Unleashing the Benefits of Hardware Subscriptions: A Guide for Merchants
Updated: May 16
The hardware industry is experiencing a significant shift towards subscription-based models, and it's not difficult to see why.
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.
Transition to Subscription Extends Beyond Industries
The transition to subscription-based models isn't just limited to the entertainment industry. As consumers increasingly perceive more value from using rather than purchasing products, the shift towards hardware-as-a-service 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. By offering a compelling value proposition and steering focus towards a new price point with added value compared to the traditional retail price, companies can win over customers and drive adoption of subscription-based models.
However, merchants in industries like consumer electronics have been slow to embrace the shift towards subscription-based models and have limited choices when it comes to providing a subscription experience. As a result, these merchants risk falling behind their competitors and missing out on the benefits of the subscription-based model.
Some options that merchants can choose from are:
in-house rental;
third-party rental;
financed purchase with a buy-back service.
1. In-House Rental
How does it work? This process involves a merchant producing or acquiring a product, recording it on their balance sheet, and offering it to customers on a monthly payment basis rather than as a traditional sale.
What does it mean to the merchant? If customers 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 and potentially affecting shareholder perception.
2. Third-Party Rental Like Grover, Wesub
How does it work? The third-party 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.
What does it mean to the merchant? When the merchant replaces the sales revenue it would have received from customers with the revenue it receives from a third-party rental company, it essentially transfers the customer relationship and related responsibilities to that third party. Hence, the third party has the rights and obligations towards the customer that the merchant would have had otherwise. If the third-party rental company provides a good value proposition to the customers, 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. Financed Purchase with a Buy-Back Service Like Fairown
How does it work? The customer purchases a product and buyback service from the merchant, with the purchase being financed through a payment schedule provided by a third-party bank.
What does it mean to 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 in the same way as before.
To sum it all up, here’s a comparison of the three payment models.
| IN-HOUSE RENTAL | THIRD-PARTY RENTAL | FINANCED PURCHASE WITH BUY-BACK SERVICE |
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, so 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 subscription Completely customised experience Increased loyalty | New customers who like subscription Better flexibility offering | New customers who like 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 |