As software grows increasingly critical to virtually every business, increasing numbers of industrial companies are investing in it to make their products smarter and to enable new revenue and innovation sources. The promise of doing so is tantalizing—companies that get it right can see their enterprise value grow as much as 1.5 times. However, achieving sustainable commercial success with software offerings has proved challenging for industrial companies, leading to increasing concerns about the ROI of their software investments. As one industrial executive said, “We have invested in and developed over 100 software products but have had limited software revenues to stand behind.”
To better understand the challenges and key markers for success that industrial companies face when commercializing software assets, we surveyed about 500 industrial-company executives. Of those surveyed, approximately 95 percent reported that their companies now have software in their portfolios. We also conducted one-on-one conversations with executives from several industrials who have started successfully commercializing software. In addition to assessing the state of software in industrial companies today, our research identified five main areas in which they need to excel if they hope to generate significant revenue from their software investments.
The state of software in industrials today
For industrial companies, software is increasingly becoming a distinct enabler of innovation and competitive advantage. It makes hardware products “smart” through connected sensors, and when coupled with hardware it creates valuable solutions, platforms, and ecosystems.
Nearly 70 percent of top economic performers among all companies use proprietary software to differentiate themselves from their competitors, compared with just 50 percent of their peers, according to previous McKinsey research.1 Markets tend to reward companies that invest in software with higher valuations—typically three to four times that of hardware-only earnings multiples.
Some software investments that industrial companies have made in recent years have been quite sizable. For example, Rockwell Automation acquired the software manufacturing platform Plex for $2.22 billion in 2021 and Keysight Technologies bought design simulation software maker ESI for $995.8 million in 2023 as part of a “string of pearls” M&A strategy.
Not surprisingly, the overwhelming majority of companies in our survey are either trying to or want to monetize their software assets. About 95 percent of respondents indicated their companies are monetizing software via either an integrated (hardware plus software) offering or a stand-alone commercial-software product. Of the remaining respondents, most indicated that their companies intend to monetize software within the coming year (Exhibit 1).
Some of these industrial companies already have large software businesses that dwarf those of major stand-alone software-as-a-service (SaaS) companies. Of our survey respondents, 20 percent reported software revenue of more than $1 billion (Exhibit 2).
Industrial companies often employ multiple strategies for monetizing their software based on their portfolio mix: 6 percent have embedded software that they monetize through increasing the value of their hardware, 37 percent have joint hardware and software that they monetize as bundled solutions, 7 percent have stand-alone software solutions, and 50 percent employ multiple methods.
They also vary with respect to the size of their software portfolios. Half of our surveyed companies reported having fewer than three software products, whereas others have portfolios of more than 100 different software offerings.
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Regardless of the software business’s size and monetization strategy, almost all of the companies we surveyed face a similar, fundamental challenge of commercializing their software investments. The following are the struggles respondents most often cited:
- Software portfolios are fragmented, complex, and filled with products that are not commercially viable—which often result from acquisitions and legacy development.
- Software is practically being given away for nothing—or close to nothing—which erodes customer perception of the software’s value and destroys any upside of incremental software investments.
- Promising opportunities are missed: Account executives with hardware backgrounds don’t understand software and sometimes don’t care, given that software deal sizes are typically smaller than those of hardware. As a result, salespeople who specialize in software can be hindered by the status quo operating model and often don’t get pulled into potentially valuable customer conversations.
- Organizational understanding of what it takes to effectively serve a new type of buyer is weak: A traditionally hardware-focused sales organization may not know how to sell to software buyers, who often are CIOs or COOs rather than the more typical hardware buyers, such as site managers.
- The infrastructure and capabilities needed to manage customer life cycle value, postsales, and renewals are weak, leading to poor visibility into renewal management.
How industrial companies can successfully commercialize software
Most industrial companies that are eager to commercialize software still have a lot of work to do, principally by adapting their go-to-market (GTM) approach to the realities of a very different business. Those who get it right can reap significant rewards: Within 18 months, we have seen companies transform their GTM approach and increase bookings (as measured by the value of contracts signed) by 20 to 40 percent year over year.
From our research, experience, and conversations with companies that have succeeded in commercializing their software, we have identified five crucial moves for carving out a path for accelerated software revenue growth.
1. Focus on your product portfolio and prioritize, prioritize, prioritize
Industrial companies looking to accelerate software revenues can use a customer-focused lens to identify software products that are more likely to be commercially viable. An increasing number of industrial companies have built software assets for internal use, in some cases to enhance their manufacturing plants’ operations or to improve the functionality of their current hardware products. The idea of developing revenue from such software can be exciting. Still, the reality is that many of these software products will not be commercially viable, because they are not attractive to potential customers. Such assets often lack the integration capability and simple user interface required for a broader external market, or even a compelling solution may lack appeal as a stand-alone product.
In our experience, the companies that have found success monetizing their software are those that conduct a thorough assessment of product–market fit to categorize their software into three categories: products that are ready to monetize as is, products that require more time and development to become customer-ready, and products that should not be considered for commercialization. For the second category—products needing further development—the software that offers the best opportunity for short-term wins should take precedence. A piece of proprietary software might be transformed into a ready-to-go, revenue-generating SaaS solution with a few minor product feature enhancements or minimal user interface/user experience (UI/UX) improvements in months. For example, a semiconductor company assessed its entire portfolio of possible software solutions and prioritized the ones that could be packaged quickly with minimum development to achieve product–market fit. This allowed their sales and marketing team to start selling and pitching, and the company soon developed a line of new solutions worth $450 million in incremental revenues.
Focusing on quickly commercializing an initial set of software solutions while deploying resources to develop products with a longer-term horizon can help foster a successful cadence and culture of software development. One industrial company, for instance, assessed its entire software portfolio to identify a group of potential winning products that were ready to sell and a second set that required some collaboration with potential customers to make them market-ready.
2. Establish quantifiable software value independent from hardware
Historically, a significant portion of the software developed by industrial companies has been used to promote hardware, and as a result, it is often given away for free or at a very low cost. For example, predictive-maintenance and diagnostic software have often been included with the hardware they support for no additional charge. This can create a muddy view of the software’s fair value, both for the vendor and its customers (Exhibit 3).
As a result, industrial companies are increasingly not reaping the full rewards of their software investments, especially when compared with their software-native peers. When industrials want to accelerate software revenues and shift to more favorable software pricing models (such as higher-priced or recurring-revenue models), they often encounter two main issues: resistance from customers who have not yet seen the inherent value of the software and internal backlash stemming from concerns that higher software prices might negatively affect hardware sales. For example, automakers have tried moving certain software features to a subscription-based price after previously including the features in the sale or lease price, a change that, in some cases, has created significant customer backlash.
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To help solve this issue, industrial companies can holistically rethink their software portfolio’s packaging, pricing, and GTM strategy. This starts with quantifying the software’s value through a triangulation of customer value, competitive intelligence, and margins.2 Then, companies can take steps to change customers’ perceptions of the product’s worth to better align it with its quantified true value.
As part of these efforts, companies may prevent further value erosion by assigning a stand-alone price for any new software from the outset—even when the software needs to be coupled with a hardware sale. In such cases, the incremental value the software brings in addition to the hardware should be clearly communicated to customers. Industrial companies can also apply this strategy to introduce new business models to customers, such as recurring revenue.
Charging for existing software that has previously been given away for free (or close to it) will often require a complete shift in customer perception. Achieving that is nearly impossible without adding significant new features to the software. The existing product, in essence, will need to be wholly repackaged and rebranded such that customers feel that the “new” offering is a genuine advancement over past bundled versions. For example, when HP shifted a portion of its business to a subscription model, it not only added new services but also established an outcome-based business model of guaranteeing uptime.
3. Create a new software-defined sales operating model
It is one thing for industrial companies to understand that they need to change how they market and sell their products to succeed with software. Making those shifts happen and sustaining change, however, is more challenging.
Selling software requires a new and very different organizational structure. This includes a more substantial and focused software sales team. In addition, stronger orchestration between hardware and software sales teams is critical when the software is being sold in conjunction with hardware.
There are three main GTM models, each with its own merits and drawbacks:
- Independent sales team model. This approach separates the software sales team from their hardware peers, allowing greater flexibility to sell directly to software buyer personas. Such a model typically attracts better, more experienced software sales talent and, in the process, helps the organization more rapidly become nimble and adept in this new discipline. However, this model can also lead to friction if both the new sales team and the legacy hardware group try to sell to the same customer, particularly without proper coordination. Prospective buyers may find the experience disjointed and unsatisfying; if they don’t simply walk away, they may push harder for a lower-priced bundle deal.
- Overlay sales team model. This approach involves augmenting the existing hardware sales team with some software specialists on an as-needed basis. Typically, a legacy account manager—often accustomed to selling hardware—oversees all sales activities, including software. The account manager will pull in a software specialist when software expertise is needed. While this keeps the account orchestration streamlined, this model can risk leaving sales teams ill-equipped to handle selling software. In our experience, teams often struggle to commercialize software successfully with an overlay sales model, and our survey respondents expressed a similar view. As one survey respondent put it, “The account management team is primarily focused on hardware and does not bring in the expertise of [solution/software] specialists.” For this and other reasons, some hardware and software sales organizations have begun shifting away from an overlay model.
- Account team model. This model falls somewhere between the two previously described. In this model, the software expertise is fully embedded within an account team led by a hardware account manager. The software seller is kept in the loop on all major customer activities and can jointly work with the rest of the account team to identify potential software opportunities. In some cases, the software seller may lead the relationships with the major software buyer personas.
Selecting the right model for a given company is critical to building a collaborative sales and marketing team that can drive increased software revenues. The decision will depend on several factors, including the company’s overall software strategy and whether the software is an integrated or stand-alone offering.
Integrated software solutions typically require hardware and software sales reps to collaborate and coordinate selling, given that the hardware and software solutions are connected, often have the same point of sale, and share a contract. In such cases, it is most helpful to have an account team or, at the very least, an overlay model where the account manager or hardware sales lead is at the helm, with support from a software sales lead or specialist. On the other hand, stand-alone solutions generally benefit from independent selling teams that deeply understand the software products.
The company and buyer personas should also be carefully considered when identifying the right sales model. We see three primary archetypes:
- Hardware and software teams selling to the same company and buyer persona. In these cases, an account model (or even an overlay model as a starting point toward a more effective sales model) ensures the buyer doesn’t needlessly communicate with different contacts at the same company multiple times to purchase software and hardware solutions.
- Hardware and software teams selling to the same companies but different buyer personas. An account team or independent sales team model can work in these cases. When choosing account team models in this scenario, it is often wise to ensure the hardware and software sellers have roughly equal seniority or roles so that neither can prevent the other from reaching the necessary buyer personas. Alternatively, with an independent sales team model, there will need to be some coordination to ensure high-level management discussions (between CEOs or other top executives, for example) are guided by a cohesive, consistent narrative about how the proposed combination of software and hardware can drive value for all the buyers across the company.
- Hardware and software teams selling to different companies. In almost all situations where the hardware and software are being sold to different companies, it is best to have an independent sales team that can act almost as a stand-alone business without having to coordinate much, if at all, with the hardware sales team (Exhibit 4).
4. Strengthen relationship with a new type of buyer
Software products typically have different buyer personas from hardware products, even for existing customers, so sales teams will typically have to cultivate new relationships and communicate a new value proposition. A majority of the industrial companies we surveyed cited this among the challenges they face. As one survey participant noted, “[The] software function often addresses different teams at [customer] organizations … and the current [hardware] teams have no existing network nor any idea whom to address.”
Companies have to make some shifts to solve this challenge. For example, an industrial company that historically sold parts to a plant manager had developed software that required selling to a CIO who oversaw the technology for several plants. In another case, a semiconductor company looking to build software solutions went directly to end users such as retailers, hospital systems, and manufacturing companies rather than existing channel partners, allowing the company to cultivate stronger, direct relationships.
Industrial companies that have succeeded with the software sales relationship shift have often done so with the help of anchor hires. These are deeply experienced people who can help open doors to new business, train others, and attract colleagues of similar caliber. For example, one industrial company in the logistics space hired a few anchor sales members from the outside who were well-versed in selling to IT leads at regional distribution sites. They were able to help the company land their first ten customers. Such hires can be valuable in other ways. Oftentimes, existing software sales reps will be paired with anchor hires to learn the best ways to pitch and position the product. In addition to anchor hires, incumbent hardware customers can also make valuable introductions to key stakeholders at their company, helping software sales reps execute a customer engagement plan and reach the right buyer personas.
5. Invest time and resources in building new capabilities, especially in postsales
Software and solution sales require new expertise and roles not typically found among hardware-oriented sales teams in industrial companies. Most notably, technical knowledge and consultative skills can be essential in sealing software deals. Lead cultivation is also critical and often requires advanced account planning, investments in digital tools, and very tight coordination with the marketing team to drive awareness and demand. Indeed, our survey respondents cited a lack of value-based selling skills and software-related technical expertise among the most significant challenges they face.
Another key area where software sales differ from hardware sales is the heightened need for postsales support, which is critical to ensure adoption and a high renewal rate. Industrial companies will need to understand the nuances of the required postsales capabilities, including the following:
- Customer success, not customer support. Customer success can sometimes be confused with customer support, which can be costly. Customer success involves proactively reaching out to and working with buyers to help them reach their multifaceted goals using the software product, unlike customer support, which revolves around answering and reacting to customer help requests. Industrial companies often do not have this function, because their products, which are sold as onetime purchases instead of on a recurring basis, generally do not require it. However, a strong customer success function is key to succeeding with software. More than 80 percent of our survey respondents cited the lack of a customer success management team as a postsale challenge.
- Renewal operations team. In a similar vein, industrial companies that sell in a much more transactional manner traditionally haven’t had to worry about renewals, but this is a key aspect of selling software. When companies shift to software built around recurring revenues, the focus on renewals and net retention becomes increasingly critical. As a result, most companies have to invest in a renewal operations team. For example, one industrial company saw that while they could land initial bookings for its software product, renewal rates were low. Root-cause analysis suggested that sales teams often contacted customers about renewals at the last minute or even past the renewal date, by which time many customers had already decided to move to another provider. The company responded by setting up a small renewal operations team to track upcoming renewals and ensure sales teams contacted customers at least three months before contract expiration. This new team was also tasked with drafting notes and troubleshooting the internal renewals processes, which helped drive higher renewal rates.
- Tooling to track customer life cycle. Industrial companies often need to build a sophisticated system for tracking renewals, another key piece of selling software. Linking renewals to contracting and customer-relationship-management systems is crucial to a 360-degree view of the customer’s lifetime value. In addition, customer telemetry built into the products can help customer success managers better support user adoption.
Software can play an increasingly central role for industrial companies as a source of competitive differentiation and new revenues. As industrial companies continue to invest in software, unlocking the true value of their investments will become increasingly important. The bar on ROI will only continue to rise. To meet this rising bar and deliver significant growth, the majority of industrial companies will need to transform how they go to market with software.
