Hardfin guide to
hardware financial operations
Effective hardware-as-a-service (HaaS) models connect eight operational areas. Every HaaS business takes a bespoke approach on this foundation.
Contact us to learn more or discuss your specific situation.
1. Solution definition
Define equipment, software, services, and bundle offerings.
Ex: automated forklift, robotics subscription, maintenance plan.
2. Subscription plans
Develop pricing plans and manage active subscriptions.
Ex: flat-fee, fixed monthly, pass-through, usage-based billing.
3. Asset tracking
Track individual assets and activity in the field.
Ex: Forklift #123 in Warehouse A, Robot #456 with Customer B, return process.
Send invoices and reconcile payments.
Ex: one-time, recurring, ad-hoc, bank transfers, cards, fee management.
Automate complex accounting for hardware subscriptions.
Ex: ASC 842 embedded leases, ASC 606 revenue recognition, asset depreciation.
Connect to a funding facility to cover cost of goods up front.
Ex: asset-backed loan to cover the BOM in advance.
7. Business reporting
Report on analytics for hardware subscriptions.
Ex: recurring revenue, churn, utilization, availability, quality, service.
Keep business systems connected to ensure consistent data.
Ex: CRM, ERP, accounting system, IoT data, and proprietary dashboards.
What is a typical BOM payback for a HaaS solution?
BOM payback period (BPP) is a critical metric for hardware-as-a-service businesses to understand. It’s the number of months before recurring payments cover the upfront cost in your bill of materials.
Legacy hardware companies don’t have to worry about it because they sell assets. The concern is immediate margins.
SaaS companies don’t understand it. There’s no upfront investment beyond customer acquisition cost! The concern is LTV:CAC.
But for a HaaS program, BPP is crucial to understand for scalability and must be closely monitored.
So what is a good BPP? Hardfin typically sees 6-24 months as reasonable:
- 🥇 Excellent: 6-12 months
- 👍 Solid: 12-18 months
- 👌 Okay: 18-24 months
- 😳 Challenging: 24+ months
Best-in-class BPP would be 6-12 months for a solution with low-cost hardware, a strong software layer, and a complementary service package. We often see 12-18 month BPP for proprietary HaaS models that are working well. Companies with an 18-24 month BPP can make it work, but margins will suffer.
In all those ranges, HaaS companies can float the cost with balance sheet, and debt is accessible. Beyond 24 months, it’s difficult to get financing and tough to make the interest math work.
Of course there are exceptions, such as long-term contracts with major counterparties like the government. But the above are guidelines for well-designed pricing bundles.
What is the typical distribution of revenue across elements of a HaaS solution?
Depending on the cost of hardware being subscribed, here are the B2B trends:
- 🖲️ $100 sensor 🖲️
→ Package is 10x cost ($1,000)
→ Software is $900 (~90% of package)
- 💻 $1,000 electronics 💻
→ Package is 5x cost ($5,000)
→ Software is $4,000 (~80% of package)
- 🦾 $10,000 machine 🦾
→ Package is 4x cost ($40,000)
→ Software is $30,000 (~75% of package)
- 🤖 $100,000 automated robot 🤖
→ Package is 3x cost ($300,000)
→ Software is $200,000 (~67% of package)
- 🛻 $500,000 truck 🛻
→ Package is 2x cost ($1,000,000)
→ Software is $500,000 (~50% of package)
- 🖨️ $1,000,000 3D printing system 🖨️
→ Package is 1.25x cost ($1,250,000)
→ Software is $250,000 (~20% of package)
Businesses such as additive manufacturing drive meaningful revenue from consumables. Companies providing infrastructure (e.g., water, electrical, internet) may have a slightly different profile.
What are the typical margins on a HaaS solution?
Margins on hardware-as-a-service (HaaS) depend in large part on the breakdown of components in the solution.
The trends we’re seeing at Hardfin for B2B HaaS in 2023 suggest that a 65-75% blended gross margin (GM) is a good target for most HaaS businesses.
The bulk of the solution will be in two core components:
- 🚜 Hardware: 40-60% GM 🚜
- 📀 Software: 85-95% GM 📀
A few components usually have very slim margins:
- 🔋 Accessories: 0-20% GM 🔋
- 🧩 Installation: 0-20% GM 🧩
- 🚚 Shipping: 0-20% GM 🚚
Three optional components have margins that vary widely:
- 🛠️ Maintenance and repair: 30-70% GM 🛠️ (depending on overhead)
- 📃 Warranty and service plans: 40-80% GM 📃 (depending on reliability)
- 🖨️ Consumables: 10-90% GM 🖨️ (depending on proprietary media)
How should HaaS companies structure go-live/activation for their contract?
It is critical for HaaS companies to define an explicit threshold for when a contract has started.
Some contracts specify an “installation” or “deployment” date based on activity such as setting up a machine. The clearest contracts specify a system acceptance test (SAT) based on defined criteria such as performance thresholds. Yet other contracts specify an abstract “mutual” agreement between provider and customer. The most ambiguous contracts don’t specify anything at all!
Subscription billing cannot start (and revenue cannot be recognized) until this threshold is met. Hardware subscriptions can be held up for weeks or months based on the customer—perhaps an approval hasn’t been granted, the production line hasn’t started, or a key stakeholder hasn’t signed into the software platform.
- 💰 For sales teams, this means ambiguity about commission. 💰
- 🤝 For support teams, this means ambiguity about customer expectations. 🤝
- 📈 For finance teams, this means ambiguity about contract term and revenue recognition. 📈
One clear lesson for HaaS: ALL contracts should specify a “drop-dead date.”
A simple example: the term will commence no later than 30 days after equipment installation. These are often called “deemed acceptance” provisions.
Such provisions ensure mutual understanding about the manufacturer meeting their performance obligations on the contract. And they ensure there’s no internal debate between sales, support, and finance about when a contract has “started.”