For many years technology companies sold products where functionality was dependent upon hardware and device capabilities. Acquiring new functionality usually required buying a new device that could do something that was not possible with the previous generation of device. Changes in technology, customer expectations, global competition, commoditization of hardware, tighter CAPEX budgets and customer demand for more value and functions without repurchasing hardware–or persistence of functionality across hardware changes–have forever shifted the market.
This paper explores some of the evolutionary drivers and provides guidance on how to navigate the shift from a device-centric to a more solution-centric, feature-based licensing model approach that enables differentiation. We explore business and implementation considerations, giving you a vision of how to take advantage of immense opportunities inherent in a business focused on providing extensible and flexible solutions rather than selling just hardware and devices.
Most importantly, movement to a solution-centric, featurebased licensing model approach allows you to increase recurring revenues and add great flexibility to your product lines, all while making your company easier to do business with.
An industry in transition
Generically, two primary disruptors have forever changed the world of telecommunications and device manufacturers. First was the ‘Internet Bubble’, which drove hardware commoditization–from servers to networking equipment incorporating high-reliability attributes that had been solely the domain of proprietary, non-open-standard devices. Telco service providers could now procure standardized hardware at significant cost savings-giving them leverage for lower prices and increased competition by eliminating the need to upgrades just to gain addit ional capability. Margins started to erode. And today, with the advent of multiple cores, standardized interfaces, virtualization and cloud offerings, the market demands and measures more in terms of capability (features and capacity), and less on brand.
Second was the ‘Smart Phone’ which was ushered in by Apple and the iPhone. Today’s sophisticated customers expect device capabilities as table stakes where a device family’s success is driven largely by the application (software) ecosystem. For example, when your car wants a data stream to schedule a service call or provide internet radio, you care less about phone brand than about capability. As a manufacturer, your device will have to support the rapidly increasing pace of new functionality without continual hardware uplifts.
Thus, hardware, and more pointedly, device manufacturers have had their entire business model turned on its head and must evolve in the new domain of the software-centric world in order to survive.
Taking the steps to move your business from hardwarecentric to solution-centric opens a world of additional revenue possibilities. In particular, you can realize greater flexibility in product offerings while making your company easier to do business with. Both of these improvements require little marginal overhead. While the path to get there requires careful thought, you can transform your business incrementally with wins along the way.
When making the transition, businesses should focus on three areas to drive business decisions:
- What are you selling?
- How will you monetize it?
- Who will sell and fulfill it ?
Clearly there are a lot of details but t he vast majority fall into one of these categories so let’s explore them.
Any discussion of technology and licensing has many terms that are often used in different ways. Here are definitions of terms used in this paper:
- Device/Hardware: An element usually sold as an independent functional unit. Generally, the term device refers to a commodity such as a mobile phone, tablet, or other end-user item. Any physical unit or element that delivers a set of functionality. Includes both devices and larger elements such as servers and other network equipment.
- Software: Applications and other malleable, replaceable code installed on hardware. In a software-and/or feature-based solution-centric approach, your applications and software become the driving line items in your portfolio.
- License: A mechanism, usually involving a key, token, or some other registration, that authorizes use of software functionality. Licenses enable you to tailor solutions and expand your product line with less reliance on physical hardware changes or delivery.
- Feature: A capability or capacity that is embodied in one or more hardware and software elements and usually is a sellable line item.
- Solution: A combination of software, hardware, features and services sold as a collection to solve one or more specific business needs. Whereas a company might once have sold 50 cash registers to a customer, that same company now sells a solution that supports 50 transaction points, along with inventory monitoring capabilities, and can add value with a new application or license key.
What are you selling?
In a traditional hardware or device model, the primary line item is an assembly of some sort: frame(s), card(s), box(es) or a commodity standalone unit such as a phone. Capabilities, usually in the form of features, typically form subtending components in the Bill of Materials (BOM) or line items that add value to the hardware. Thus, you sell a chassis with some number of features added on. Extensions to the original sale may include new features, but usually center on new cards or other tangible additions, if not replacements. This was often true in commodity devices that were considered expendable with a limited lifetime.
In the new world, we come in from a different dimension. We sell capability (features and capacity). Rather than quoting a WhizMaster 5000 with 85 processor cards and, oh by the way, it will service up to 300 customers; you now quote a 300 Customer Support System that just happens to include the hardware to make that happen. Rather than selling a purpose-built word processor, phone or other end user device, you sell a unit that can be expanded by a software change.
Think very carefully about this. We have just broken and replaced every product management and quote configuration rule and asked our entire carefully trained sales force to STOP focusing on selling hardware. Every company that’s made the shift has had to overcome this mind-numbing change in thought process. Be careful to avoid minimizing its importance or difficulty.
How will you monetize it?
So, if what we sell is different, then how it gets monetized will also change. In fact, there are many more creative opportunities for driving revenue with a solution-centric, feature-based licensing model approach.
Again, in the traditional hardware world, the revenue stream boils down to two components:
- Units of hardware with an associated capability as one-time sale, usually with a high margin
- Annuitized revenue stream with support contracts, usually for both hardware and software, with or without an ability to upgrade software along the way
In reality, many hardware companies deeply discount support contracts in order to make the initial sale; ultimately this undervalues a critical revenue source. Focus on devices and larger hardware tends to drive a very bumpy revenue cycle, especially for large contracts with long sales intervals.
The other challenge with a hardware, device-centric marketing approach is that customers have a natural tendency to want to drive down incremental cost of each unit which puts your sales in a defensive posture. In fact, the software capabilities or features often times takes a back seat to physical device and it is solely the device that drives pricing.
Fast forward to today’s solution-centric, feature-based licensing model approach and we see that changing product focus to one of software, feature, services and solution value moves your marketing conversation away from customers’ perceived cost associated with manufacturing hardware (and the drive to lower it) and the traditional perceived near-zero distribution cost of software.