Capital Life Value Model

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When your customer’s buying decision considers the timeframe that your equipment can produce revenue, you may need to employ a value model that considers capital life. Two common situations where this applies. The first is when the buying decision considers when the equipment must be replaced due to failure. The second is when the buying decision considers the equipment capability over multiple generations of the customer’s product.

The first case is less common for the primary reason that it’s difficult to substantiate during the buying process. Your beefier parts and more rigorous testing certainly are consistent with long equipment life, but you’ll have a hard time proving it. If you find yourself making an “our machine lasts longer than their machine” argument, be prepared to back it up commercially. For example, you may have to guarantee a free replacement if your equipment fails before the promised time.

On the other hand, it is not unusual for equipment buyers to consider the ability to produce multiple generations of their product when making equipment purchases. See the figure below.

Diagram of the Capital-Life value model

For example, in semiconductor-chip manufacturing, each chip generation requires new equipment that can process smaller features and new materials. If the buying decision considers the purchase of new equipment for future product generations, the capital-life value model may be appropriate.

To illustrate, suppose your equipment is five percent slower than your competitor and costs more per system. However, only your equipment is capable of producing process-A products and next-generation process-B products.  If your customer chooses your competitor, he will need to buy a new set of equipment when he switches his factory over to process B. See the value model for this example below.

UnitsYour EquipmentCompetitor’s Equipment
Throughput process AkU/yr285300
Throughput process BkU/yr285300
    
Target factory capacitykU/yr25,00025,000
New systems for process A#8883
New systems for process B#083
    
System price$550,000500,000
Total capital expense$48,245,61483,333,333
Difference$ 35,087,719

In this example, your equipment saves your customer more than $35M despite being slower and more expensive.