The subscription business is nothing new, but over the past decade its application has dramatically expanded. Today, we can buy subscriptions to almost anything, from grocery items and baby products to wind turbines and locomotives.
In the manufacturing space, high-maintenance, software-intensive products—like airplanes, autos, and medical equipment—have proved natural candidates for subscription, and technology companies too are beginning to realize the benefits to offering flexible and customizable subscription plans.
Subscription has myriad advantages for both vendor and customer, and over several decades many companies have slowly morphed their traditional product offerings into something that more closely resembles a subscription to a service.
Recently, IoT connectivity—in which products are connected to each other and the manufacturer using sensors—has brought a new dimension to this model.
For years, manufacturers like General Electric have been offering power-by-the-hour-type subscriptions to their customers. Even Caterpillar is moving toward selling metric tons of earth moved rather than tractors. Because smart, connected products can relay back information about usage and performance, it enables pricing products by their usage and performance and also brings extra perks to the subscription model – more efficient maintenance, for example.
GE, which offers a subscription model on its jet engines—customers pay for the time the engine is in the air— has thousands of sensors on its engine. This data is streamed back to GE in near-real-time so that anomalies can be flagged and service can be performed before a costly, and potentially dangerous failure occurs.
Of course, all this begs the question: If I can subscribe to something as a service, why buy the product at all?
That’s what a team at California-based Faraday Future, is asking itself. The start-up is pinning its future business success on subscription. Alongside its more traditional sales model, Faraday will offer a “mobility subscription” by 2020 that will let customers call for the type of car they require exactly when need it. With fewer millennials owning or driving cars, it may be on to something.
As the popularity of cloud computing rises and the digital economy becomes the new normal, the subscription model will become king in many arenas, including enterprise software. By 2019, Gartner predicts, subscription will have overtaken perpetual licensing and maintenance for technology companies.
“Virtually all software vendors are in a transition in how they build, sell, and deliver their products. The momentum toward subscription will continue,” says Amy Konary, IDC Research vice president.
Industry leaders like IBM and Adobe have already made the leap. Microsoft shifted to the cloud two years ago and launched its subscription-based Office 365. The move could potentially net the company 80 percent more revenue over the lifetime of each customer. And for Microsoft, at least, it's been a successful sales pitch. Office 365 went from 4.4 million subscribers in 2014 to 18.2 million subscribers by the end of 2015. Customers enjoy benefits like access to smartphone apps and new experimental apps as well as new features rolled out every month.
Eliminating the cost of an up-front one-time purchase is another huge draw for the subscription customer, especially when it comes to pricey jet engines or enterprise software.
“The subscription model is the most cost-effective and convenient pricing option for those organizations that may have previously felt prevented from acquiring a state-of-the-art solution due to the steep initial capital outlay,” says Bill Pollock, a services industry analyst and consultant at Strategies for Growth.
When done right, subscription delivers continuous value, personalized control, and a unique customer experience. But it’s not without its obstacles for vendors.
Moving to subscription requires a shift in thinking and culture and often flies in the face of deep seated business practices and values. For a company that’s used to thinking in quarterly earnings, it can be hard to take the longer view, to retrain sales, or perhaps hire a brand new customer success team. This new business model requires a lot of communication and transparency with employees, customers, and investors.
While subscription may not be right in every instance, its potential is massive and far reaching. Many companies can benefit from at least a hybrid model, and while this new approach may take some getting used to for both vendor and customer, the long-term benefits almost certainly outweigh the challenges.