As the device market becomes increasingly commoditised, intelligent device manufacturers face challenges from multiple fronts including increased competition, growing demand for differentiated functionality, the need to respond faster to changing market conditions, and the business imperative to reduce manufacturing costs by decreasing the number of unique physical devices produced.
Further, with the growth of multi-functional, internet-enabled devices, increased competition from developing countries like India and China, and globalisation of economies; the intelligent device manufacturing sector today needs to re-think its business model and product strategies.
To remain profitable, intelligent device manufacturers must find ways to generate incremental revenue streams. One strategy many intelligent device manufacturers are embracing is the monetisation of software on devices as well as monetising device capacities and capabilities.
As a result, they are becoming increasingly committed to using embedded software licensing as a means to drive down manufacturing costs, respond more rapidly to market changes, and differentiate product offerings. Key to manufacturers’ success is their ability to understand how to leverage software in their marketing mix and monetise it – similar to what traditional software vendors have been doing for years now.
Why monetise software?
Manufacturers can deliver more value to customers by making it easy for them to provision capacity and capability, while at the same time making sure that their customers have access to the latest product upgrades. Manufacturers can be assured of intellectual property protection, competitive differentiation, added revenue streams, and targeting of multiple geographies – without increasing manufacturing stock keeping units (SKUs). The result is increased customer satisfaction, larger profit margins and therefore significantly improved business performance.
The fact is that most intelligent device manufacturers already deliver embedded software within their devices. So it makes sense for them to then create recurring revenue streams from the same offering through subscription licensing, maintenance/upgrade fees, pay-as-you-grow, -otherwise known as usage metering business and licensing models. High-tech manufacturers can therefore build multiple sources of ongoing income, instead of limiting it based on one-time hardware purchases by customers.
By focussing on delivering product functionality as a set of software entitlements, intelligent device manufacturers can gain granular and flexible control over how to package and sell that functionality. For instance, they can efficiently create lower-end products at lower price-points, mid-market products at moderate price-points and premium products at higher price-points – all with the same basic code and hardware.
They simply need to licence the relevant software capability differently for each type of product. To illustrate, in the military/defence technology community, products often have a five to ten year (sometimes longer) lifecycle. During this period, all product capabilities may not be required at the same time, but in a phased manner. Companies in this market therefore need to be able to easily upgrade and downgrade customers without deploying additional hardware. They also need to be able to offer customers licensing and pricing models based on roles and features over the life of the product.
Intelligent device manufacturers can shorten sales cycles by adopting a ‘try before you buy’ model. This is done by controlling software entitlements to customers – i.e. their right to download, use and update software.
High-tech manufacturers can allow prospective customers to trial new products for a fixed period, ensuring that for subsequent use they purchase the necessary software licences for the product in question. Further, this also makes cross-selling and up-selling much easier – customers can immediately activate newly-purchased product capabilities by simply entering a licence key.
A software-centric business model enables intelligent device manufacturers to offer electronic software distribution and entitlement management-enabled self service. Typically, it takes time and money to pre-configure hardware devices with the right software. However, through software entitlement management, manufacturers can ship devices, but then allow customers to retrieve the software they need via a self-service portal, significantly cutting manufacturing and related costs. Under an exclusively hardware-centric business model, the revenue on any given sale can be substantially delayed by the process of building and shipping units. With software, on the other hand, manufacturers can recognise revenue shortly after an order is placed by simply providing customers with access to software and any associated licence keys. This in fact significantly enhances customer experience too – they can do everything online without the hassle of arranging to physically ship the product back to the manufacturer or wait for a replacement device to arrive in the event of a problem.
The key is that by provisioning devices with software, intelligent device manufacturers can quickly bring new capabilities to market, leverage their technical advantages through a wider range of OEM licensing relationships, and more flexibly enhance their product offerings.
Managing a digital business in a intelligent device manufacturing company
While a shift in business strategy to a software-centric value proposition offers numerous advantages, achieving it requires a change in mindset from the traditional way of doing business. In addition, to effectively transition business strategies, and optimise the results achieved from such a shift, it is important to follow a proven, practical process.
Intelligent device manufacturers need to think like a software company by deploying software licensing and entitlement management methodologies alongside operational and business processes.
For intelligent device manufacturers to become digital businesses, undertaking the following steps is crucial:
- Securing business buy-in for the transformation
- Understanding the traditional software licensing methodology and its uses in the high-tech context
- Determining the appropriate software licence compliance policies and enforcement mechanisms
- Understanding the difference between delivering hardware and digital goods
- Understanding the software value lifecycle – as opposed to a one-off hardware transaction, it is an ongoing process
- Creating business processes to support the value cycle of the software
- Implementing a customer self-service portal – it can reduce operational costs and increase customer acceptance of software
- Defining and executing a product management and go-to-market strategy
- Implementing sales training and compensation policies – selling is not about selling numbers of hardware pieces, but about selling ‘value’
- Continuously fine-tuning strategy for product development, delivery and execution to optimise revenue and margins
In summary, the intelligent device manufacturing ecosystem is complex, and the unbiquity of the internet, in fact, leaves manufacturers little choice but to embrace a software-centric approach to selling hardware to ensure differentiation and optimisation of revenue.
Adopting solutions that leverage software through embedded licensing, entitlement and device lifecycle management can enable manufacturers to unlock new revenue streams, protect intellectual property and implement configure-to-order manufacturing processes that dramatically reduce inventory while facilitating greater responsiveness to changing market conditions. The case is compelling.
Vincent Smyth is General Manager EMEA, Flexera Software