In our previous blogs in this original equipment manufacturers (OEM) series, we delved first into key challenges that emerge as OEMs increasingly intertwine software and the challenges creating software-centric solutions that OEMs face regarding successful software management. We emphasized the importance of alignment, both within the organization and with the overarching digital transformation strategy. We also highlighted the significance of aligned software and asset lifetime management, as well as the need for connectivity to create a cohesive ecosystem.
For OEMs looking to expand their software portfolio and drive profitable revenue growth, they find themselves on various transformation journeys. These transformations encompass shifts from free-to-fee models, transitioning from traditional license sales to subscription-based business models, and evolving from product offerings with software add-ons to comprehensive software-centric solutions that include hardware, software, AI, and services. Additionally, there's a growing trend among providers, adding a third layer of transformation by offering all-inclusive subscription services.
Among these challenges, monetization is a pivotal aspect of business model transformations. It's also undeniably the most complex hurdle, which we will explore in depth in this blog.
Mastering the art of monetization is crucial to helping customers achieve their desired outcomes. Keep reading to learn how to navigate monetization and transformation in this industry.
To read the first two blogs in this series, check out the following links:
- The Road to Digital Transformation: Unpacking Software Challenges for Original Equipment Manufacturers (OEMs)
- Software-Centric Solutions for Original Equipment Manufacturers (OEMs): Navigating Challenges and Seizing Opportunities
Software Offering Management and Monetization: A Key Challenge for OEMs
Monetizing maintenance and support services for their installed base has long been a strength for our members. However, for OEMs, the ongoing challenge lies in monetizing services and reducing the free offerings they provide. Specifically, when it comes to software for equipment operation and updates, many companies we've spoken to face hurdles in developing a successful monetization strategy.
In a 2018 industry trend analysis, we noted a common trend among hardware-centric OEMs: many were giving away software and maintenance services in the hope of selling more hardware. However, this approach missed a significant opportunity to learn from software companies that excel at increasing recurring service revenues. This trend has only continued.
Monetization revolves around transforming the business model, which is undoubtedly the most challenging aspect. At TSIA, we’ve drawn insights from the experiences of legacy software companies that have successfully transitioned from selling software licenses to operating in the cloud subscription model. The difficulty of this transformation and the keys to successful management can be gleaned from this Informatica case study.
To enhance your software monetization initiatives, a company must recognize that it’s already software, SaaS, AI, and data-driven. These emerging imperatives require the same focus as your core product business.
Identify Value Creation through Software: A Key to Monetization
When discussing monetization in software, it's essential to shift our focus away from simply counting lines of code. Instead, focus on the value generated through data acquisition and the pivotal role it plays in enhancing customers' outcomes. Monetization is about providing value by actively contributing to improving customers' outcomes and charging for these invaluable contributions. While it may sound straightforward, it's a challenging task.
Monetization begins with formulating a clear digital value-creation strategy, and then shaping a coherent product and service portfolio that aligns with this strategy. Outcome improvements are achieved through software and data transformation into actionable insights to enhance:
- Overall processes
- Digital customer experiences (DCX)
- The delivery of responsive remote services
- The provision of real-time insights through dashboards and alerts, among other benefits
Consider the journey a customer undertakes when using a product over time. Initially, there's an investment in implementation, training, and ramp-up. As time progresses, the customer realizes an increasing return on investment (ROI). With the integration of software and services, you have the potential to expedite implementation, reduce costs, and, most importantly, boost your customers' ROI through the delivery of digital value.
Machine learning (ML) and artificial intelligence (AI) further amplify the outcomes and ROI improvements for customers. They enable the provision of proactive and prescriptive remote services, as well as more autonomous control over operations.
Internally, it's imperative to comprehend the tangible values that software and AI add and build the capabilities needed to make customers recognize these contributions. While software closely tied to the product may offer limited value and monetization opportunities, the real potential lies in going beyond the product itself. Empower your software to enhance customer processes, streamline workflows, and drive value creation. The software can effectively manage customer processes and even accurately predict the health of processes and equipment.
Leaders on this journey toward outcomes have a well-defined framework for identifying and addressing customer outcomes, setting them apart as pacesetters in the industry.
Overcoming the Monetization Threshold: Focus on Customer Value
In our journey toward effective software monetization, it's crucial to understand what TSIA refers to as the "monetization threshold." Simply put, customers are willing to pay for software and AI only when it adds tangible value to their business operations. They're not interested in footing the bill for the value your business derives from these technologies.
Remote services are pivotal in enhancing vendor service efficiency, reducing warranty failures, and facilitating better onsite deployment planning. Through these services and the insights they provide, vendors can elevate product quality and spark innovation in research and development. However, it's important to note that customers won't pay for your operational efficiency gains.
Monetization strategies must be grounded in customer values. Here are some practical examples of monetization opportunities for software:
- Software license sales: Include software licenses with the initial product purchase.
- Subscription models: Add a subscription plan to the product, encompassing software, software maintenance and support, and regular updates.
- Implementation and consulting services: Assist customers in maximizing the software's potential through professional services, training, and seamless update processes.
- Service enhancements: Leverage software and AI to offer value-added services, such as remote assistance and information services.
- Compliance and regulation tools: Provide tools and software that aid in compliance, regulation adherence, and risk management.
- Streamlined operations: Simplify product and service usage, reduce complexity, and enhance efficiency through data provisioning, autonomous operations, and automation.
- Process improvement support: Offer support for customers to optimize their processes, resulting in reduced time-to-market, improved productivity, and a better user experience.
These software offerings can be provided as standalone solutions or bundled with products or services, depending on your business strategy.This marks the beginning of your software offering management journey, where customer value takes center stage in your monetization approach.
Effective Offering Management: Meeting Customer Needs
To embark on a successful journey of offering management, it all starts with thorough customer and market research. Understanding customer needs is paramount. For OEMs, there's seldom a one-size-fits-all solution in software and services. Providing these offerings demands in-depth business domain expertise, encompassing specific usage patterns, regulatory requirements, education levels, and more.
Every industry possesses its unique perspective and comprehension of business outcomes. Furthermore, products, services, and software are customized and configured to cater to individual customer needs. This vertical and customer-centric focus often clashes with the concept of standardization in offerings.
Accordingly, TSIA has amassed ample evidence showing that complexity can erode profit margins. A quote from the "State of Service Offer Management 2023" underscores the central challenge: "It is a fundamental challenge for the service portfolio leader to maintain a balance between customer choice and portfolio complexity—to develop creative multiservice packaged offers aligned to the business problems of well-understood customer personas."
Defining requirements for new software offerings or adaptations necessitates adopting a life cycle view. The management of software offers should encompass policies for updates, extending all the way to end-of-support. This alignment is vital, not only with traditional product offerings and services but also with smart connected products and remote services, as well as across all software categories discussed in our previous blog.
Creating Additional Revenue Streams through Monetization
In software monetization, the ultimate goal is twofold: to monetize your software effectively and ensure high customer satisfaction (CSAT). Satisfied customers are not just likely to renew their subscriptions—they are also likely to expand their engagement by acquiring more licenses and subscriptions. However, the key to customer loyalty should not be a mere lock-in effect; rather, it should be driven by genuine excitement for your offerings.
The strategies for monetization heavily depend on the type of software and the provisioning method.
For software installed on-premises, the following monetization model applies:
- CapEx sales: This involves selling licenses for software as a separate entity or bundling software licenses with the sale of capital goods (CapEx). Regarding premium features or software add-ons, we strongly recommend giving the software a distinct price tag and communicating its unique value. This approach simplifies pricing for software maintenance and updates as the software life cycle progresses. Eventually, license sales should be phased out, transitioning into bundled subscriptions, aligning with trends in the software industry.
Now, let's delve into subscription models. A successful subscription must offer value beyond mere software usage to entice customers to embrace and adopt your offer. The available options for OpEx sales include:
- Bundled subscription: Offering software as a subscription, which can be bundled with products, services, and onsite software installation. Such a bundle can encompass support, maintenance, and updates, creating a tech-as-a-service offer.
- Pure software subscription or SaaS: Providing software as a pure subscription, typically called Software as a Service (SaaS). The more your software extends beyond the product, the easier it becomes to monetize through a subscription model. Subscriptions bring the advantage of generating recurring revenue streams while including maintenance and updates.
- Mixed subscription: OEMs often offer software solutions spanning from edge to cloud. In this scenario, a subscription offer can combine on-premises and cloud-based software, and possibly even hardware, under a single service bundle. This comprehensive approach covers the entire spectrum of your offering.
- Pure cloud software subscription: For cloud-based offerings, subscriptions are the standard monetization model. Customers must continue to derive ongoing value from your offering, facilitated by services like support, training, and introducing new features.
Having well-defined monetization models makes it easier to move away from providing software and software maintenance for free.
Companies that successfully monetize software tend to enjoy both growth and profitability. This holds true for OEMs as well, in line with the prevailing shift towards Software as a Service (SaaS) and other XaaS models, further emphasizing the importance of AI in this landscape.
For OEMs, the future lies in effectively monetizing software and embracing evolving consumption models.
Debate, Deliberate, and Decide: Monetization Strategies for OEM Software
In the world of OEMs, managing and monetizing software offers a realm ripe with opportunities for improvement. To embark on this journey and thrive, here are key takeaways:
- Customer-centric focus: Always center your efforts on enhancing the outcomes for your customers.
- Connect and collect: Establish connections and gather data and information to inform your decisions.
- Leverage software and AI: Develop the capabilities to harness the power of software and artificial intelligence effectively.
- Comprehensive offer portfolio: Craft a compelling offer portfolio encompassing products, software, services, and AI.
- Continuous improvement: Commit to refining data, enhancing your offerings, and creating new solutions.
TSIA strongly recommends sharing this blog series with your executive team. Encourage debates on the challenges and opportunities presented. Assess your current status and define a roadmap. Deliberate on which capabilities are becoming mission-critical for your company's future success. Finally, make clear decisions about the capabilities your company needs to enhance to become a pacesetter in managing your software offerings.
In closing, success in software management and monetization lies in your ability to adapt, innovate, and put the customer's needs at the forefront. Embrace these principles, and you'll be well on your way to thriving in the ever-evolving landscape of OEM software.