Digital signage network operators have struggled for sometime to determine what the best business model is in digital signage. Recent studies have shown that the next couple of years the money inflow will not be in the advertising. Hardware and software sales, on the other hand, are expected to grow substantially, doubling the industry’s footprint by the year 2012. And with many industry incumbents shifting their focus to the SaaS model of digital signage, we are seeing a shift in revenue appropriation. We are seeing the digital signage industry shift from an industry which makes its money in software and hardware sales to an industry working toward the “razor and blades” business model.
King Camp Gillette is sometimes referred to as the “father of Freebie Marketing.” While working as a traveling salesmen in the 1890s, Gillette saw opportunity in making money from a disposable product. His first idea was spawned from the bottle caps he saw get thrown away. He integrated his idea with a problem he saw in the need to consistently sharpen his dull straight-edge razor. Although it took him a few years to develop the disposable blade, Gilette discovered he could make more of a margin from the disposable blades–a recurring used item–than he ever could from the standard blades that needed constant sharpening.
Gillette co-founded the American Safety Razor Company in 1901. Production began in 1903 and in that year he sold 51 razors and 168 blades. In 1904, he sold 90,884 razors and 123,648 blades. His success was attributed to several factors: automated manufacturing, low prices, and good advertising techniques. The “razor and blades” business model was born of an idea housed in the mind of a traveling salesman. The Gillette company was sold to Proctor and Gamble in 2005 for a mere $57 billion. Gillette’s business model seems to be sound (that was laced in sarcasm).
Different forms Freebie Marketing have been used by Comcast and crack dealers alike and have aided many companies in establishing a recurring revenue stream. Digital signage will be no exception going forward. The “razor and blades” model references Gillette’s use of the disposable razor blade as a method for gaining residual revenue. Gillette practically gives away the razor, just so you will keep using the blade. Those of you that may have used the Mach3 or Fusion razors realize the margins are so high it makes me sick to my stomach. Inkjet printers, Comcast cable, Dish Network satellite television, and affiliate marketing all utilize similar business models. My former experience in the satellite industry was no exception: give the hardware away for nearly free to glean recurring revenues over an extended period.
There could be a few issues with thinking your recurring revenues will come back for 10 years. Hardware wears out and software becomes obsolete. Many networks are still fairly new, but will certainly be searching for new solutions as their equipment, including software starts to wear out and go belly-up. The recurring revenues only last as long as the hardware and software. Digital signage is here to stay. The question is: What will be the surviving business model in five, ten, and fifteen years?
Will digital signage SaaS be the norm? Will full server, player, and software solutions, with annual maintenance fees of 10% be the “in” gig? Will the industry, much like he current state of Internet hosting, be forced to drop its prices down to $5/month just to deal with the competition? What do you think?