Everything-As-A-Service (XaaS)

Business Models for Original

Equipment Manufacturers
Subscription, Pay-Per-Use and Pay-Per-Outcome
Harinderpal (Hans) Hanspal
hans@thing.company

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 4

 Buyer expectations of B2B and B2C products and services are shifting
regardless of industry

Privacy and Security Frequent Product

Updates

Planet Friendly and

Sustainable Personalized Products

CUSTOMER
EXPECTATIONS

"Set and Forget" No Ownership or Single

Operations SKU Purchasing

Rapid Deployment Direct from

Manufacturer

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 20

 Buyer expectations are driving OEMs to new BUSINESS MODELS that
require many things to come together, bound by TIME and FUNDING

Building & Servicing Finding & Keeping

Products Customers
Products Customers

Original
Equipment
Balancing Revenue, Manufacturer Building & Integrating
Capital (OEM) Ecosystem
Funding & Expenses Ecosystem

Resources

Accessing Talent,
Technology & Spaces
(c) Thing Company llc | hello@thing.company | @thingcompanyllc 22
 Buyer expectations of product PERFORMANCE, operating EXPENSES, and
LONGEVITY requires OEMs to build SMART products, enabled by electronics,
advanced connectivity, software, algorithms, APIs and new ecosystems

Source: https://hbr.org/2014/11/how-smart-connected-products-are-transforming-competition

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 28

 Buyer ownership preferences are shifting from bulk purchase and ownership
to on-demand, single SKUs paid for by subscription, usage or delivered
outcome, shifting operating expenses to deploy, maintain, operate, repair
and secure products to OEM

Customer Responsible Everything-As-A-Service (XaaS): OEM

for Delivering Outcome Responsible for Delivering Outcome -

Pay-Per-
Buy/License Lease Subscribe Pay-Per-Use
Outcome

COSTS to Deliver Outcome = Product Costs, Product Deployment, Operations, Maintenance, Repair, Security

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 46

 Smart products create new monetization opportunities for OEMs to
increase customer/asset/contract lifetime value using any
combination of TRANSACTIONAL, SUBSCRIPTION, PAY-PER-USE and
PAY-PER-OUTCOME revenue models

Legacy
Hardware
End-User responsible for + Smart Smart
Warranty Product Connected
product CAPEX and Product + Product
+ Product
deployment & MRO OPEX Parts + Condition + System
to deliver outcome + Monitoring Monitoring Multi-Asset +
Aftermarket Service Service Support Partner
Service License License License Services

Smart
Smart Product System of
Product Connected
Product System Systems
Product
XaaS

OEM responsible for Subscription Subscription Subscription Subscription Subscription

Or Or Or Or
CAPEX for product and Pay-Per-Use Pay-Per-Use Pay-Per-Use Pay-Per-Use
Deployment & MRO Or Or Or
OPEX to deliver outcome Pay-Per-Outcome Pay-Per-Outcome Pay-Per-Outcome

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 68

 Smart products combined with XaaS business models and recurring
revenue models create many benefits for OEMs
•Monthly Recurring Revenue
•Annual Recurring Revenue
•Average Revenue per
Customer/Asset
•Asset Lifetime Value
•Customer Lifetime Value
•Total Contract Value
PREDICTABLE recurring
REVENUE streams
More FREQUENT
customer TOUCHPOINTS
•Targeting new markets
•Increase Utilization
•Customer Engagement
•Upselling Opportunities
(c) Thing Company llc | hello@thing.company | @thingcompanyllc
CUSTOMER experience
and CHANNEL
•More Frequent Product •Parts Turnover
performance INSIGHTS
Improvements •Less (post-warranty)
•Operational Efficiency •Targeted Customer aftermarket parts and service
Improvements Segments competition
•Go-to-market
Channel/Acquisition Cost
Optimizations
PRODUCT experience
INCREASE aftermarket
and consumption
services ATTACH RATES
INSIGHTS
69
 Legacy OEM business of selling finished products, spare parts and
aftermarket services is cash-flow friendly with fixed gross margins for product
sales

• Long product cycles Products

Products & Services
& Services
• Gross Margins determined by
production unit costs • Single Transaction
• Aftermarket Services (Warranty, Awareness
Awareness • Transaction Size Determines
Parts, MRO Services) Success
• Large Size Transactions
Acquisition
Acquisition
• Mostly offline (i.e non-digital)

Fulfillment
Fulfillment
• Customer Responsible for
• Fixed Cost-of-Goods Sold
CAPEX & OPEX spend
Deployment
Billing & Rev Rec • Cost of Sale Recovered
• OEM Aftermarket Services
available for additional cost • Product Revenue Recognition on
Shipment/Deployment (“Freight on Board”)
• Competitive aftermarket parts Billing &
Deployment
and service market Rev Rec
• Services payments based on
time-based milestones Aftermarket
AS Services
• Break-fix Relationship

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 49

 Getting to profitability requires managing costs across multiple areas in
addition to reducing “UNIT COST” of finished product

Freight-In &
Raw Duties & Tariffs
Freight Out
Fabrication
Materials &
& Assembly
Components Selling,
Warehousing
General &
& Fulfillment
Administration
Production
Reworking &
Labor &
Scrap Defects & Financial &
Overhead Returns Billing Fees

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 50

 Aftermarket services can be more profitable than selling physical
products, but Aftermarket Lifetime Value and attach-rate of services
varies significantly industry-to-industry

Industrial Equipment aftermarket services: Growing the core | McKinsey

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 51

 XaaS business models become profitable over time and require
efficient and agile processes for product development, finished
product production, customer/asset acquisition, activation,
operations, customer engagement, and asset utilization

Frequent Updates – Features & Operational Functionality

Multiple transactions over contract lifetime Designed for Excellence (Manufacturability, Rapid
Contract lifetime value determined by Asset Utilization Deployment, Efficient Operations, Recyclability)
Profitability driven by Acquisition Costs vs Lifetime Value
Billing & Revenue
"XaaS" Products
Recognition

Pure XaaS
Free Test Drives
Subscribe
• OEM Responsible for Asset Acquisition
Operation & Pay-Per-Use Hybrid (Legacy + XaaS)
Deployment
Engagement Pay-Per-Outcome • Customer Responsible for Asset Acquisition
Add-Ons
• OEM Responsible for delivery of outcome
OEM Responsible for OPEX Upgrades
Downgrades
Usage & Engagement Determines Success Pause
Variable Cost-of-Goods-Sold Restart
Gross Margins based on Operational Efficiency Cancel
Fullfilment Awareness

Acquisition

Omni-Channel with Digital First Channels to

reduce Acquisition costs
Optimized for Marketing & Sales Efficiency

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 53

 XaaS and ON-DEMAND business models take longer to get to
profitability and require UPFRONT CAPITAL for device acquisition,
deployment and operating expenses

Customers Finished Product/Asset

Average Device
Device Lifetime
Revenue Per Retention
Value
Customer Customer Customer Device Rates
Acquisition Support Lifetime
Costs Costs Value Device Device Finished
Acquisition Deployment Product and
Costs Costs Parts Inventory
Customer Average
Retention Revenue Per
Rates Customer Device
Operating
Costs

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 55

XaaS business model profitability can vary for each customer, location, fleet
and asset

Customer | Location | Fleet | Asset

Customers Lifetime Value
Acquisition Costs
Location1 Location2
Average Recurring Revenue

Fleet A Fleet B Fleet C

Retention Rate
Cost-to-Serve
Asset A Asset A1 Asset A2 Asset B1 Asset B2 Asset C1
Acquisition Cost vs Lifetime Value
Time-to-Recover Acquisition Costs

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 59

 Asset/Customer acquisition costs vs customer/asset lifetime value
ratio and time to recover acquisition costs determines XaaS success

Acquisition Lifetime
Costs Value

Retention Cost
Recurring
Rate & Product To
Revenue
Lifetime Serve

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 58

 Gross Margins for XaaS business models vary month-to-month over
CONTRACT, CUSTOMER, and ASSET lifetime

Customer | Asset | Contract Lifetime Value

Acquisition Channels Revenue Gross Margin Lifetime Retention & Utilization

Finished
Recurring Product & Parts
Revenue CAPEX

Asset Utilization
Deployment &
Fulfillment
(Onboarding)
Acquisition Expansion
Costs VS Revenue
(Upgrades/Add-Ons)
VS VS Asset Useful Life

Maintenance,
Repair,
Operations Engagement &
Retention

Lost Revenue Remote & Field

(Churn/Downgrades) Support

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 60

 Increasing lifetime value requires continuous technical AND business
innovation

• Product & • Segments • Packaging • Acquisition

Customers

Revenue
Products & Services

Expenses
Service • Acquisition • Pricing Costs
Catalog Channels • Policies • Cost-to-
• Product • Time-to- • Subscription Serve
Features Value • Pay-Per-Use
• 3rd Party • Engagement • Pay-Per-
Products • Retention Outcome
• Design for
eXcellence

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 67

Recurring Revenue Models require continuous improvement, efficiency and
agility across PRODUCT, CUSTOMER and ECOSYSTEM operations

Customers & Distribution Channels Product (OEM & Suppliers)

Awareness Design

Devices/Assets
Retire Engineer
Customers Product Inventory
Billing & Rev Parts Inventory
Rec Lifetime Value Acquisition
Acquisition Costs Deployment
Fulfillment Costs Maintenance
Recurring Revenue Repair
Retention Rate Overhaul
Cost-to-Serve Operations New
Service Remote Support Product
Field Service Introduction
Customer
Support &
Fulfillment
Service Scale
Operations Production

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 70

 CONTINUOUS IMPROVEMENT, AGILITY and EFFICIENCY across product
DEVELOPMENT and PRODUCTION cycles reduces product unit costs

Scrap & Rework

Design

Overproduction

Retire Engineer Waiting

Learn Build Product Underutilized Talent

Lifecycle Transportation
New
Service Product Inventory
Measure Introduction
Talent Motion
Scale
Production
Over Processing

Continuous
Improvement Agility Lean

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 71

 Designing for eXcellence (DfX) helps reduce OEM’s production costs, but
XaaS models add additional DfX requirements for acquisition, deployment,
operational efficiency, engagement and utilization

Design
Design for Manufacturability (DfM)
Design for Supply Chain
Retire Engineer Design for Testing
Design for Recycling
Product
Design for Acquisition Channel
Lifecycle
Design for Deployment
New Product
Service
Introduction Design for Serviceability
Design for Operations
Scale
Production
Designing for Engagement & Utilization

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 72

 Legacy OEM lead-to-cash processes are transaction-focused while XaaS
processes focus on outcome, customer engagement, asset utilization, and
operational efficiency

Legacy XaaS
One-time purchases | License Fee | Parts |Aftermarket Services Subscription | Utility | Outcome

Products & Services

Products & Services

Awareness
Awareness
Billing & Revenue
Recognition
"XaaS" Products

Acquisition
Acquisition

Operation &
Fulfillment
Fulfillment Engagement
Deployment

Deployment
Deployment

Billing
Billing & Rec
& Rev
Rev Rec Fullfilment Awareness

Aftermarket
AS Services
Acquisition

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 73

 Legacy OEM business operations are siloed, XaaS business models require
cross-functional teams to maximize lifetime value and recover acquisition
costs quickly

Legacy XaaS
One-time purchases | License Fee | Parts |Maintenance Services Subscription | Utility | Outcome

Product Products & Services

Products & Services
Billing & Revenue
Marketing Awareness
Awareness Recognition
"XaaS" Products

Sales & Legal Acquisition

Acquisition Product
Operation & Marketing
Deployment
Logistics Fulfillment
Fulfillment Engagement Sales
Logistics
Customer Success
Finance Deployment
Billing & Rev Rec Legal
Finance
Customer Success Billing &
Deployment
Rev Rec Fullfilment Awareness

Customer Success Aftermarket

AS Services Acquisition

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 79

 Example: Tesla Customers and Pay-Per-Use Supercharger Network

Customer Lifetime Value Supercharger Lifetime Value

 Lifetime value of customer determined by  Lifetime value of supercharger determined by:
 Transaction and average recurring revenue from  Utilization of each supercharger and location over
supercharger lifetime
 car purchase
 Average recurring revenue generated over supercharger
 aftermarket services and parts lifetime – Charging (Tier 1) vs Idle (Tier 2), Location, Peak vs. Off-
 supercharger network usage Peak

 Operating costs for providing aftermarket services and  Supercharger location and network operating costs (varies
supercharger network location-to-location) – Amortized equipment landed unit cost,
Power/Utility Costs, Monitoring/Maintenance/Repair
 Time-period customer uses aftermarket services and Operations, and Customer Support
supercharger network
 Supercharger site acquisition costs
 Customer acquisition costs
 Design
 Marketing, including test-drive car inventory
 Planning
 Sales
 Installation

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 83

 Hybrid Legacy + XaaS Example: GE TruChoice Flight Hour

TrueChoice Flight Hour Lifetime Value

 Customer & Engine Lifetime Value
 Engine Sale Revenue (single transaction)
 Flight Hour Recurring Revenue
 MRO Cost-to-Serve
 Engine fleet size, location & lifecycle

 Recurring Revenue
 Engine Hours Flown
 Wing-time

 Cost-to-Serve
 Remote monitoring
 Parts and Spare Engine Inventory
 Skilled Support & MRO Personnel
 Engine removals, upgrades, repairs
 Scheduled vs unscheduled
 Warranty
Source: TrueChoice Flight Hour | GE Aviation

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 84

XaaS business models impact every aspect of an OEM’s business

Products designed for Customer engagement with

eXcellence with frequent products and product utilization
release cycles and deployments determine success
Products Customers

Original
Equipment
Customers and products
Manufacturer Ecosystem impacts product
monetized over a period with Capital (OEM) Ecosystem unit, customer/asset acquisition
significant upfront investment in and cost-to-serve costs
product and customer operations

Talent

Talent in every functional group

in product, customer and
revenue operations is impacted

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 89

 Building a PROFITABLE business to respond to buyer expectations
requires significant changes to OEM’s legacy innovation, industrial
and commercialization processes

Product Development & Production Delivering Customer Value And Outcomes

Product Design
Engineer Prototypes
New Product Introduction
Test & Certifications
Scale-Up Production
Aftermarket Services
End-of-Life services
Balancing Funding, Revenue & Expense Models
Transactional vs Recurring Revenue Models
Product vs Services Margins
Customer/Asset Lifetime Value (LTV)
Customer/Asset Acquisition Costs (AC)
AC vs LTV Ratio
Time-to-Recover Acquisition Cost
Cost-to-Serve Customers/Assets (Gross Margins)
Purchase-to-Retirement Customer Experience
Direct-to-Customer Digital & Offline Storefronts & Sales
Products Customers Deployment, Productivity, Availability and Uptime Product Experience
Warranty, Maintenance, Repair, Operations Service Response Time
Cyber & Physical Security
Original
Equipment
Manufacturer Building & Integrating Ecosystems
Capital (OEM) Ecosystem Product Design & Production Supply Chain
Aftermarket Services Supply Chain
Go-To-Market Channels
Freight and Logistics Partners
Commercial & Open-Source Technology Providers
Resources Data Integration Partners
Financing Partners
Accessing Talent, Technology & Spaces
Advanced Skills from Materials to Digital Technologies
Full-time vs Part-Time vs Per-Project Talent
Product and Business Operations Enabling Technologies
Spaces – Workshops, Factories, Buildings, etc

(c) Thing Company llc | hello@thing.company | @thingcompanyllc 88

 Thank You

Feedback?
Harinderpal (Hans) Hanspal
hans@thing.company
18
(c) Thing Company llc | hello@thing.company | @thingcompanyllc 3