Things are moving fast these days. Vendors are speeding up their plans to catch up with new development. The changes are coming from both technological and business sides. Today, I want to focus more on the side of business. Few years ago, I put some of my thoughts in the blog post – Faltered licenses and future business models. Fast forward from 2010 into 2015… there are lot changes in the way software companies are selling their software. Actually, many of them are not selling software anymore. Subscriptions became a reality.
The following article caught my attention earlier this week – Keurig accidentally created the perfect business model for hardware startups by Bolt (venture capital firm focusing on hardware). Take a read – there are some great examples and comparisons of business models in the article. Here are few of my favorite passages:
Recurring revenue matters because it fundamentally changes your business. There are good reasons investors are averse to hardware but love software. One of the leading reasons revolves around future revenue. Investors pay huge premiums to own stock in companies betting on the likelihood that future revenue will be drastically larger than current revenue. If you’re in a traditional hardware business, future revenue is confined to cyclic product sales. This roughly means you get one shot at revenue with each customer per product development cycle: each sale must be painfully acquired by building a new product every 18 months or so.
This is where the brilliance of the Keurig model shines. The initial sale of a $120 Keurig brewer isn’t that difficult or costly. Keurig doesn’t spend a lot on marketing or advertising and the product isn’t complex to manufacture or service. In my rough estimation, the BOM for a brewer is around $40, giving Keurig about a 25% gross margin on the product. Time from PO to FOB is likely less than 2 months, yet high-margin K-cup sales start immediately and continue for years. Keurig spends less than $0.015 on each K-cup and charges 100% more per unit than bagged, ground coffee. Yet few people complain about this cost.
The big thing is recurrent revenues. It is much easy to sell something to your customers. Especially, if the price is a comfortable zone. This trend is going up these days.
It made me think more about business models of engineering and manufacturing software. PLM is included. And PLM was guilty many years for very “uncomfortable” price points. Which in many situations lead to wrong set of expectations and failure of PLM adoption.
I can see a trend among software vendors today to change that. It might be a good question how to bring PLM price point to “comfortable zone” and connect it to the use and adoption of software. The more you use it- the more revenues you will be able to get from customer. On the other side, usage of software means value for customer. Some sort of win-win situations.
What is my conclusion? Business models revolution is coming to enterprise software. In the next few years, we are going to see many examples of innovation in engineering and manufacturing software business models. Freemium and subscription is only beginning. The latest example of Onshape, which is inventing pay for privacy model. Watch that space for innovation. Just my thoughts…
Best, Oleg
Picture credit Keurig and Bolt article
Image courtesy of ddpavumba at FreeDigitalPhotos.net
