In 1775, Watt and Boulton Gave Away Steam Engines for a Third of the Coal Savings
By charging for coal saved rather than for the machine, they steered engines toward places like Cornwall where coal was dearest.
My First Million · Rory Sutherland: completely legal marketing hacks that always workIn the 1770s, a British mine owner already running a thirsty steam pump got an unusual visit. James Watt, the Scottish inventor who had improved the steam engine, and Matthew Boulton, the Birmingham manufacturer who backed him, offered to supply their new engine for free.
The engine they were replacing was a Newcomen, an earlier and less efficient design that was already in use in some mines. Watt and Boulton told owners using those engines that there would be no charge for the new machine itself. The owners would pay them a third of the money they saved on coal.
As told by Rory Sutherland, who works in marketing, the arrangement was hardware as a service in 1775. It set the price on what the engine saved, not what the engine cost, years before Rolls-Royce charged airlines in a similar way by billing for each hour an engine was in service.
The deal lined up the gain for the seller with the gain for the mine owner, so the engines went where they saved the most. The owners who needed coal savings the most were the ones where coal was most expensive.
That meant places like Cornwall, the example Sutherland gives. The tin mines there were a long way from any available coalfields, so coal cost more there. An owner in Cornwall who burned less coal saved a lot of money, and a third of those savings was still a lot of money for Watt and Boulton.
Sutherland says the earliest Watt engines tended to go to districts where coal was dearest because the savings were largest there. The owners kept two thirds of the savings, and Watt and Boulton collected a third. If Watt and Boulton had simply charged a flat fee, such as 100 guineas for an engine, they would have kept none of the upside their efficiency created.
The point Sutherland draws is that the people behind the deal were thinking clearly. It is a mistake to assume that people 200 or 300 years ago did not understand incentives, he says, when they had worked out how to get paid for results.
Questions people ask
Who were Watt and Boulton?
James Watt was a Scottish inventor who greatly improved the steam engine, and Matthew Boulton was a Birmingham manufacturer and entrepreneur. Boulton backed Watt financially, built the engines in his works, and sold them to mines and mills across Britain.
What made Watt's engine better than the Newcomen engine?
The Newcomen engine did useful work, but it heated and cooled the same cylinder with each stroke, wasting huge amounts of heat. Watt added a separate condenser, so the engine used much less coal to pump the same amount of water.
Does anyone still price machines this way?
Yes. Rolls-Royce later sold jet engines with its Power by the Hour program, charging airlines for each hour flown rather than for the engine itself. Software, copiers, and industrial equipment are often sold the same way today, with payment tied to use or savings.