Last updated: Subscription business models: Start small, plan big, reap rewards

Subscription business models: Start small, plan big, reap rewards

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In the wake of the pandemic, many businesses are moving towards deploying subscription business models – in fact, 70% of organizations have done so, or plan to do so.

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, as the lines between B2B and B2C continue blurring. 

What is a subscription business model: Definition

A subscription business model is a recurring revenue model that allows companies to generate steady income via regularly recurring charges. Customers are usually charged on a monthly or yearly basis for a product or service.

Manufacturers transforming: The benefits of selling products to solutions, in 3 steps

For a few years now, cutting-edge manufacturers have been opening new channels of distribution like e-commerce sites, or marketplaces, reaching out directly to the end-customer, and by-passing their traditional value chain.

Benefits of these subscription business models:

  • Decreasing time-to-market
  • Better brand control
  • Gathering analytical customer data
  • Increasing profit

Besides the technical challenge of going Direct-To-Consumer, jeopardizing existing relationships with their ecosystem of wholesalers and retailers selling their products and parts is a concern for manufacturers.

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:

  1. Adding Software-As-A-Service to their existing products and parts 
  2. Going for an Everything-As-A-Service model 
  3. Going to a solution bundle model 

Adding Software-As-A-Service to existing products and parts 

One recent customer is a typical B2B business: A German manufacturer providing machines and supplies to window and door makers.

They wanted to provide a Software-As-A-Service application, helping the producers of windows and doors to design these items in a much more tailored and easier way.

The window makers could enroll with an app via an e-commerce site, 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. They plan to go with Device-As-A-Service model for their next step. 

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 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. The idea was that the customer could see the impact to the bill even before confirming the change on the subscription contract. 

Device-As-A-Service: Subscription business models are revamping the future of industries

Device-As-A-Service is a good example of subscriptions and usage-based offerings that focus on the function of a product as the service, not on the product itself.

Think about these examples of device-as-a-service:

  1. You don’t buy a power drill any moreyou buy the service that the drill is giving which is making holes
  2. 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.

Illuminating the way to a brighter and greener future:

Light-as-a-service: A world leader in connected LED-solutions wanted to create value, combining the use of IoT sensors on the bulbs 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 active area in creating these new subscription business models.

We’re 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: The subscription model has been the answer, along with the tracking of entitlements with start/end dates, capabilities, add-on options, etc..

The solution bundle model: Tying it all together

The final step is wrapping contract-based services like maintenance and warranties together with the XaaS model, providing a complete bundle solution to the customer.  

Let’s take the example of a customer that manufactures laser printers and imaging products:

  • 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 to help them 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 installation and maintenance services, through a contractual agreement paying them by service action 
  • Consumables distribution partners complete the ecosystem by enabling the replenishment of consumables free-of-charge for the enterprises 

Thinking of moving to a subscription business model? 6 things you must know first

In order to successfully execute a move to the world of subscriptions, you need to understand several important aspects:

  1. 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 
  2. 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…  
  3. Collection, metering, and pricing of large amounts of transactional details is needed to follow the usage 
  4. Partner settlement with different types of contract agreements such as revenue share is fundamental in a multi-party relationship  
  5. Planning for scaling capabilities is a must-do in this “Start Small, Think Big” journey 
  6. Easy integration with front office like web shops, quoting tools, as well as simple integration with your back-office invoicing, collection, revenue recognition, reporting

Warning, warning: This is not a DIY project

Thinking of building these features yourself?

I warn you against going down this path: Doing a heavy lifting of your existing order-to-cash process will inevitably lead to a number of challenges.  

As your business grows, the inability to scale while transactions start to explode represents a showstopper.

Maintenance costs 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 significantly slow the execution, giving 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.  

The benefits of moving from selling product to selling business subscription models 

There are direct benefits for your company and its bottom-line, as well as benefits for your customers, which will increase retention.  

  1. Creating sustainable, recurring revenue will be the number one outcome. Investors will be reassured, and shareholder value will consequently increase
  2. You’ll create added-value services on top of your core business, which will contribute to enhancing customer satisfaction  
  3. You’ll be able to analyze the usage-based and consumption data, allowing you to get to know your customer better, fine tune your offerings, and propose more appropriate customized solution bundles
  4. You’ll 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

Rev up revenue.
Gain loyalty.
Learn more about
Subscription service succe$$ HERE

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