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Data for subscriptions podcast - Episode #35

Pricing Strategies for As-a-Service

Guest

Ron Giuntini

Ron Giuntini
Founder, G35 Software

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Episode description

In this episode of the Data for Subscriptions podcast with Ron Giuntini, the conversation centers on pricing strategies and the necessity of managing usage data to ensure successful subscription services. Ron, with extensive experience in the Equipment-as-a-Service (EaaS) market, discusses examples such as the importance of accurate tracking for office printing services provided by companies like Xerox and HP, which rely on consumables and maintenance. Another case mentioned is the heavy machinery industry, where companies like Caterpillar operate on a pay-per-tonnage or pay-per-dump basis, showcasing varied subscription models.  

Highlights

Challenges of Customized Offerings in As-a-Service Pricing Strategies

Ron Giuntini detailed the operational complexities when a business attempts to scale up its subscription model while offering customized services. He explained that even with a relatively small number of customers, say 100 or 1,000, the requirement for each customer to have a tailored solution compounds complexity exponentially. For instance, if each service configuration involves five different partners supplying parts, the management and coordination effort becomes highly complex and unsustainable. This situation often leads to inefficiencies and elevated costs that can undermine the profitability and viability of subscription-based offerings. 

Data Management and the Need for Automation 

A significant portion of the discussion focused on how companies manage the intricate data involved in subscription and as-a-service business models. Ron pointed out that many companies still rely on manual processes, such as using Excel documents, to handle essential data tasks. This approach is often error-prone and inefficient, suggesting a pressing need for more automated solutions to manage data effectively. Despite the urgent need for better tools, Ron noted that appropriate application software that can address these needs is not readily available in the current market. The lack of such tools represents a critical gap in the capabilities of many businesses that pursue subscription models, indicating a potential area for innovation and development. 

Real-world Examples and Importance of Accurate Usage Tracking 

To illustrate his points, Ron referred to specific examples, including companies that are pioneering usage-based pricing models. One case involved a company that provides machinery to clients and charges them based on consumables like drug testing and gunpowder. Another well-understood example was office printing, where companies like Xerox and HP supply printers to businesses, charging them based on the amount of use rather than a flat fee. These examples underscored the necessity of precise usage tracking; the capability to track every interaction or transaction accurately is crucial for billing and service fulfillment in subscription models. Without such accuracy, companies risk failing to meet service levels or incorrectly billing customers, which can lead to customer dissatisfaction and damage to the business’s reputation. 

Transcript

Behdad:
Hello and welcome to the Data for Subscriptions podcast, where we explore and learn how to run better subscription and as a service businesses. I’m your host, Behrad Banyan. And today I have the pleasure of welcoming Ron Giuntini to the show. Welcome Ron. Thank you. So Ron, you’re the founder of G35 software and a well esteemed expert in anything as a service. 

Well, before we get into the topic of today’s discussion, which is going to be largely around pricing strategies and also the requirements and implications it has on usage data management to make sure that that is successful. Why don’t you talk to us a little bit about your background and, uh, basically what made you so passionate to become such an expert in as a service transmissions? 

 

Ron:
Well, I’ve been involved with the EFT market for a long time. Just about 50 years from manufacturing, uh, components for the aftermarket to running an aerospace, uh, business unit, uh, and working with, uh, clients all over the world, uh, only B2B OEMs I work with and dealing with, uh, the aftermarket. What I noticed that, you know, everything, these were on demand transactions. 

I mean, it’s the real value in providing a service to a customer is. Dealing with a longer term, uh, service contract and I, my first one I did, uh, over 40 years ago was dealing with the aerospace industry, which is basically known for power by the hour with Rolls Royce and Pratt and Whitney. And basically, these are 7 to 12 year contracts for maintaining, uh, airliner, uh, engines, and it’s been very successful. 

Everyone uses that as a case. People forget that those air, those engines are not. They’re owned by the airlines. What the OEMs do is provide these long term, uh, service agreements. So I had that, I did it with frequency of landings on, on gears and also, uh, engines. And they moved into multiple industries. I actually developed these programs for the military, uh, which was called performance based logistics. 

I, um, dealt with, uh, the construction industry, computer industry, just about everything. And what I found that, yeah, in America. You know, you talk about subscription and services, but that was a business model that existed, was a very successful business model in the United States, 60, 70 years ago, it was called, it was called bundling, bundling services. 

OEMs, the, the best example in history was the, uh, United shoe machinery company where they were the largest manufacturer. They controlled an entire market of manufacturing machines to make shoes. United States was the biggest shoe manufacturer in the world and Massachusetts was, and they all use this machine. 

And what they did was they gave you the machine and they charge you per consumable. Okay. It was a brilliant business model. Absolutely dominated. Great. And then in 1953, 1954, uh, the Supreme court ruled that this was unfair to the competition and they dismembered under antitrust and killed that program and bundling, which is subscription, uh, and all the services was a horrible work. 

You couldn’t even use it in American industry. Uh, and that went on till late eighties. Uh, so it went on for 30, almost 40 years. Uh, and then the Supreme Court ruled that as long as [00:04:00] the customer is not hurt, then it’s okay to bundle. So all of a sudden, but that left, I mean, if you look at most of the executives, they grew up during the bundling, uh, being a bad word. 

So a lot of those guys, you know, they just walked away from that well into, uh, today’s world. Uh, so that’s evolving now. So we’re starting to see that decoupling people are starting to say, Hey, maybe that’s not a bad idea, right? And in the U S. They’re starting to move towards that. Uh, in Europe, uh, you tend to be more, have more empathy for the competition than the consumer all the time. 

All right. You have sort of different laws, but in the United States, uh, that’s moving. And the biggest industry right now, which is really exciting is the whole robotics industry, which is exploding and moving towards. So I’m a big advocate of this because also don’t take this. To me, the way to stop the Chinese infiltration of the Cap, CapEx market is to bundle everything as a service because they don’t know how to deal with services. 

Behdad:
Right. So there could be a knowledge advantage also because of what you just taught us here is that the days or the roots of As a service in a way goes way further back than I had envisioned myself. I thank you for that. Of course, with today’s technology and whether we call that IOT or robotics or AI, we’re obviously the last 10, 15 years has been a big, uh, Let’s say a buzzword if we want to call it or something that really has caught on in terms of momentum. 

So let’s just jump right into it because we’re going to come to some of those cases. You mentioned a few of them. We’re going to give more examples of companies that you’ve been working on with these advanced services. There’s a great ebook that we’ll also make sure that is linked in the show notes afterwards, but to make sure everybody’s on the same page, Ron, when it comes to when we say different pricing strategies, when you provide as a Why don’t we just quickly go through from the least complex to the most complex pricing strategy you could have. 

Ron:
Probably the best, the easiest one is just a subscription, you know, which is basically, uh, a fee for providing some kind of resource, usually at least in the B2B world, it’s like consumables, uh, or you have a subscription maybe for updates for firmware on equipment, all right. That’s probably the simplest. 

Uh, then you have, um, then the usage become then you have usage and then perform it combined. So you have a paper usage, uh, which has to be again, different industries are have different types of usage patterns. Some have relatively predictable, uh, usage. Others are all over the place. You have that, um, so that’s evolving that usage. 

The problem with usage is again, unless it’s absolutely flat, uh, then you have variations. So how do you price something like that? Uh, when you price. First of all, pricing has multiple elements. It should, you know, people always talk about value pricing. I get, I’m not wild about there’s value pricing, but there’s also value pricing for the customer. 

There’s also value profitability for the supplier. Okay. It has to be both sections. So, uh, pricing, uh, to do pricing. To do pricing, you also have to have a business model. All right. You know, again, any one of these, uh, products as a service machines as, or whatever you want to call it. All right. Uh, has to have a business model established. 

That’s hard. All right. Uh, because you have different usages. You have an OEM doesn’t have one model. They have multiple models. The biggest, actual population of their install base are out of production models. All right. So do you, do you price a product only at the time that it’s sold new, attach a contract there, or do you provide at the end of the limited warranty? 

Do you provide it to other people in the install base who’ve never had a contract and pricing? Uh, is difficult question is, uh, what kind of margin do you want? All right. What are your risks? How do you amortize the onboarding of a multi year contract? I mean, pricing is very difficult. Most marketing people, I mean, my almost universal experience is marketing guide, customers say, I want to, I want a product as a service marketing goes, well, we’re going to charge you 5 percent per year. 

I’d go, really? Do you have any idea what your costs are? Nope. But that’s why I’m going to do it, you know, pricing this again, this pricing, any contract that’s over one year must be reflected on the balance sheet as a long term service agreement, general ledger account. Okay, it has, it has the, it’s an asset and it’s a liability. 

It has a, it has usually one GL number. You have no idea, usually, if you’re making a profit or not on these, on an individual basis. So when you say about pricing, most people have no idea if the pricing is going to, this is, this is very complex. And, uh, anyway, the answer to your question is there’s no easy answer on pricing, unless you know what your [costing is and your risks are for that particular model and where it is. 

Behdad:
Perhaps just to plug in the fact that, uh, what you mentioned in terms of you have customers on different types of contracts, hybrid is what we refer to then, of course, because, and I think this is, uh, an important point to make, which probably most of our listeners Absolutely understand that they’re probably going through the same situation themselves is that a very few companies are running only say subscription or only usage based realities that you’re running multiple variations for the purpose and this should I want to state this as well as that while yes, you need to figure out. 

Um, your pricing level based on your costing and your risk analysis and so on. But actually the main point is, so the starting point is, uh, the, um, the willingness for the customer to pay and what is the best way to serve that customer, which is then directly links to the, the pricing strategy that you have, which is what we’re gonna get into with some of the advanced services because, uh, there. 

There is more and more a shift towards this usage based, you mentioned something that I think we should also come back to, which is performance based, I think it’s worthwhile to spend a minute on it because usage based and performance based, while very close, are not necessarily exactly identical, both are A thousand percent contingent on usage data, but they’re not the same. 

But my point here is that there’s more and more a shift towards that, but I think for probably forever, we’re going to have a hybrid situation where you’re going to probably have customers still on perpetual or licenses or whatnot, the one time transactional model. And on top of that, you have additional. 

Ron:
And it’s obvious. That’s what customers want. Every customer wants something else. That’s why. Virtually all of these are customized. All right. There’s going to be very, you, you know, the old days of, uh, gold, silver, bronze, or whatever are gone. All right. At least on the B2B side and even maybe on the B2C side, that’s a whole different, uh, world. 

So when I work with clients, I mean, we, it’s, it’s, that’s why the business model is so quick if you don’t have a business model that can be robustly challenged by a CFO, uh, they’ll throw you out. And you will never get to, uh, first base as we say in the United States, all right? You’re never going to get there. 

Behdad:
So, let’s go to some of these, uh, use cases, Ron, because in the ebook that I just referred to a few minutes ago, you’ve, uh, you’ve articulated a number of interesting cases that you’ve identified and also work with yourself. They, they of course come with different flavor. But if I would ask you, what are the two, three advanced cases or services that you would like to kind of exemplify when we speak about usage based, where do you see this? 

I refer to them as front runner companies, those that are leading the pack that have been doing this for a while. Run us through the ones that you feel are mostly inspiring to learn from, which would be the first one.  

Ron:
I’d like simplicity. All right. And. Especially companies that have proprietary consumables. 

For example, I worked with one company. What they do is they do, uh, for, uh, all kinds of government agencies. They do, uh, gunpowder, uh, explosive testing and organic, inorganic, uh, drug testing, especially illegal stuff, right? So they have a machine that they have consumables and then you take samples and put in a machine and it gives you, uh, a result. 

But what they’ve done is they’ve basically given away their machines and they just charge per consumable. Because the consumer has a direct relationship with the usage. All right. And so they embedded the whole amortization of the machine. In the consumables with a minimum. So they, they sell batches with a certain, uh, with a subscription in effect, but repeatable so that they know within 18 months, they paid for the machine and they’ve made nice profit. 

That was very successful, very simple. We’ve tried to keep it as simple as, uh, possible that when the big players, that’s very popular on, uh, wall street. Is intuitive surgical where they have robotics or, uh, specific surgeries. And they give you the machine and they have proprietary consumables. And they know that for every consumable, uh, sold package sold is an operation. 

All right. So simple, try to keep it as simple as possible. Uh, there’s, um, There’s other industries, again, the big one, the aerospace is, so in those two examples I gave you, you have the, the machine as well as the, uh, usage, uh, combined, all right? You have power by the hour, uh, the airlines, which is the older that’s been around since, uh, I guess the late sixties, early seventies. 

And the reason why you have these programs power by the hour usage base for the aerospace industry, it’s our face is because when you have new technology and that was new technology back in late 60 jet engines. All right. There’s a hesitancy. I mean, the customer base. Is nervous about the reliability. So the OEM is putting their hand up and going, I will take care of that by assuring you that you’re going to have uptime on these machines and I’m going to charge you per hour. 

So technology, it’s like the robotics. People are very nervous about using robotics in manufacturing and warehousing. Uh, and in a last mile delivery of robotics on the street, you know, so they’re going, no problem. I’ll guarantee you that I’ll meet performance and reliability by charging you per hour of use. 

All right, uh, and what’s beautiful about that, that they’re actually, their models are replacing humans many times. So, for example, there’s one, uh, OEM, robotic OEM that has built, uh, surveillance robots that walk around facilities. And they charge 8 an hour versus 15 or 18 an hour. But it might cost them a dollar an hour. 

It doesn’t, it’s irrelevant. Okay. The customer sees the value of saving money. They [00:17:00] use that machine. in the New York subway system for security purposes, and it was vandalized and destroyed. But anyway, that’s it.  

Behdad:
But if I may go back to the first two cases, because if we just take it a little bit stepwise, because the example of the company that was doing drug testing and gunpowder and so on, and basically the machine, Uh, is given for free, so to say, and pricing then based on consumables, based on tracking that usage. 

You have another case here where I think many, many of our listeners will probably recognize, we probably have that their own offices, office printing. It’s one of those simple to understand cases. It’s been around for quite a while. Xerox is mentioned, for example, here and HP happens to be two of the customers that we work with. 

But this is, again, I think a good example of where. It’s pretty straightforward, but you need to track basically every time the printer is being used. Why? Because by, and you need to know that with 100 percent accuracy, because otherwise you will fail to deliver that service. And let’s speak in normal terms. 

If the printer stops working, you’re not, you’re an unhappy customer. You want the printer to be working. You want the ink to be there. Everything needs to be working smoothly for that purpose. You need to be measuring that data accurately, therefore, you make sure that you maintain that product to the standards that you are obliged to for the customer. 

But this is, uh, I think, um, despite there is absolutely complexity in that, there are more complex products. I think cases. And one of the ones that I wanted to go to is again, uh, one that’s been around for a while, but excavation mining, these huge machine caterpillar being one of the companies there just walk us through how that operates with when you pay for tonnage, for example. 

Ron:
Yeah. I mean, it’s, I mean, you can measure tonnage or you could measure the number of dumps. Okay. Because those, for example, in a mining, a large mining operation, you know, those trucks are huge. Okay. They’re running 24 seven and they’re totally loaded every single time. Okay. So their weight distribution. So what you, you don’t need to really measure, you know, uh, the actual tonnage. 

All you have to do is know the truck size and they probably have different truck sizes and also just the frequency of dumping. All right. I like to keep it. Uh, simple. All right. So you could put a monitor on a, on a vehicle that just shows you its GPS location, which is a dumping location. Okay. And just track that. 

I mean, there’s a lot. The, the key is, again, The customer must understand how, what drives the pricing so that they can audit themselves. You know, they have people that sign these contracts have to report to someone. I’ll tell you a funny story about that. Okay. Talk about, uh, usage, uh, and how that drives, uh, the  

Pricing and how it can cause a lot of problems, actually. 

I working with one client, we developed this really great program, uh, for maintaining a particular, uh, machine. And it was a five year contract and we had every incentive because it’s, remember you have a fixed price per usage, so you have every incentive as the, As the OEM to find any way to reduce your costs, right? 

So you can increase your profit if you have a fixed price, right? I mean, that’s the incentive that you have as the OEM. So what we did was we created really improved the reliability of the product. So in the past, it had reliability issues, but after about close to three years. We had no reliability, so we didn’t have any, uh, texts going in to fix any problems. 

Now that caused a problem because leadership’s going, wait a second. We’re paying every month for paper use, right? All right. Per hour of operation. And you have no texts there. Why are we paying for this? You had explained to them that. That was the whole point performance, right? All right. So you can get, this got pretty ugly actually, because, uh, it causes some embarrassment for the operations people been involved with the contract in, uh, trying to explain to their leadership, but boss, you know, we, we accomplished what we were trying to do. 

All right. Performance. All right. So this is really. Ugly. I mean, this is every story. Every situation is a different story.  

Behdad:
I think this ties back to the question you raised before in terms of you need to make sure that your business model is watertight. And by that, my view is that sometimes we mix up pricing models. 

Uh, with price value, those, those aren’t necessarily the same thing. This is also why some companies that have been running variation of subscription and usage based models, even though being, let’s say, more developed, they have had some challenges because ultimately as a customer, you’re still questioning, what am I really paying for? 

But one important point you made when we were discussing the previous case with the, the mining and excavation and so on is. Transparency. You said it’s important to understand what you’re paying for. This, I think, is a very important point to just, uh, double click on because in all the examples of companies that I’ve witnessed that are successful, the transparency of usage is one such factor. So if we just apply it on the case that you mentioned, being able to on a real time, basically monitor how much usage is going on is one way for you to basically keep control of your, if you will, cost, because you know that at certain point, probably end of the month, there will be a bill. 

That is correlated to that usage because there’s a unit price for that usage. One.  

Ron:
I was just going to bring out the point that that’s one of the dilemmas. You know, what I always do is develop a standard usage for the billing purposes, within a variance analysis every six months. We look at here’s, here’s how much we’re going to bill you. 

Um, and this may have been, you may have below that or higher than that, but at least they can go to their bosses because that’s what they budget. Remember they have, they go through a budgeting process and you know, it’s, it’s hard to describe, you know, wild variation. So you have a standard and then you have a decision, then you have an agreement on how you’re going to deal with the variance. 

So you’re going to push it. Uh, further down the road or eat it just gets involved with, uh, on, on the OEM side in regards to revenue recognition issues. It’s, it’s, it’s, it’s complex.  

Behdad:
Yep.  

Ron:
Everything’s complex.  

Behdad:
So we mentioned a couple of basically use cases for this whole stress testing we’re doing in terms of how to make sure that you’re successful when you’re running these kinds of pricing models. 

But one is of course for billing we’ve discussed, you actually quickly mentioned the whole revenue recognition, which is another one for financial processes. Uh, we talked about quickly, at least touch the fact that capturing that usage data for the product to make sure that your products delivers on point is something that we mentioned. 

And then we also talked about just transparency, uh, towards the customer. But what other basically means and use cases are important to make sure that you accurately track this user’s data? One that I have seen myself, and maybe you can just elaborate on it if you’ve seen the same, is what we refer to as settlement, because typically what these companies, whether being the examples with the consumables or others, they typically end up having a large sub supplier base. 

Of being able to deliver that service. There are multiple parties involved. Have you seen that as well in, in the examples that you  work with?  

Ron:
Almost always. Yeah. All right. The, uh, an OEM, uh, I, I use the word obligor, the obligor, the OEM is the person that designs the product and takes all the risks, all right. 

And the obligor then chooses who they want to sell the contract, who who’s going to actually be the salespeople for the contract, because a lot of times it’s not. The OEM, it’s their authorized distributors or other people. And then you have, uh, the service providers, they have to oversee that. This is not, you know, when you have a contract, there are a lot of players in this thing. 

All right. And you have to oversee her. Most people sign contracts and then they sort of. Don’t do anything about it. You know, there has to be someone overseeing who is delivering these services and you can have multiple services. I mean, you can have your own organization distributing parts, but you can have, uh, your many times for many, uh, products on the product. 

Remember that most OEMs. Uh, are not manufacturers, they’re assemblers. All right. And most of their parts come from their, and their subsystems come from suppliers. A lot of times they’ll use their suppliers. As the provider of the services. So they’ll sign a contract with them. I mean, you could have, depending on the complexity of the contract, I mean, you could have five or six different suppliers, uh, providing that, but you also, the face of who is providing that service, maybe the person who sold it, all right. 

But that’s not. The obligor. Okay. So you have to verify because they’re going to go to that person a lot of times and say, I have a, I have issues. All right. But you have to coordinate that. This is very, uh, challenging. Again, there’s some OEMs that sell directly. Uh, to the end users and others that sell through distribution channels. 

Behdad:
Yeah. Now this space also from, from what we’ve witnessed can quickly get extremely challenging because if it sounds simple when we speak about it, like, well, you, you might have parts from five different sub suppliers that you bundle in your packaging yourself, but then imagine if you give a discount to your customer as the main provider, and then you’re supposed to. 

Kind of apply that backwards to any of the products. Uh, you also mentioned in our discussion that you want to make sure that every customer basically has a customized offering. Well, that in itself, if you have a hundred or a thousand customer and every customer, ideally to serve them well, need to have a customized offering. 

And let’s again, keep it simple with five different partners that are providing parts in your offering to that customer. We can just quickly do the math. This becomes very, very unsustainable, ugly, absolute and unsustainable. Why don’t you just kind of. Pivot a little bit to also how organizations typically deal with this kind of data. 

In our experience, Ron, there seems to be, since we’re still somewhat early days on these kind of business models, there seems to be a fair amount of manual efforts around this where you just put bodies around them with Excel documents and people just trying to make sense of all of these data points that we refer to all the time. 

How much of seen an awareness that this needs to be done, maybe automated to offload human errors? How much have you seen? Where are we in that curve?  

Ron:
Um, well, the, um, the tool today, there’s really no application software that provides that today. Okay. That gives you, enables you to create the business model and to configure a cost price. 

And, uh, quote and it, now the on the product configuration, there’s a CPQ, I dunno if you’ve heard. Sure. Configure price quote. Really? But that’s, that’s strictly products. There is no one doing this on services. I mean, I, uh, actually G’S 35 software actually was that product. Uh, it was actually, uh, the configure a contract, but then the pandemic, uh, destroyed my business. 

But light goes on. Uh, so, but there is nothing out there. Uh, there’s no one doing it. That I know of because it’s too complex. All right. And an IT person. It would not be able to put it together because you need operational experience on this, uh, IT person with operational people and marketing people and finance people. 

Right. It’s complex.  

Behdad:
When you say that, uh, the company’s quote to cash kind of system is there to basically solve for that though, I mean, between CPQ the billing system and payments and so on. It isn’t that there though to solve it, but I, but I think. You know, the way that I interpret your point is that there is no one system that automatically solves everything is what you’re saying. 

Ron:
There’s no, for example, CPQ. For products, uh, does that, right? You can figure, I mean, it does prices, but there’s nothing for a service contract. Okay. On that. That’s what I’m saying. You know. Okay. But once you got that, then you can have the revenue recognition issues and you know, what all the other ancillary, uh, uh, software that’s available today, it’s no big deal because that you just feed into that. 

It doesn’t, they don’t care if it comes from a CPQ for product or CPQ for service.  

Behdad:
Yeah. Because what I think is that in order to make these business models work, you You need basically the systems that we refer to within quote to cash to be talking to each other on a constant basis. And it’s simply not a one flow, one direction. 

It actually is bi directional. It needs to go back and forth. So when we’re, for example, speaking, it’s that we’re changing price for a specific unit that needs to get fed downstream into other systems. and vice versa. So this I think is from what we’ve observed is that many, many companies have really overseen the management of that data that needs to go back and forth and therefore is trying to kind of catch up with that work by just Largely doing it either manually or semi manually or just using improper tools. 

One such example is that billing systems are there to do their job, which is to build, but not necessarily manage all of that usage data. Because that’s why sometimes billing systems are, I will say, incorrectly Uh, being blamed for a lack of performance and these billing transmissions that we see constantly. 

We try to advise many of the companies we work with is just hold off on it. Stay away from a three year billing transmission because that might not be your problem.  

Ron:
Almost everyone I deal with, uh, use Excel workbooks. I mean, yeah, disgusting. I mean, it’s. It’s ugly. I mean, really ugly. Uh, because how do you maintain something? 

You know, it’s like any changes or whatever. I mean, almost universal. I have yet to see application software. I’ve seen people try to use, um, CRM software combined with CPQ software. You know, but nothing works. It’s not on this space. Okay. On the B2B, uh, space, uh, some of the B2C space, uh, may work because it’s a whole different, you know, we’re not, we’re dealing with populations of hundreds of thousands, at least here, there’s no, you know, the population there’s so much static, uh, available in these business models and you, the stuff you have to do in regards to mitigate the risk is totally, totally different on the price. 

And profitability. But profitability. One of the reasons I love this field is because we’re dealing with profit margins, if done right, can run 25 to 30%, uh, profit as a percentage of revenue. Okay? Yeah. Major. I mean, you, when you look at the, uh, a typical product generates maybe seven to 8%, sometimes 10%. 

Okay. Services, parts and services on demand. Generate maybe 15 to 17 percent or so. All right. But these. They’re off the chart. If done right, if not done right, you bleed to death. You, I’ve seen clients, I mean, you just, just cut my wrist and let me bleed till I’m unconscious. No,  

Behdad:
I think the recurring revenue model is absolutely beyond serving a customer need. 

in a better way, potentially than the traditional perpetual models or one time sales. It definitely comes with the upside of being quite, let’s say profitable more so than the traditional model. That being said, the, uh, I’ve also seen that the trap is the inefficiencies, especially when you scale the business. 

It’s one thing when you start off small, but from all the examples that we gave today, these are businesses that have scaled. And as soon as you start to scale, it creates an enormous amount of volumes and therefore cost.  

Ron:
It’s one of the funny things about this whole area, which I found to be, uh, the self interest of people, when you’re dealing with a salesman, you know, they’re, they’re looking at selling a product. 

Okay. But, and then, so you’re selling a product for, let’s say a hundred dollars, and then you have a service contract that maybe 20. Okay. So where are they going to focus their efforts, uh, on their commission? They’re going to focus it on the product. So what I’ve done and successfully is we double. Uh, sometimes even triple the commissions that, uh, people get for a contract. 

But then you have the present value. So you have to look at the total, uh, profit streams, uh, over the life of the, um, of the contract, which can be very, very attractive. So then they have an incentive to start pushing, uh, contracts. Something as simple as that can make a huge difference in regards to getting that visibility you need for the service. 

Uh, long term service contracts and service contracts. 

Behdad:
Ron, we’re going to take one question here now and before we start to wrap it up. But, uh, if we go to the question from Clinton, um, as evident on the screen here, what metrics and KPIs should we track to ensure that our as a service pricing model is driving both profitability and customer satisfaction? 

Ron:
Well, and we got the profitability that that’s on the balance sheet, okay? I mean, you remember you have a general ledger account for, uh, revenue, uh, for assets, which is the revenue side, the predicted revenue side of the contract. And then you have the liabilities, which are your future costs. So it’s right there in the financial point of view. 

You have these are all GL, uh, postings. Uh, so you can mentor that on the, on the performance side, obviously, you know, whatever the service requirements are, for example, uh, the duration of downtime, all right, what is it going to be for an un, for unplanned, uh, for a failure, for example, how fast am I going to respond to that? 

That’s a KPI, you know, is it, you got, you know, you got the duration and the duration is going to be built upon you providing the text and the service. If that’s in the parts, if that’s the case. Or just how fast you ship the parts out. I mean, there’s a bunch of KPIs you can do, uh, you know, for that it’s respond, you know, most of the time it’s response time to reduce, uh, downtime. 

If you’re dealing with on the reliability side or delivering, delivering parts, there’s a zillion KPIs, but what’s really important is that the financials. Are all reflected on the balance sheet. And this is where you get, this gets really ugly because you can play all kinds of games in regards to how you recognize revenue and how you recognize costs, but then you have to pay a price when the contract’s over, if they not in balance. 

All right. So, so I would spend time on the general ledger account.  

Behdad:
Ron, as a final advice to everybody who has been listening to us today, Would all the cases and the companies that you see have been running and scaling their as a service business well, I mean, effectively it’s profitable. It’s done efficiently internally as well. 

What is the, what are the two things we need to get right? What is your message to, uh, every business out there that kind of want to run their as a service business more effectively?  

Ron:
You have to have a business model, a business model that I call [00:38:00] has gone through stumped the chump. That means that people have, you’ve presented it, you’ve been beaten up by this chief financial officer. 

You got beaten up by as many people as you can to make sure that that business model is reasonably. Robust and minimizes the risk to yourself as the obligor, the OEM, and also provides the value, uh, to the customer. That’s the first thing, uh, you do. And the second is just. overseeing, you have to have someone overseeing these contracts who understands operations, not a financial accountant. 

They’re worthless, don’t take this personally, but they’re not the people to do this, all right? It has to be someone who’s in the service area, understands finance, but also understands what it takes to onboard these programs and then, uh, deliver The [00:39:00] performance that was promised the customer.  

Behdad:
Excellent. Ron, thank you so much for your time in the conversation. Greatly appreciate it. And thank you everybody for tuning in. Okay, great. Take care.