Predictable revenue – those are the sweet words of harmony that every chief financial officer (CFO) of a company wants to hear. The problem is that predictable revenue is sometimes a mirage. Over the past 10 years there has been a trend in the software industry called Software as a Service (SaaS), instead of buying software as one time upfront purchase you instead pay on a monthly or yearly basis. This benefits both sides, the consumer gets to pay a small amount every month and the software company gets consistent revenue month over month.
This model has been historically applied only to software companies but the hardware guys are getting in on the action as well. The company that everyone talks about is Amazon Web Services (AWS) which is an internet infrastructure provider. They rent webservers on an hourly basis to businesses and you pay for what you use. (I could digress and tell you that in the “olden days” we had to lug Compaq ProLiant servers to a datacenter but I’ll spare you the details.)
Now, a new breed of startups are selling a hardware device and in addition charging a monthly service fee for enhanced services. The one that I love to talk about is Dropcam, they have a video monitoring camera that is so easy to use and makes every other video camera offering look like them came from the paleolithic era. You can throw down $200 for their Dropcam Pro camera and start using it in minutes and you will never have to pay any additional amount if you want live streaming. However, where they really make their money is from their DVR offering. You can watch the previous 7 days or 30 days worth of camera footage and they charge you for that privilege. Their monthly charges are USD 9.99 for 7 days and USD 29.99 for 30 days. As you would imagine many people opt for these packages, no one is going to sit around and watch the camera all day and hence the DVR offerings are a great way to monetize the Dropcam hardware.
Another example are the hardware devices that are being introduce by Automatic, MetroMile and Zubie for your car, it allows you to track and monitor you car from your smartphone. The device fits snugly into the on-board diagnostics (OBD-II) port of the car and then provides location information, speed, mileage, check engine light status and other metrics. Some of the companies are selling the device as a one time purchase while others are selling it like Dropcam, sell the hardware and also have a monthly service fee. When you do the math, you realise the average new car costs about USD 40,000 in the US and that shelling out an extra USD 10-20 a month is really nothing to monitor such an expensive asset.
As more and more hardware devices are created to replace static devices:
Nest – thermostat
Nest Protect – smoke sector
August – door lock replacement
you will see an explosion in Everything as a Service (EaaS) offerings. It’s actually a great revenue model and more importantly it forces the company to continually up their game and make their product/service that much better in the long run.