Why Is Xerox Giving Away Free Printers?

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(This post originally appeared on Forbes)

Remember the days when you purchased a software application and paid for it one-time upfront? And then the software company would beg you to sign up for one of their maintenance and support plans so that you could receive upgrades and continuing service? Not anymore. Today, most software companies have discovered the lucrative world of the cloud and they are moving away from the old model of paying up front. Now they “give” the software to their customers, in exchange for a monthly fee that covers all support, maintenance and upgrades. The model has been tremendously successful. So successful that some of the largest software companies, from Microsoft to Oracle, are focusing much of their future R&D on cloud based applications, rather than “on-premise.” And so successful that other technology companies are looking to do the same. Like Xerox Corporation.

Disclosure: Xerox Corporation is a client of my company. However, I have received no compensation for this piece.

Just a few weeks ago the company announced their Small Office Savings Plan, designed specifically for small and medium sized businesses. According to this report: “Partners offer their customers a free Xerox color printer; and in turn, customers agree to pay a predictable monthly fee used exclusively for supplies. Printers available under this channel-only plan include the Xerox Phaser 6500, 6600 and 7100 or the Xerox ColorQube 8570. The company also throws in free on-site service and support with each device. The upside for customers, who can place their supplies orders online, is the monthly supplies charge is the same each month, allowing them to more easily manage budgets and cash flows.”

Xerox is betting that many SMBs prefer to make a fixed monthly payment for their printing supplies and service, just like software. If they are moderate to heavy printers of color documents they will find that the cost will be equal or less than what they’re paying now over the course of a two year period (the two year plans range from $59 to $149 per month but customers can also enter into a one year plan if they prefer). Naturally, there’s a risk that some SMBs will resist entering into a long term commitment because…well…we hate commitments. But if we do the math and agree that the cumulative cost is the same and it’s predictable AND we get a free color printer that we can keep forever then: sign me up, right?

“We’re responding to what our small business customers want,” David Bates a Vice President of Marketing at the company recently told me. “They don’t want to buy and own hardware. They want flexibility. They want predictable costs.” A free printer isn’t so bad either.

And what does Xerox want? What every technology company wants: guaranteed future cash flow. It not only makes revenue and cost management simpler but it greatly enhances the market value of an organization. Companies with predictable cash flow are bought and sold for multiples of that annual number. Companies without (like mine) are left to justify the value of their assets and hope that a potential investor will believe that its customers will stick around even though they’re not committed to do so. Cable, telecommunications and now software companies have figured this out. The infrastructure is there and new customers can be added with high marginal profit because overhead is not increasing. Shareholders love this. We’re all trying to figure out this model. And Xerox thinks it has.

Bates reminded me that giving away printers isn’t a new concept for the industry. “We all know the deals where you can buy a new PC and get a printer thrown in for nothing.” He said. “Many of our printers are sold below cost.” For companies like Xerox it’s all about the supplies of course – those expensive cartridges that we begrudgingly buy and the maintenance plans that we sign up for to keep our printers (which are still a very necessary part of the 2014 office) operating. Printer companies, like so many others, make the most profits from the accessories they sell. And SMBs like me grumble each time we have to pay. So why not just roll it all into one monthly payment, and throw in a nice color printer to boot?

“This plan is a way for us to not only attract SMBs but an aggressively different way for us to build a revenue flow,” Bates said. And he’s right. The model has worked for other technologies. It will probably work for printers too. For me, and most of my clients, the world is turning into one monthly payment.  Maybe your company can also figure out a similar model.

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