Particle.io CEO Zach Supalla’s latest Atoms and Bits* newsletter issue analyzing “Hardware/Software Business Models” reminded me of many discussions I’ve had with organizations shifting between very different business models. The newsletter covered six different hardware-software business model mixes and the hardware-software offering implications of each business model.
What the newsletter issue didn’t cover, and I suspect will be a topic for a later issue, were the business and organizational implications for the organization attempting to switch from a hardware-centric business to a software-centric business (except for a quick “Going from a traditional hardware sale to a full subscription business model is a heavy lift”).
Tale as old as time (or at least not a new problem)
Most of the companies or teams I’ve worked with in the past 20+ years had some mix of software in their predominantly hardware-driven business model (indeed, I’ve often been one the software folks at these hardware companies).
Most of these companies knew that software, media, and Cloud services could help drive more revenue. Though for most of them, revenue was really meant to be derived from hardware sales and software and services were just something to throw in to entice the hardware purchase.
But all of them spent some effort trying to understand how to use software and services, tied closely to their hardware, to generate new revenue or accelerate their current hardware-centric revenue streams. And I do recognize how they all flirted with one or more of the six business models Zach mentions in his newsletter.
Once a leopard…
What I was most interested in exploring at these companies when they attempted to shift away from their hardware-centric business was to figure out how to do the shift and what it implied for how the company operated.
Zach hints at the challenge of the shift briefly at the end of the newsletter, talking about the need for a hybrid business model to “shift from purchase-heavy revenue to subscription-heavy revenue.”
Keep in mind, though, that a hardware-centric business model is built around discrete product design and manufacturing, embedded software engineering and UX, hardware design and supply-chain constraints, logistics, and unit and volume sales and commissions. From end to end, the whole company is built to design, make, and distribute atoms. And the marketing and sales are mentally and organizationally architected to serve the pushing of those atoms.
Moving into the bits world of software, Cloud, and services calls for a quite different way to design, make, and deploy. You can’t get hardware designers designing web services. You can’t get your embedded software engineers building your service back end. You have to shift your usual expenses spent on factories, machinery, components to servers and software which are priced and paid for in a different way. And you’ll need to figure out how to incentivize your sales teams, especially when software subscriptions can have a much lower cost than the average hardware sales your sales team is use to. Also, I’ll even claim that there might need to be a wholesale change in leadership – leadership with deep skill in hardware, might not be able to understand or take full advantage of any of the more software-flavored business models Zach describes.
Heavy lift, indeed
Despite that, I still agree with Zach that there’s so much more value a hardware organization can unlock by folding in software. But I’ve seen first-hand that to get there the hardware-centric company needs to gain a whole new set of competencies, reconfigure the manufacturing and logistics flows, change how the company speaks and sells.
No, I don’t think it’s impossible. Just hard. And companies who are not paying attention or investing in the needed organizational shifts will end up failing, or, like some I worked for, vanishing.
Thoughts?
*I first heard the term ‘atoms and bits’ decades ago from Nick Negroponte of the MIT Media Lab. And I’ve always lived at the intersection of bits, atoms, and narratives. So I smiled when I saw that Zach chose to title his newsletter Atoms and Bits, especially as Particle.io adds more bits to their atom-based business.
Image by Michael Siebert
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