INKISH.NEWS -

Software as a Service or SaaS has for years been a very successful business model for software vendors and their customers. There are a couple of good reasons for that. Rather than having a high initial cost, customers can pay in smaller installments, and what initially costs the software vendors money will over time become more profitable and, therefore, an advantage for both vendor and user. Software is very suitable for this business model since the cost of adding a new customer to the portfolio is almost zero. The development and running cost can be split into more accounts, and at some point, the balance between running operation and breakeven is favorable.

The SaaS model is favorable for both parties, which may be one of the reasons SaaS works so well. The vendor needs to develop and serve customers so well that they earn the next payment. Though customers eventually pay more than a licensing deal, it becomes an operational cost - AND a critical understanding is that SaaS models typically can be terminated with short notice (typically till the next payment!)

A few days ago, Heidelberger Druckmaschinen announced that they had found a partner for their subscription model (Munich Re). Good news for Heidelberger Druckmaschinen, and maybe something that will improve the balance sheet further by taking over financing some of the machines Heidelberg has financed themselves! But as we have written about earlier here on NEWS, is a subscription model on hardware any good?

First of all, it depends on who’s perspective you choose to take! The major difference between software and hardware as a service is that with every new customer comes a high initial cost. Heidelberger Druckmaschinen has a cost of producing the equipment. Even if the subscription model was comparable to software with no or small initial payment, Heidelberger either has to finance the cost themselves or find partners who can finance the equipment - since it will take several installments before it breaks even. With hardware, you usually have a depreciation time and repayment time, sometimes even with a scrap value, and this is all because the machine gets less and less worth. Software becomes better and better over time. Hardware loos value and eventually becomes obsolete. Therefore, a subscription model on hardware always needs to have an element of financing compared to software where the development cost is the cost (plus some server space, backup, etc.)

I don’t know the details of Heidelberger Druckmaschinen’s subscription model (I have seen a couple of contracts, but these are pre-covid), but what used to be essential was the different “levels” of the agreement you could choose. If you take the entire package, it includes the printing machine, consumables, and service/consultancy and essentially ties a customer into a Heidelberg ecosystem. Heidelberg will make money on consumables, the machine itself, and eventually, the central question of whether this is a good idea or not - whether the ROI for you as the customer is better, the same, or worse.

In the press release announced, November 8th, 2021, Heidelberg says, “These customers pay a fixed monthly rate for an agreed basic print volume (pay per outcome) plus a fixed price for each additional printed sheet. The model also includes consumables and consulting, software/IoT, and technical services.”

This sounds to me like what we have seen on all-inclusive contracts in digital print for years. If you print less than forecasted, your cost per sheet will be higher - and what you should compare is, of course, how much financing, operation, and consumables would cost you on 100% variable terms. You will also have to look into the price of the exceeded volume and remember this is often where you would make a lot of money if you finance the machines the way you would typically do!

When we asked a CTO from a printing company pre-covid, the cost of having a subscription from Heidelberg would be more expensive. Paying a premium is not bad in itself if what you get is premium compared to your needs. One of the things Heidelberg also promised in the press release is “Munich Re takes over the investment of the machine, thus enabling clients to modernize their production capacities without capital-intensive upfront investments and to achieve better cost forecasts and transparency.”

Before entering into any acquisition of digital or offset - or anything for that matter, make sure to do your homework. Heidelberg, of course, has a couple of incentives with their subscription model, which are a) sell more machines, b) make more money, and c) upsell on additional services like consumables, software, etc.

All a legit reason to enter into a subscription agreement with Heidelberg or any other for that matter, but your focus should, of course, be a) best possible financing, b) best possible operational cost, and c) highest level of flexibility to ensure your best possible market position.

The good thing for Heidelberger Druckmaschinen with the announcement of the collaboration with Munich Re is that another headache seems to be cleared from Wassenberg’s table. Maybe, which is not mentioned in the press release, the machines Heidelberg had to finance themselves can be removed from the balance sheet, further strengthening Heidelberg’s financial situation.

Final note. Financing is an essential part of any acquisition today. With extremely low-interest rates these days, banks and leasing companies must be creative to make money. So the question is, of course, if you could get the machine for the same price as Munich Re, and finance this yourself. Maybe the collaboration also includes favorable terms for Munich Re on the equipment and the consumables - again, 100% fine. Remember, there is only one to pay the bill at the end of the day - YOU.

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An addendum:

Regardless of what financing you are looking into, always remember to calculate lifetime costs under various scenarios. As far as I know, Heidelberg offers multiple subscription options, and again, before you choose to put all your eggs in one basket, calculate! Can you easily get out of an agreement, regardless of whether it's a leasing contract or an all-inclusive contract like Heidelberg's EaaS? Also, take into consideration what happens if the market changes. What is the scenario in case your total volume decline or increase? It may be extremely valuable to get an independent consultant's view, just because some PSPs have in the past burned themselves on what appears to be simple all-in contracts on digital printers. All the best - and keep investing in new technology!

Nov 10, 2021

Author: Morten B. Reitoft