EA Practice Test 3

Selling Use Instead of Equipment

¹For most of the industrial era, manufacturers of heavy equipment made money in a simple way: they sold a machine, and the buyer bore the cost of running and repairing it. Over the past few decades, a growing number of producers of compressors, elevators, aircraft engines, and commercial lighting have offered an alternative. Rather than selling the machine, they keep ownership of it and charge the customer according to use: a fee per hour of operation, per cubic meter of compressed air, or per unit of light delivered. Advocates describe the arrangement as a realignment of incentives. Under a conventional sale, a manufacturer may profit from parts and repair work when its machines break down; under a usage contract, every breakdown is a cost to the manufacturer, which therefore has reason to design equipment that lasts and to maintain it diligently.

²The arrangement also changes what the manufacturer learns. Because it services machines it still owns, the producer gathers detailed records of how its equipment performs in the field, records that can guide the next generation of designs. Customers, for their part, convert a large capital purchase into a predictable operating expense, which can be attractive to firms that would rather not borrow to acquire equipment.

³Yet the model has spread more slowly than its advocates predicted, and the obstacles are not merely ones of habit. A manufacturer that keeps ownership of its machines must finance them, so a company that shifts a large share of its business to usage contracts may find that its revenue arrives gradually while its costs arrive at once. Its sales staff, long rewarded for closing large orders, may resist contracts whose value is realized over years. And some customers hesitate to depend on a single supplier for equipment central to their operations, fearing that the supplier will raise its fees once switching to a competitor has become costly. The model is likely to thrive, then, chiefly where these frictions are weakest: where machines are expensive to own but easy to meter, and where customers have credible alternatives.