Rashmi Guptey
1st February 2022
Harish Talreja
25th January 2022
Sid Talwar
31st December 2021
Ankit Moorjani
30th June 2021
20th January 2024
Sandeep Murthy
17th March 2022
1st January 2020
20th November 2017
7th June 2022
15th May 2022
17th February 2022
28th November 2023
Prashant Mehta
2nd February 2022
22nd September 2021
30th August 2021
15th March 2022
21st January 2022
14th January 2022
5th November 2024
Monish Pathare
28th October 2024
4th October 2024
5th August 2024
20th October 2021
25th April 2021
Akshat Jain
12th February 2021
31st May 2020
Tanya Rohatgi
19th August 2024
20th June 2024
Siddhant Ahuja
25th April 2022
14th February 2022
2nd June 2018
5th June 2024
15th February 2024
9th February 2024
26th May 2022
1st February 2024
20th November 2020
Shivani Daiya
20th February 2020
17th August 2014
17th October 2024
18th July 2019
17th September 2021
15th September 2021
Maansi Vohra
28th January 2021
Atharva Purandare
10th January 2021
Tanvi Ghate
23rd January 2024
Ahan Rajgor
12th May 2022
8th March 2022
22nd February 2022
22nd August 2024
29th July 2024
5th June 2022
5th May 2022
16th April 2021
15th November 2014
25th October 2021
8th March 2020
7th August 2018
27th December 2016
17th February 2021
29th September 2020
24th September 2020
26th July 2020
20th January 2020
15th October 2018
26th June 2018
13th June 2017
21st May 2024
13th February 2024
15th July 2024
10th April 2024
20th February 2024
The commoditization of hardware is forcing a range of product-oriented businesses to revamp their business model to remain relevant. instead of selling the product, companies are offering the benefit to customers in other ways.
The commoditization of hardware is forcing a range of product-oriented businesses to revamp their business model to remain relevent. Rising competition from emerging markets, continuous tech innovation and increasing information symmetry has squeezed the profits of traditional hardware companies and eroded their long-run differentiating factor.
Fundamentally product-led businesses have a large installed base to cash in on. Typically, they complement their revenue streams with aftermarket services such as operational support, repairs, spare parts, etc. But in order to generate superior returns and cover overbearing capex in today’s competitive environment, companies are experimenting by making service a core value proposition - offering it as a service. Essentially, instead of selling the product, companies are offering the benefit to customers in other ways. And it’s being applied to a whole range of industries.
GE transformed the heavy machinery market by offering its jet engines as a service on “power by the hour” basis. Likewise, Philips sells LED lights on a per-unit basis for large industrial buildings (in the Amsterdam Airport). Instead of paying for the entire lighting system upfront (installation, bulbs, etc), the Airport pays for a fixed level of lighting at a fraction of the price.
On the consumer side, most smartphone manufacturers are battling the commoditization of their hardware. Apple though has been extremely successful at creating a sticky ecosystem where consumers buy an iPhone with the preconceived notion they will have to access services connected to it - iCould, apps, ApplePay, HealthKit, etc. Xiaomi has taken this a level further, disrupting the market with its “Triathalon Model” – concentrating on software and services, using hardware as a means to provide it. Xiaomi prices its models almost at cost, generating all profits down the line through added services such as apps, games, software, customizations and tools.
In the realm of software, the invention of cloud-infrastructure made selling Software as a Service (SaaS) possible. Instead of manufacturing software on disks and shipping them to clients, software companies are placing solutions in the cloud charging clients a subscription fee (usually per user per month).
In many areas, pivoting to services increases accessibility to expensive products. SolarCity pioneered the movement for solar making customers pay for the energy generated by panels instead of the equipment itself. Kotak Solar is driving a similar trend in India. Its opex model removes the massive upfront investment needed to convert to solar. Kotak helps customers generate savings from day 1, without any upfront capital (around $15,000 - $50,000 for a average household).
Even industries as archaic as furniture are seeing this adaptation. Furlenco offers its furniture on subscription basis, with customers paying a monthly fee for however long they want. This is increasing access of (high quality) furniture across Indian metros, reducing ownership burden and increasing flexibility.
Its being applied everywhere: Content (Netflix), complex manufacturing (3D-printing, imaterialise), beauty care (Dollar Shaving Club & Birchbox), etc.
Advantage for Businesses
There are multiple benefits of shifting a typical product model to a service.
Above all, it allows businesses to convert chunky capex into more stable opex, improving cash flow visibility. Revenues can be evened out over a period of time, reducing the cyclicality of businesses (like education & tourism). In turn this can have positive impact on valuation. Furlenco’s furniture assets can be used over a long duration by multiple customers increasing utilization, NPV and ROE.
Most important in my point of view is that businesses can engage with customers over the lifetime of an asset when offering a service - no longer does contact with the customer end at the point of sale. This creates opportunities to up-sell products and increase stickiness in the ecosystem. More importantly it can have a positive impact on competitive differentiation.
Benefit for Customers
Cost advantage is the primary benefit for customers. Customers can spread out the cost of the product over a period of time. Reducing the burden of heavy capex helps businesses become more nimble - increasing investment flexibility and the ability to scale up quickly.
This particularly improves accessibility, particularly in difficult economic times. Pay-as-you go models lets customers use a product only as much is needed, removing the barriers to entry. Amazon Web Services is a prime example - letting small companies use complex cloud services without having to make chunky infrastructure investment.
This is a trend emerging across the board, in multiple industries. However I think this is only the start of a much broader effort by companies to remain relevent in an increasingly competitive landscape.
A business without differentiation quickly becomes commoditised weakening margins. Operational improvements become a hygiene factor in highly competitive markets.
We spend a lot of time thinking about the changing nature of ownership. It’s amazing how much “stuff” most of us collect over time. And how little we actually use in everyday life. It makes you start questioning consuming and purchasing habits in general.
In this investment we are doing our small part in affecting the consumption patterns of our society. Harvard University sociobiologist Edward O. Wilson claims the earth can support 10 billion people – a number others predict may be hit by 2100.
You will receive the next newsletter in your inbox.
The monthly Gazette is your source of happenings within Lightbox - updates, blogs, deep dives, opinion pieces and all things consumer tech
Join the thousands who hear from us