The economics behind HVAC as a Service

In a previous post, I introduced the concept of HVAC as a Service or HVACaaS for short. The idea of HVACaaS is for the equipment manufacturer to become more than just the producer of a product or box. Instead, the equipment manufacturer will make and sell a product, but then be the “service provider” that effectively manages that solution for the equipment owner.

This isn’t a revolutionary idea. In fact, there is a lot of precedent for this across other industries. Consumers are increasingly getting used to purchasing a service instead of a product, or a product that then opens the door to a suite of services that they can also purchase. 

In our previous post, I used the music industry as an example, consumers have become accustomed to purchasing music as a service through iTunes or other streaming music companies and have moved away from purchasing it as a physical product like they did when records, cassettes, and CDs were the standard. They’ve also grown accustomed to purchasing these music services as a follow-on purchase to their product purchases, such as paying for music on iTunes after paying for an iPhone.

In the case of the music industry, this makes a lot of sense. People are willing to buy streaming music as a service because it’s more convenient and provides them with a better user experience. Just try fitting an entire Gen-Xer’s CD collection into a backpack and you’d understand immediately. 

Does this make sense for manufacturers in the HVAC industry? What about other commercial and industrial equipment manufacturers? Would customers be open and willing to embrace it? I think it does make sense in this industry. I think customers will welcome it. Here’s why…

New revenue streams for equipment manufacturers

Much like how the iTunes store opened up new revenue streams for Apple in the form of music and movie sales, embracing an HVACaaS model, where the OEM sells a solution or product to the customer and then sells add-on services for that product, will open the door for multiple new revenue streams for the manufacturer.

When selling an air conditioner, or a hot water heater, the OEM is effectively selling a product to the equipment owner that they then need to install and operate. But they’re really not the best equipped to do so.

Ultimately, there is no organization, company or individual that knows a device better than its manufacturer. They know it inside and out. They know how to make it operate optimally. But That knowledge is practically wasted when they sell the product or device only to watch it be poorly installed, maintained and managed by the equipment owner.

By selling maintenance and management services to the equipment owner following the sale of the equipment or device, the manufacturer can profit from this knowledge. This enables the manufacturer to provide operational guidance and insight and deliver a better, more efficient experience, at a reasonable monthly rate.

That additional source of monthly revenue couldn’t be coming at a better time for manufacturers. The only direction margins are going to go in the hardware business is down. It’s a commoditized, competitive marketplace which means that it’s only going to get more difficult to charge a premium for hardware as time goes on.

If manufacturers can add new services and revenue streams, they can grow their margins and become more profitable. They can also drastically raise their valuations should they decide to entertain selling their companies. Subscriptions and monthly service fees are guaranteed revenue that can be used to illustrate additional company value, making the company worth more to both investors and potential acquirers. 

Would consumers want to buy these services from the manufacturer?

Outsourcing equipment management equals savings

Let’s flip the equation and look at HVACaaS (or any equipment as a service, really) from the perspective of the customer. 

If a customer buys a hot water heater or an HVAC system, they purchase the physical device and then they have to operate it themselves. They’re spending the money to get it, and then spending money over time to operate it. But they’re not particularly good at operating it, because they aren’t the ones with the real knowledge and understanding of how it works and how to configure it to operate optimally.

HVACaaS rolls product and operation into a service. Should the customer buy an air conditioning unit, the manufacturer would operate it for them and save them money. The manufacturer can then work to manage and maintain that device, utilizing available data to optimize its performance and ensure that it’s operating optimally. They, more than anyone, know how to get the most out of their equipment. 

They can utilize data and analytics to recognize trends and patterns and optimize operations to generate the best, most efficient experience. They also understand when things are about to break. By analyzing the data and information available, they can roll a service truck or maintenance crew to repair or service a device before it stops functioning.

So, would a consumer want to purchase HVACaaS? I think they would. For a low monthly fee to the manufacturer, they can ensure that their devices and equipment are always working and are repaired before problems lead to actual downtime. What’s more, they’ll probably make their investment back in energy savings and efficiency. For a low monthly fee that will actually pay for itself in energy savings, the consumer gets incredible peace of mind and the guarantee that they won’t have to go without air conditioning, heat, hot water, or another necessity.

For further thoughts on the value of HVACaas and cloud-enabling devices, click HERE to download a complimentary copy of the ABI Research report, “Equipment Manufacturers Turn Cloud Connectivity into Competitive Advantage.

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