Subscription-Based Services

OPPORTUNITIES FOR GROWTH THROUGH INNOVATION

Subscription-based service models today offer the potential of growing through innovation and reaching out across boundaries in all industries.

Currently, subscription-based services and subscription business models are used in all sectors and industries: whether it be in IT, in IoT (Internet of Things) and Industry 4.0, in the automotive sector, and even in equipment and machine engineering. The question that corporate and group leaders in all industries face today is less of whether or when their industry shall embrace the “subscription business transition”, but rather whether subscription business models shall completely replace current/original business and revenue models, permanently run parallel to them, or whether they will act simply as complementary offers.

The emergence of the subscription society is only just beginning, nevertheless the potential, as well as the extent of the economic and social changes that it will bring about, are already becoming obvious.  

The economy has been booming for some time now, although it may temporarily be affected by the looming economic slump. Nonetheless, the upturn has been particularly evident in new innovations combined with the number of new patent applications, which had been increasing worldwide from 2008 until it reached a peak in 2016. Despite this, company leaders are facing a real dilemma: Although, according to one survey, around 70 percent of executives believe that innovation is currently the most important factor for ensuring a company’s continued growth, most of them are doubtful that their own companies are currently up to providing the required innovative capacity.

The identification and effective exploitation of innovation opportunities requires a clear structure, reliable data and a culture of innovation. And this is exactly the core problem that most companies face. To allow the entire potential for innovation to be exploited, a number of differing models are being used more often for structuring purposes. However, this has only made the topic of innovation even more confusing and of course complex. Often the focus is so centred on innovation that one loses sight of the actual business and not least of all, the customers.

The goal of driving business growth through innovation often means that new services and products are constantly being introduced to the market, but the needs of customers are being increasingly neglected. Overview: The majority of companies still think and act primarily in product-oriented business and conception models which have been practised since the early 1960s. This means that, despite 24/7 Internet access, end-to-end digitization, population-wide coverage with SmartPhones, and the ubiquity of artificial intelligence, most companies have failed to break free from the supposed allure and simplicity of product-driven sales, marketing, and business models.

The solution has in fact been well-known since the 1990s as the so-called second dimension and generation of marketing as customer-oriented or customer-centred marketing. The customer-centred business model must therefore be a model that puts the needs and requirements of the customer first and foremost, enabling innovative services and products to be developed for and around the customer. Such an approach shall inevitably lead, sooner or later, to a subscription-based service model, since needs, desires and requirements do not remain constant or linear over time, but change individually depending on life situations, general conditions, personal preferences and objectives (in the B2B environment, the equivalent is the business situation and how corporate goals can dynamically change according to economic, macroeconomic and political circumstances).

 

THE POTENTIAL OF SUBSCRIPTION-BASED SERVICES

When asked, most companies would of course say that their customers’ needs lie at the centre of their activities. But usually they only traverse well-trodden paths when they introduce new products and services. The old-fashioned, but unfortunately too often used idea is that innovations first arise in the minds of developers. It then continues its development and optimisation away from the market before being introduced to a controlled market environment. What then remains is the hope for positive customer feedback. If this does not materialise, the innovation transforms into a hard-to-digest cost trap offering no further scope for change and growth.

A subscription-based service model is significantly more slimlined in development. The main question here is: What are the needs of the customers? And are these actually served directly by the subscription model. While the customer uses the product or service, the company is able to anticipate changing needs and demands by tracking usage behaviour in real-time and then responding immediately with a modified, optimised offer.

Companies such as Amazon or the American cinema subscription service MoviePass lead the way here. Their subscription models provide concrete figures on new subscribers and churn rates, and on the factors that influence them. This means that any weaknesses in their offers can be detected very quickly so that they can be automatically eliminated on an ad hoc basis in the form of an optimised service. Such subscription models allow a company to offer solutions both flexibly and rapidly so that over the long-term customers can be retained.

 

SUBSCRIPTION MODELS ARE ESTABLISHED IN ALL INDUSTRIES

Dr. Ricco Deutscher, CEO and co-founder of the subscription management platform billwerk, explains in a guest contribution on CIO.de that the success of the subscription model is not sector dependent. Everyone can benefit from this. “In the manufacturing industry, mechanical and system engineering, the automotive industry, and even in industries such as oil and gas extraction and processing, subscription-based services will play a large part in stopping the stagnation of recent years and reinvigorating business brands, products and services”, explains Pierre Schramm, marketing expert for subscription business models and CMO at billwerk. Companies embracing the subscription business transition will quickly realise the tremendous potential offered by subscription-based services in general and the use of subscription management platforms in particular. And all this to transform customer and data-driven customer needs almost in real time into innovations so that the development of new products and services can flow easily. Using billwerk, companies are able to unleash the full potential of their subscription business models.

 

THE POSITIVE IMPACT ON COMPANY EVALUATION

Our accuracy with this assessment has been proven by the many success stories such as Dollar Shave Club or Adobe. The subscription model for razors is booming at a time when the disposable razor market has been stagnating for years. The Dollar Shave Club, which was founded only in 2012, has been so successful that the consumer goods company Unilever acquired the company in 2016 at an assumed price of approx. $ 1 billion. With its 3.2 million customers the purchase price corresponded to $312.50 per customer. A bet for the future? UNILEVER’s management clearly saw the potential of this subscription model to compete with the other market leaders Procter & Gamble (Gilette) and Edgewell Personal Care Co (Wilkinson).

 

THE SHARE PRICE OF UNILEVER SHARES AT THE NEW YORK STOCK EXCHANGE (NYSE)

Other brands as well are also not holding back. Subscription models have now become standard practice in all sectors – whether it be food directly from the discounter, coffee and wine from specialist suppliers, or clothing in so-called subscription boxes. All models offer the customer the added convenience of saving the troubles of going out shopping. And even in the automotive industry (including the luxury segment), subscription models have now become well accepted. Renowned manufacturers such as Porsche offer all-in subscriptions, which not only customised equipping of the desired vehicle, but also a comprehensive pallet of services such as maintenance and repair.

 

SUBSCRIPTION-BASED SERVICE MODELS STAND FOR INNOVATION

Taking a step towards a subscription-based business is feasible for any company. The mere introduction of such a model can already foster changes both internally and externally – since new thinking models and direct customer contacts can be created. Until just a few years ago, direct customer contact was barely possible in both B2C- and B2B-driven industries without using an intermediary. Merchants and manufacturers required media such as newspapers, TV or retailers to reach potential new customers and communicate with their existing customers. Consumer desires and needs had to be gauged by market research. And in the automotive industry, most manufacturers, with only few exceptions, had never had direct contact with the buyers and owners of their products, since the customer relationship in most cases was between the manufacturer’s dealer and the car buyer. One of the first manufacturers to break this obsolete structure, introduce a paradigm shift with its direct sales of vehicles, and create an infrastructure involving  artificial intelligence to feed usage and behaviour data directly for enhancing the production of autopilots, is the electric car manufacturer Tesla.

 

AGILITY AND IMMEDIACY

By using subscription-based models, the needs and desires of customers can now be perceived directly. Often, the required solutions and optimisations spring up on their own in a way that would otherwise have taken months of research. Companies can react in a much more agile manner so that they can better suit the users of their products, even if their behaviour chops and changes at short notice. As a result, a company that offers a subscription box model is at a clear advantage compared to traditional retail trade or conventional, transaction-based e-commerce.

In order to enter the subscription market, it is important not only to get an idea of the customers’ expectations of their own products, or to monitor the offers of competitors, but also to consider the experiences of customers in general with subscription models, and even those from other industries. This is because the more popular subscription-based business models become, the higher will be the expectations of consumers. For this reason, barriers have to be broken and vision has to be extended beyond the borders of one’s own industry so that mistakes can be avoided from the outset.

Conclusion: Innovation is necessary today at a time when many sectors are stagnating. Subscription models provide an innovative way to focus on customers and their needs so that products and services can be developed around them. In the subscription society, this shall make long-term success more predictable and likely.