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CAPEX TO OPEX – The Differences & Advantages

Blog CAPEX TO OPEX – The Differences & Advantages

We’ve often stated that business models are always changing. The time comes when old methodology and gadgets wear out their welcome, and companies must alter how they do things to stay in the game.

 

THE WAY WE DO BUSINESS IS CHANGING

Over the last decade, we’ve witnessed the deaths of brick-and-mortar retailers as enterprises switch to the online market. We’ve seen factories in America shut down and shift production overseas to countries, where labor and materials cost less, and we’ve seen the dependence on social media grow as businesses seek new ways to attract customers. 

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PRODUCT-AS-A-SERVICE

The biggest change we’re seeing is the pivot to product-as-a-service business models. This usually entails the fusion of genuine products with their accompanying services and monitoring. One-time transactions for outright purchase are usually omitted from the equation. Instead, customers find themselves “subscribing” to a product, and paying a recurring fee for the service in question.

 

An example of this would be IIoT applications that allow the connectivity and real time data collection from industrial or commercial equipment. A manufacturer or commercial equipment user pays a recurring fee, based on output or uptime for example, for the usage of the equipment. This recurring fee typically includes all maintenance and repairs covered under warranty for the duration of the contract. This is possible because data is continually being collected on the health and status of the equipment, enabling the provider to keep the machinery in optimal working order. This business model enables sellers to increase their revenue streams and build strong customer engagement, while eliminating expensive capital expenditures (CAPEX) costs from the buyer’s balance sheet and transitioning it to a much more manageable and predictable operational expense (OPEX). 

 

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CAPEX – WHAT IS IT?

CAPEX expenditures often induce future benefits. Purchases like new factory equipment or commercial grade ovens used in restaurants are examples of capital expenditures. The equipment is purchased outright, at a substantial expense. While the equipment will typically pay for itself over time, the return on investment (ROI) is generally not realized until long after the purchase is made.

 

CAPEX doesn’t just refer to monetary investments. It also means improving or adding to a company’s current assets. For example, if a manufacturer decides to invest in IIoT technology or the necessary data scientists to train employees, CAPEX is the relevant business model. Another example might include fitting equipment with sensors, so machinery can communicate and shed light on what problems require attention. It would be wrong to suggest that CAPEX hasn’t served its purpose. As one sees, the model does present clear advantages to business owners, but as times change, business models change, and OPEX is offering a future that managers and executives find too promising to pass up.

 

HOW OPEX IS TAKING OVER

OPEX refers to the costs of a company’s day-to-day operations. This can include anything from a worker’s daily wages to electrical costs. Now, you might be asking yourself, “If we're paying for the equipment one way or the other, why does it matter if it's CAPEX or OPEX?” For end customers who are purchasing Industrial Products-as-a-Service, the difference is substantial! 

  • There is no longer a large upfront investment in equipment that won't achieve an ROI for years to come.
  • With monthly subscription billing, financial forecasts are stable and predictable.
  • The customer isn't  responsible for maintaining and repairing the equipment, which means they don't have to have in-house service technicians or pay for additional service contracts.
  • Because they’re paying for utilization only, most of the time it will be the OEM or service provider who is responsible for the uptime and making sure the SLAs are met.

 

CONCLUSION

For companies who want to maintain their competitive edge and stay relevant in their market, innovation is essential. For industrial and commercial equipment providers, the evolution from CAPEX equipment sales to Products-as-a-Service is simply the next evolution in the way business is being done.

 

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