You put in your quarters (or dollars), push the button, give it a kick, and out comes your Diet Coke or peanut M&M's or whatever else you might be drinking or eating. At least that's the way the vending machines in my old office used to work. The timing of the kick was key, as often things got stuck somewhere short of the bin.
It's amazing what you can get in vending machines these days. It used to be just drinks and snacks. Now you can get lots of cool stuff. I recently saw a vending machine stocked with iPods, iPads, and Bose headphones (it did not accept quarters). Don't tell my daughter, but I even saw a Sephora vending machine while researching this post.
It's an interesting business model if you think about it:
- You make an initial capital investment to buy the machine.
- You place the machine in a high traffic area.
- You service the machine, making sure all the product bins are full and that routine maintenance is up to date.
- You provide on-call support, usually next day, to fix problems.
- You collect money every time someone uses the machine.
Hopefully you've priced whatever you're selling at a price point that allows you to achieve ROI and then continue to generate profit from the machine. Vending machines have been around longer than most of us have. Obviously the business model works.
Could a Vending Machine Approach Work for Your Business?
If the business model works for drinks and snacks (and iPads and makeup), is there an application of this model for your business? At least one medical equipment manufacturer has found the answer for his business to be yes.
An MRI machine is an incredibly useful and expensive piece of medical equipment. The machine itself can cost between $1 million and $3 million, and the room to house it can cost as much as $550,000 to build. That's a hefty capital investment that limits the size of the market for these machines to large hospitals and medical groups.
But what if instead of selling the machine, you made it available to clients on a pay-as-you-go basis? There is still an initial capital investment for an MRI room and installation, but the upfront capital requirement for the customer is much lower. I can't name the company here, but this is actually happening. It's a win-win. Smaller hospitals and medical groups can now provide better care, and the manufacturer has a new revenue stream.
It's roughly the same business model as the vending machine described above.
- The manufacturer makes the capital investment to build the machine.
- The manufacturer places the machine in a hospital or medical practice.
- The vendor services the machine, providing scheduled preventative maintenance.
- The vendor provides on-call support to fix problems.
- The vendor collects a usage fee each time the machine is used, billing the customer periodically.
Rather than collecting payment at the point of purchase like a vending machine, the MRI machine passes usage data back to a billing platform and invoices are generated periodically. Otherwise, it is virtually the same model. Do you see the potential? This company has opened up new markets by creating a lower capital cost entry point for its product and at the same time created long-term revenue streams.
M2M Communications and Cloud-Based Billing Up the Ante
The machine-to-machine (M2M) technology that makes this possible is readily available to any business. M2M allows vendors to create a highly efficient distributed monitoring system for their system solutions. These systems can be quite complex and integrated to a variety of other systems. Welcome to the odd but burgeoning world of machine-to-machine communications.
The most valuable communications between devices are events that trigger messages that demand action. Without human intervention, instruments monitoring the events would automatically communicate back to their systems in order to react.
In this example, the situation is monitored by a local device. For example, the vending machine regularly communicates back to a central monitoring system (the M2M portal). This regular communication consists mainly of short messages verifying that the devices are operating correctly. When certain criteria or thresholds are met, the devices are set to send a very different kind of message, sometimes something as simple as an alert. For example, you may have an alert to refill a soda machine.
Oddly enough, the M2M model is well-suited for informing companies about how they could think of their recurring revenue businesses. That's because each event could be considered an opportunity to offer something, with the offer of a product or service based on various criteria—e.g., type of event, magnitude of the event, location, duration, etc.
The key is to enhance the value of each event based on the nature of that event, establishing a relationship between the vendor and the consumer. To facilitate that relationship, the vendor has to have a recurring revenue management system that can orchestrate and respond to events accordingly.
Just Phone Home (or to the Cloud)
In simpler terms, all you need is a product that can capture usage information and connect to the Internet. In most cases, the product phones home and passes back usage data on a regular basis. To bill the client, cloud-based billing providers have developed solutions specifically designed to support this kind of application.
Recurring revenue business models have been around a long time, but advances in technology like M2M and cloud-based billing are opening up new possibilities.
If anyone ever asks you what a vending machine and an MRI machine have in common, now you know. The business model that makes the vending machine profitable can also be used to expand the market and create new revenue streams for the MRI machine manufacturer. Could it do the same for your business?
Bob Harden is the former director of global billing solutions at Experian. Lewis Sears is the implementation manager at Aria Systems, a cloud billing systems provider which powers recurring revenue for the enterprise.