Usage-Based Financing

Usage-Based Financing: Provides Value for All Parties

Tuesday, February 27, 2018

Today end-users are met with unique challenges regarding equipment financing.  This includes a growing demand for greater operational efficiency to try and produce affordable products while maintaining margins. End-users want equipment that is “always on,” while wanting to minimize their Total Cost of Ownership (TCO). Usage-based and managed services models are solutions that have emerged to meet these demands, and they are quickly growing in popularity.

This article examines usage-based financing (UBF), along with its benefits and value to both manufacturers, and machine builders.  

What is Usage-Based Financing?

A usage-based billing model essentially charges the end user based on the number of units  or services they utilize over a given manufacturing cycle.  

Providing Key Alignments

The key characteristic and advantage of this usage-based solution is its ability to align various aspects of a business. As mentioned in the definition above, the foundation of usage-based financing is the alignment of revenue with usage. This model aligns incentives of both OEMs and end-users.

UBF provides end-users with access to more advanced technology which, historically, has been too expensive when financed traditionally.  The traditional finance method in industrial manufacturing is a fixed-term lease. The usage-based model has a much lower initial cost for the machine, but charges the end-user based on production.  This payment plan is scalable and can be adjusted as a customer’s needs grow. This is an important benefit for any new or small businesses which often lack the funds necessary to purchase the best technology or best machine.

Why is Usage-Based Financing So Popular?

Most equipment manufacturers can attest to the fact that UBF seems to be trending within industry publications and forums. One factor in this rise of interest is the global growth of the construction/manufacturing equipment market. Paralleling this growth is the emergence of innovative technologies, which have shaped customers’ expectations regarding service, experience, and flexibility. With the ability to not only pay a lower cost per unit, but also base usage off of necessity, both OEMs and end-users can now experience a range of production possibilities without worrying about a price-tag.

The usage-based model represents manufacturers recognition of a changing marketplace and the need for a solution designed to keep pace with this evolution and meet both a present and growing demand.

Risk Mitigation

By converting "fixed" manufacturing costs to true variable costs that are dependent on usage/value, manufacturers can reduce some key fixed-pricing risks. These include:

• Risk 1: Inaccurately estimating volume for costing purposes, a pitfall that can create adverse standard cost variances which, in turn, can decrease gross margin within an unpredictable economic climate.

• Risk 2: The inability to drive down unit costs annually.

• Risk 3: Using cash to unnecessarily invest in capital equipment for production.

Who Benefits from UBF Flexibility?

End-Users

UBF benefits end-users because it converts a traditional large up-front capital expense into a more manageable operating expense, thereby freeing up cash flow and providing more working capital.  The end-user can also determine production frequency and scale a product as the company and product needs grow. Risk mitigation is a key selling point for lower-use customers, because the financial losses associated with depreciation and usage that do not provide a return on investment are minimized.

OEMs

UBF assets can be designed/intended to be purchased as key pieces of infrastructure are re-configured as services. This possibility not only helps position manufactures as “Solution Providers” to their customers, but also helps them increase equipment sales, parts/service revenue, and enhance their equipment’s reputation by basing service on actual usage and proper replacement times. For example, OEMs utilizing usage-based, machine-as-a-service (MaaS) are able to translate the financial reward of creating a recurring revenue system.  Recurring revenue business are continually valued more.

What’s Next?

The degree of connectivity available via the Industrial IoT, paired with the scalability/smaller transaction sizes created by Blockchain, will only add to the popularity and appeal of UBF. Advancements in technology and the evolution of customer preference and experience will make this innovative model more viable for a broader group of end-users.

Moving forward, companies can expect to benefit from the increased connectivity mentioned above. Integrated data analysis will also provide businesses with valuable insight and a lens through which to view how customers use and interact with their products and assets. This information can then be applied to improve the product, service, and overall experience of the end-user.

The future benefits to companies can also be applied to customers on the other side of the equation. Customers will benefit from intuitive and responsive services, as well as systems and experiences which can be customized to their preferences and unique needs.

The market is changing – expansive data centers housing countless servers are now utilized by almost every business. This shift has increased cost competition in the server industry, which has, in turn, decreased OEM margins. This chain reaction has led some to reduce operating costs, while it has caused others to exit server markets.

These environmental factors have helped give birth to UBF and MaaS – positioning them as optimal solutions in an evolving technological landscape. Recurring revenue businesses are continuously valued more highly than one-time fixed cost companies, and providing the manufacturing industry with access to such an innovative technology and progressive business model is an exciting development that offers a significant opportunity for manufacturers and customers alike.

SteamChain Provides the Connection

SteamChain enables OEMs to offer usage-based financing (MaaS) to their customers. Leveraging Blockchain and SteamChain allows OEMs to be paid based on the productivity of their equipment over its lifecycle, consequently increasing the OEM’s long-term financial upside and better-aligning incentives with customers’ demands.

Contact us today to learn more about our innovative solutions for the manufacturing industry.

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