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Industrial Companies Shifting to Subscription Models Need to Think Beyond Technology

Michael Mansard
Principal Director of Subscription Strategy, Zuora

Increasing bandwidths, cloud connections, and new IoT solutions are driving technological change. They’re also driving the subscription economy, in which monetization takes place via flexible subscription models and pay-per-use. The promising potential of recurring revenues makes subscription models attractive. However, common subscription-based business concepts — such as those you may be familiar with from a company, like an Adobe or Netflix — cannot be directly transferred and applied to the business of providing industrial capital goods. So what does an industrial company have to do to change its business model from pure product sales to agile subscription models?

Bring the Business On Board

When a company wants to introduce new technologies to support subscription offerings, it often initially focuses only on features, usability, compatibility, or security. The bigger challenge, however, is to generate added value with the technology and to design for change management within the company. In top management, decision-makers are often enthusiastic and want to implement their vision quickly, but it’s not always easy to convince the entire decision-making hierarchy of the benefits of shifting to a subscription model. The subscription economy demands numerous changes in perspective from all employees in a company. Businesses making the shift need to educate each and every individual employee who will need to help realize the new corporate vision, communicating why these new guiding principles are attractive for the future of the company — and how they will affect employees’ personal areas of responsibility.

Communicate to Customers

The digital economy puts the customer in a central position of power. This means that providers must be able to react quickly to the needs of their customers. The user will not give the manufacturer three to four years to develop a new product model and the accompanying service. The desired adaptation must happen immediately; the innovation should be available as soon as possible. That’s why it’s a good strategy to communicate with customers early in the development process in order to adapt the service offering to actual customer needs in order to generate new added value.

First the Service, Then the Product

Schneider Electric provides a good example of how a subscription business model transforms the previous sales logic around the product and a downstream service. While Schneider Electric’s core business in 2000 was in products for installation and building systems technology, today the company offers flexible usage models for more efficient energy management and develops loT-capable solutions that can be seamlessly networked. In the subscription logic, the service is an integral part of the product. This requires a complete rethink on the part of the sales staff. They don’t sell individual breakers or switchgear — such a sale is comparatively simple — but rather they have to sell the entire complexity of cloud, edge, and devices as well as recurring digital services based on the results expected by the customer.

3 Models for Pricing Subscription Services

If a company introduces paid service packages for capital goods, the willingness to buy is influenced, among other things, by which sales channels are used and how closely the customer is already connected to the company. For industrial companies, there are three core pricing models.

  • 1. Asset First. The “Asset First” model is straightforward, offering the simplest services with equally simple subscription terms for smart devices.
  • 2. Services First.
  • With the “Services First” model, premium services are automatically included from the start, with the offer often tailored to the respective customer. However, pricing in this “Services First” model can be more difficult, with entirely different value propositions depending on the customer.
  • 3. Subscribed First. The third model is “Subscribed First.” It assumes existing customers, who usually buy in bulk, may now consider agile subscriptions for, say, a hundred of their machines. Such customers are used to discount negotiations and are familiar with the processes involved. With such a group, caution is often the order of the day. Attacking your standard to make them buy digitally or on a subscription basis can cause problems.

Upsell for Added Value

Upselling is a method for finding — and delivering — added value, and is an important tool in the subscription economy. Its aim is to lead the customer from a free trial package (or even a low-cost introductory solution) to a paid premium service. In order to achieve growth on the basis of a subscription model, customers must be able to clearly identify the added value of individual paid-for offerings. This can sometimes be a challenge. For industrial companies, traditionally services were downstream of the product — as such, they generated no (or low) costs for customers. With subscription-based business models, however, the service is now at the center; it’s an integral part of the product. This means that customer expectations must be redirected and that subscription packages must be designed strategically to induce customers to want to pay for premium service.

Technology + Processes + People

The ability to adapt to customer demands requires a company to be flexible in its monetization options. This flexibility needs to be supported by the right technology, processes, and people. In terms of technology and processes, businesses need an agile subscription management system that enables everything from implementation of different pricing and packaging models to real-time subscriber insights. In terms of people, the subscription model demands commitment, from the individual person, teams, and the entire organization. The subscription economy holds great opportunity, but demands a consistent and thoughtful strategy for businesses to achieve success.

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