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Product aka Hardware Subscription for Merchants: A Complete Guide

Updated: Dec 2, 2023

The consumer goods industry is experiencing a significant shift towards product or hardware subscription models, and it's not difficult to see why.

Fairown's CEO Hendrik Roosna
Fairown's CEO Hendrik Roosna

The days of planning a budget for a specific purchase and shopping for music and movies on CDs and DVDs are gone. Subscription services like Netflix and Spotify have revolutionised the way we consume entertainment, offering access to a vast library of content for a flat monthly fee.


The Transition to Hardware Subscription

The transition to subscription-based models isn't just limited to the entertainment industry. As consumers increasingly perceive more value from using rather than owning products, the shift towards hardware subscription is gaining momentum.


The success of companies like Netflix and Spotify in selling their value proposition to consumers is a prime example of how businesses can convince customers to switch to subscription-based models.


How can companies win over customers and drive the adoption of hardware subscription?


By offering a compelling value proposition, and focusing on a new price point with added value compared to the traditional retail price.


However, merchants in industries like consumer electronics have been slow to embrace the shift towards hardware subscription. They have limited choices when it comes to providing a subscription experience. As a result, these merchants risk falling behind competitors and missing out on the benefits of hardware subscription.


Hardware subscription models that merchants can choose from.

  • In-house rental

  • External rental

  • Flexible product ownership with a buyback service


1. In-House Rental

How does it work?

The process involves the merchant producing or acquiring a product, recording it on their balance sheet, and offering it to consumers for monthly payments rather than as a traditional sale.


In-house rental model

What does it mean for the merchant?

If consumers perceive rental services as highly valuable, it could become the dominant business model, replacing sales revenue with recurring rental revenue. This shift would transform the company from a producer/retailer to a rental company, resulting in a significant change in unit economics. It potentially affects shareholder perception.



2. External Rental Like Grover, Wesub

How does it work?

The external rental company obtains the product from the merchant and enters into an agreement with the consumer, taking on all associated rights and responsibilities for the product.


External rental model

What does it mean for the merchant?

The merchant replaces the sales revenue it would have received from customers with the revenue it receives from an external rental company. This essentially transfers the customer relationship and related responsibilities to that third party.


Hence, the third party has the rights and obligations towards the consumer that the merchant would have had otherwise. If the external rental company provides a good value proposition to the consumer, it can become the main source of revenue for the merchant.


However, this also means that the merchant becomes dependent on this one rental company, which increases concentration risk.



3. Flexible Product Ownership with a Buyback Service Like Fairown

How does it work?

The consumer purchases a product and the buyback service from the merchant, with the purchase being financed through a payment schedule, provided by a third-party bank.


This is a flexible way for product ownership, because consumers can either return the product at the end of the usage period and upgrade to a new one, or keep using it.


Financed purchase with a buy-back service model

What does it mean for the merchant?

The merchant will continue to conduct business in the same manner as before, generating revenue by selling products directly to their customers. There will be no significant change in the company's sales model, and they will continue to interact with their customers the same way as before.


Comparison of Hardware Subscription Models

IN-HOUSE RENTAL

EXTERNAL RENTAL

FLEXIBLE PRODUCT OWNERSHIP

STRENGTHS

Stand out in competition


No dependence on a third party


Recurring revenue


Stand out in competition

Low cost of entry and maintenance

Good value proposition for short-term usage

Stand out in competition


Low cost of entry and maintenance


No change in revenue structure


Good value proposition over preplanned periods


Lower cost to provide, monthly price is more attractive

WEAKNESSES

Ties up capital


Expensive to launch and manage


New type of risks (credit, fraud, funding)


Compliance requirements


Heavy dependence on the third party


Rental company has a high cost to facilitate funding, credit and inventory risks


Too expensive price point over longer periods


Change in revenue structure and concentration


Light dependence on the third party


Less flexibility than rental


OPPORTUNITIES

New customers who like hardware subscription


Completely customised experience


Increased loyalty

New customers who like hardware subscription


Better flexibility offering

New customers who like hardware subscription


Lower monthly price point for longer periods


Preplanned recurring sales revenue


Increased loyalty

THREATS

Too high customer price to the perceived value


Customers won’t find the offering attractive enough


Losing focus on core business


Not able to manage new risks and processes effectively


Not getting enough business value from transition


Higher than expected costs from transition

Approval rates depend on the rental provider


Too high customer price to the perceived value


Not enough customers who need products in short term


Sales concentration


Transferring customer loyalty to the rental provider

Too high customer price to the perceived value


Approval rates depend on the bank

Want to hear more about how your business can benefit from hardware subscription?



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