Subscription Knowledge Series #2 – Start Small, Plan Big: How to Embrace Successfully the World of Subscriptions
Going through this turmoil created by Covid-19 may have created a sense of urgency in your company to build a more sustainable business.
That might be the right trigger to move towards deploying subscription services like 70 % of organizations have done, or planning to do. According to Gartner, by 2023, 75% of organizations selling direct to consumers will offer subscription services. And we see that this trend is definitively not restricted to B2C model, while the lines between B2B and B2C are blurring.
The example of Manufacturers – Going through their transformation Journey from selling products to solutions, in 3-Steps
Since a few years now, the trend for manufacturers has been to open new channels of distribution such as e-commerce sites, or yet marketplaces, reaching out directly to end-customer, by-passing their traditional value chain. Decreasing Time-to-Market, better brand control, gathering analytical customer data and increasing profit are the main drivers of this new Go-To-Market.
Besides the technical challenge of going Direct-To-Consumer, that we will be covered in a future blog-post, it may jeopardize the existing relationship with their ecosystem of wholesalers and retailers selling their products and parts.
Currently, we see a new trend where manufacturers want to enrich the traditional relationship with their resellers by providing added-value services. We see typically a 3-step approach for these manufacturers to embrace this change.
Step 1 – Adding Software-As-A-Service to their existing products and parts
One recent customer we helped in this journey is a German manufacturer providing machines and supplies to window and door makers, typical B2B business.
They started to embark on this journey with SAP, to provide a Software-As-A-Service application, helping the producers of windows and doors to design these in a much tailored and easier way. The window makers enroll to this app via an e-commerce site supported by SAP, enabling them to self-manage their subscriptions. The actual invoicing for this new SaaS, is done using the existing billing and invoicing back-end system. The next step that they foresee is to go for a Device-As-A-Service model that we will describe further on.
Another company we helped on their transformation develops, manufactures and markets products for the construction, building maintenance and manufacturing industries, all professional end-users. Their first use case is a cloud-based software enabling the design of anchorage projects. One of their main asks was to have the flexibility to add and remove software licenses in a self-service scenario using the web shop based on SAP Commerce. The idea was that the customer could see the impact to the bill even before confirming the change on the subscription contract.
Step 2 – Going for an Everything-As-A-Service model
Device-As-A-Service is a good example of this second step. Subscriptions and usage-based offerings in this model will focus on the function of a product as the service, not on the product itself. Think about these examples:
- You don’t buy a power drill any more, you buy the service that the drill is giving which is making holes …
- You don’t buy a printer, a scanner, an air-compressor anymore, you buy a number of pages printed, black or colored, you buy air-as-a-service, you buy light-As-A-Service etc …
Talking about Light-as-a-service we worked with this one company, world leader in connected LED-solutions who decided to create value, combining the use of IoT sensors on the bulbs along with a creative usage-based model translating light usage into costs, per building, floor and room. The benefit for their B2B customers is to make the right decisions in their daily profession for a smarter and cheaper maintenance. The social benefit is to contribute to a greener planet by saving energy.
Medtech is another quite active area in creating these new business models. We are helping a leading manufacturer of life science instrumentation and software addressing pharma, biotech, diagnostic and chemical companies. With the advent of new tax regulations that no longer incentivize companies to amortize their capital investment, customers were looking for a new way of using these expensive instruments through an affordable business model: subscription model has been the answer, along with the tracking of entitlements with start/end dates, capabilities, add-on’s etc…
Step 3 – Going to Solution Bundle model
The final step is to wrap contract-based services such as for maintenance, warranties, together with the XaaS model, providing a complete bundle solution to the customer.
Let’s take the example of this SAP customer, manufacturing laser printers and imaging products. While they decided to launch printed managed services, their business model became more complex and multi-sided.
- They sell to enterprises complex solution bundles of hardware, managed print services, installation services, warranties, maintenance, software subscriptions and usage-based services. Frame agreements are set-up with these enterprises for helping them to outsource the management of their fleet of office print and scanning devices according to these more complex B2B contracts.
- They deal with service partners, providing these installation and maintenance services, through a contractual agreement paying them by service action
- Finally, consumables distribution partners will complete the ecosystem by enabling the replenishment of consumables free-of-charge for the enterprises
What are the good tips to know in order to execute successfully your move to the world of subscriptions?
- New pricing mechanisms are required: Traditional pricing, performed on a per-unit basis with surcharges and discounts applied to it, don’t map anymore to subscription usage and consumption models
- Contract change management becomes key: customer relationships are based on contracts, no more orders, very likely to change over their lifetime with add-ons, removals, co-terming, specific entitlements etc…
- Collection, metering and pricing of large amounts of transactional details is needed to follow the usage
- Partner Settlement with different types of contract agreements such as revenue share is fundamental in a multi-party relationship
- Planning for scaling capabilities is a must-do in this “Start Small, Think Big” journey
- Finally, the easy integration with front office such as web shops, quoting tools, as well as with your back-office invoicing, collection, revenue recognition & reporting becomes essential
Are you really thinking of building these features yourself?
I warn you against going down to this attractive path: doing a heavy lifting of your existing order-to-cash process will lead inevitably to a number of challenges. As your business grow, the inability to scale while transactions start to explode represents a first showstopper. Maintenance cost will increase as new requirements are developed and errors might occur throughout the business process, generating revenue leakage. While the market requires a quick Time-To-Market to try, test, launch and adjust new offers, the necessary change requests might slow down significantly the execution and hence, give more windows of opportunities to the competition. Finally, maintaining a happy ecosystem of partners might also be a challenge if you continue to pay incentives, commissions and revenue share using spreadsheets’ type of reporting.
What will be the benefit of moving from selling product to selling subscriptions?
There are direct benefits for your company and its bottom-line, and benefits for your customers, increasing their retention.
Creating a sustainable recurring revenue will be the number one outcome. Investors will be reassured, and shareholder value will consequently increase as this was previously proven through stories such as Adobe going full cloud.
At the same time, you will create added-value services on top of your core business, which will contribute in enhancing your customers satisfaction and … stickiness.
You will be able to analyze the usage-based and consumption data in order to get to know your customer better, fine tune your offerings and finally propose more appropriate customized solution bundles.
Finally, you will provide an affordable model to your customers to move from a capital investment (capex) to a usage-based one (opex), sending them a variable bill based on usage.
Want to discover new trends, challenges, customer stories and order-to-cash key functionalities to adopt for your business model transformation?