Becoming a Full Solution Company: Key Insights to Successfully Add Software to an Existing Hardware Product
by Kevin Frisinger, on October 19, 2021
At Exosite, we’ve worked with a large number of organizations that we call value-added resellers (VARs). These organizations often sell a hardware component that is used within a larger piece of equipment or machinery that is built and sold by an original equipment manufacturer (OEM). For example, a VAR might sell electronic controllers to a variety of OEMs, who use the components in different industrial equipment, like cement trucks, forklifts, and buses.
However, margins on pure hardware sales are often relatively low. As VARs look for new ways to increase revenue, many consider adding a software component to their hardware that enables remote monitoring. This type of functionality enables VARs to:
- Generate new recurring revenue. Rather than a one-time hardware sale, VARs are able to charge their customers for continued access to the software component of their solution on a monthly, yearly or multi-year basis.
- Enhance the value of their hardware and increase margins. Investing in a software component means VARs pay to develop one solution that they can then sell over and over to different OEM customers with little customization or additional required investment. So, with every new software subscription, recurring revenue increases.
- Enhance the value of their business as a whole. The recurring revenue associated with adding a software component can increase the value of a company itself—sometimes by 20% or more, as compared to a hardware-only company.
But making the transition from a hardware company to a full solution company—one that offers both hardware and software—doesn’t come without challenges. In this blog, we’ll discuss how the VARs we have worked with have been able to successfully add a software component to their hardware offering. We’ll also outline the challenges they faced and the key insights they learned along the way that you can utilize to expedite and simplify your IoT journey.
Challenge 1: Limitations around software and software development
As the expert in your industry, you know the ins and outs of your hardware. But the process of developing, deploying, and maintaining software may be a foreign concept. The IoT software ecosystem is very complex and includes many variables to consider (see our Solving the IoT Puzzle white paper for a complete list). If you aren’t an expert in each area, there are many roadblocks that can delay your time-to-market or trip you up completely.
Key Insight #1: Find an experienced software partner
Find a knowledgeable software partner who has in-depth experience in the IoT industry to ease the burden of software development, deployment, and maintenance. While the IoT industry is relatively young, there are vendors who have been around much longer than others. Select a partner who is known for having a software product that is easy to use, enables you to get started quickly, and helps you scale up when you’re ready.
Ask for customer references to learn more about the experience similar organizations have had with software vendors you are considering. You may also look for industry validation, like analyst reports, that outline the strengths and weaknesses of various vendors in the industry (check out the Gartner October 2020 Magic Quadrant for IIoT Platforms for an example.)
Key Insight #2: Ensure you have a dedicated internal team
Be sure you have buy-in from your leadership team to provide dedicated internal resources to focus on this project. While your software partner will bear some of the burden when it comes to software development and maintenance, you will still need a cross-functional internal team—from marketing and sales to manufacturing and support—to actively engage with each other and your software partner to develop a complete solution that your organization can sell and support. In order to be successful, adding connectivity to your hardware should not be a side hustle for you or anyone else on your team.
Challenge 2: Takes longer to get to revenue than expected
Many VARs see adding connectivity as a silver bullet that will help them generate new revenue immediately. While this may be true, the more common reality is that adding connectivity and readying your team to support a complete solution can take time. Often more time than you might think. This is especially true for VARs whose connected solution will be included in a larger piece of equipment sold by an OEM. In that instance, VARs also have to wait for their OEM customers to go through their entire new product development process to include the connected component, train their team on connectivity, and onboard their customers.
Key Insight #1: Set reasonable expectations
Set reasonable expectations (read: low) when it comes to the pace at which your team expects to develop the solution and begin generating revenue. Even with a strong software partner, a good business model, and significant customer interest, it will all take time. So, be conservative with your leadership team about the level of traction you expect in the first year or two in order to maintain your credibility and their support. Update them often about your progress and continue to remind them of the value that is in store for your company (i.e., increased revenue, higher margins, enhanced business value) if you stay the course.
Key Insight #2: Carefully consider software costs
As we said above, finding a knowledgeable software partner is one of the most important steps you can take to set yourself up for success. But knowledge alone isn’t power (at least when it comes to IoT). Ensure your software partner offers:
- Low start-up costs you can support during the development phase of your solution. It can be hard to justify big up-front investments before you’ve onboarded a significant number of customers.
- Feasible long-term pricing that doesn’t penalize you if it takes longer for you to find success. Pricing that only grows as your customer base grows will allow you to move at your own pace and ensure you can make the business work before investing large sums of money (see our pricing page for an example.)
Challenge 3: Customer engagement is slow
As with generating revenue, it can take longer than you might expect to onboard customers when you roll out a complete hardware/software solution for the first time. This is especially true if your customers are slow adopters of technology or if they are an OEM that must incorporate your connected hardware into a larger piece of equipment or machinery (see Challenge 2 for more details).
Key Insight #1: Help customers understand the value
A complete hardware/software solution may be relatively new to your customers, so be prepared to help them understand how connectivity provides value to them, how it provides value to their customers, and how they can charge for it. This may require you to take a deep dive into your customers’ business and do some brainstorming, but it will go a long way in helping you handle their objections and encourage them to take the leap.
Key Insight #2: Offer flexible pricing and payment terms
One of the major benefits of adding a software component to your hardware is the new opportunity to generate consistent, recurring revenue rather than a one-time hardware sale. But, paying monthly may be a new concept to your customers. As they get used to the idea, be sure to offer flexible pricing and payment terms to encourage early adoption. For example, some customers may want to pay more up front for the hardware in order to have lower monthly pricing for a longer term (e.g., 3-5 years). Others may want low start-up costs that require higher monthly fees, but a shorter commitment (e.g., 12 months).
Challenge 4: The sales team struggles to sell a complete solution
As we’ve mentioned, offering a complete hardware/software solution will present new challenges for both you and your customers. Your sales team is no different. Many sales teams struggle to figure out how to sell a complete solution, especially when it is a significant shift from what they have historically sold.
Key Insight #1: Develop new support tools
Selling the value of software is very different from selling transactional hardware, so be prepared to revisit things like your value propositions, positioning, and pricing, so you can generate new training and tools (e.g., collateral, presentations) to support your sales team. You may also want to consider new compensation plans that will encourage them to sell the complete solution. A few options to consider:
- Pay early and often. This might include giving your sales team a percentage of the entire year’s worth of recurring software revenue for a new contract up front. While it can be tempting to pay only on cash collected over the life of a customer contract, that puts the sales team in the position of making money off an annuity stream rather than focusing on adding clients. The subscription revenue stream is great for companies, but does not drive your team to get out and close the next deal.
- Consider total contract value (TCV). A one-year deal is great, but a three-year deal is better. Develop a model where the TCV of the deal is understood at signing, and pay for that. Make sure you have an element of breakage (clients who never go live) in your incentive plan, so you don’t reward closing business that was never going to go live.
Key Insight #2: Plan to hire a technical sales resource
Plan to hire a new resource specifically geared to provide extra support to the sales team—this might be a technical sales representative or applications engineer (AE) that understands the business side of your product, helps the sales staff answer technical questions, and can also guide customers as they architect their solution.
Feeling discouraged? Don’t. Although adding software to an existing hardware product can be a process, it doesn’t have to be painful. But, the key is to get started now. Customers are increasingly expecting connectivity as part of any hardware component they purchase, and you don’t want to be left behind by your competitors.
Again, finding a knowledgeable software partner is one of the first steps you can take to set yourself up for success. Exosite has helped hundreds of organizations—of every size and in every industry— accelerate their IoT journey and add real business value from day one.
We’ve poured years of experience into ExoSense®, a remote monitoring software application that gives you immediate access to the remote monitoring capabilities you need without building software from scratch. And, with affordable start-up costs, flexible long-term pricing, and a dedicated support team, you’ll be empowered to find success at your own pace.