especially for engineering part of it) comes from productivity measuring and it is very hard to do.

    However, speaking about things that easier to measure we can get into optimizing supply chain, part cost, operation excellence.

  • I agree that optimizing supply chain, part cost, operations, etc. generates value for most large companies. What is less clear however, is how PLM contributes to generating value. One might say that PLM can help to reduce part cost for example. But how?

    When I was a Sr. Manager at Booz Allen, we had to prove to a partner that the strategy we developed would work before it was presented to a client. This forced us to really think through the process and how PLM would really generate the value.

    One typical example was reducing the number of parts. The partner would ask how? We would say, “people can search and find a part”. How? What if person does not know the part number? “Well search by description” What if the description is just one word? Well, you need more data. Ah Ah! without good, detailed data about parts, parts cannot be found and the business case fails.

    Sorry to sound so negative about PLM but we need to face the fact that PLM must provide real value or the revenue models will not matter.

  • beyondplm

    Dana, so… in the spirit of your comment, what is the right answer that satisfy the ROI based on reducing of the number of parts?

  • Oleg, here is the insight. The objective is to reduce the cost of the parts not the number of parts. Yes, reducing part count will lower inventory costs and provide a good ROI however, reducing part count costs money and takes resources. To reduce part count, an engineering organization must substitute one part for another. This substitution costs money. The engineering work has to be done to validate the new part in the system, the CAD work has to be done, the drawings updated, an engineering change order has to be written and the part has to be tested. All of this work takes resources from other projects. On the other hand, if the purchasing organization can work with the supplier to reduce the cost of the existing parts without changing the form, fit and function, then this cost reduction will drop right to the bottom line.

    Another answer might be that enabling engineers to find existing parts will prevent new parts from being created and avoid increasing inventory costs. However, this is cost avoidance not cost savings. Also, engineers tell us that PLM applications do not provide suitable capability to find parts. If an engineer cannot find a part, it cannot be reused.

    The solution keeps coming back to the need for organized, detailed data about parts. The data has to be in the form of attributes and attribute values with units of measure. With organized, detailed data, procurement can find similarities between parts and work with suppliers to reduce part cost. Engineers can find parts using attributes that match their requirements. Organized data will produce the ROI not the PLM application.

  • beyondplm

    Dana, I think data about parts is clearly one of the key elements to provide visible ROI for PLM. However, “Parts” data is disputable between PLM and ERP vendors. It is an interesting and tough place to innovate. I will try to come with some more thoughts about that later. Thanks for your comments!

  • Oleg, I would enjoy reading your thoughts on parts management and I’m sure I will have something to say 🙂 Obviously I’m passionate about the topic. Of all the PLM functions I have deployed and audited over the years, parts management / parts rationalization is the only capability that has truly delivered measurable ROI. Yes parts management / rationalization is hard, yet the PLM and ERP vendors have done little to enable parts management. They have approached parts management from a computer science viewpoint not a business viewpoint. Consequently, they have missed major functionality.

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  • beyondplm

    Dana, here you go — Part Management is stuck between PLM and ERP.

    http://beyondplm.com/2014/09/11/part-management-stuck-between-plm-and-erp/

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  • yamini

    Great Article..It was very informative..I need more details from your side..include some tips..I am working in Erp In India

  • beyondplm

    Thanks, feel free to reach me out via email.