You tell me the product, regardless of how long it’s been around, and I’ll tell you how it can be turned into recurring subscription revenue.
The subscription economy started as a B2C movement, with companies such as Netflix and Dollar Shave Club leading the way. But, the subscription economy is starting to impact B2B companies as well.
Otis Elevator Company, founded in 1853, develops, manufactures, and markets elevators, escalators, and moving walkways. You can’t miss them, and chances are you used one of their products today. Otis recently launched Otis One, which includes analytics tools that identify irregular sensor readings, like unusual door closing and opening times, and sends alerts to property owners and maintenance professionals. This allows them to analyze problems faster, and fix them with more precision and less downtime.
It’s a win-win for everyone. They sell the software as a subscription service, and in fact, Otis generates about 55 percent of its revenue from services and 45 percent from new equipment sales. So, if Otis can generate a majority of its revenue from services, it means B2B organizations, big or small, can too.
Buy for the Hardware, Stay for the Service
"Servicing and maintenance have profit margins of up to 25 percent, while new equipment sales yield margins of around five percent to 10 percent."
Apple, famous for making money on their hardware, is now launching a gauntlet of recurring paid services. Apple has 390 million paid subscriptions across all of its services, an increase of 30 million compared to last quarter. By the end of 2020, Apple expects to pass half a billion paid subscriptions.
Traditional companies are shifting from “asset” purchase models to subscription revenues as part of a reaction to growing trends. The hope for many of these companies is that the subscription model means more profit and less labor.
Every Business Will Become a Subscription Model
When the New York Times first announced they were moving to a paid paywall digital content subscription model in 2011, the Internet freaked out.
No American news organization as large as The Times has tried to put its content behind a paywall after allowing unrestricted access. The move is being closely watched by anxious publishers, which have warily embraced the Web and struggled with how to turn online journalism into a profitable business. NY Times, 2011
But, the New York Times took a risk and introduced a model that almost every traditional publisher has adopted. They have over 4.7 million subscribers as of August 2019.
Now, eight years later, subscription services are growing in popularity, and for good reason. Every industry is exploring how they can turn some of their core service offerings into a recurring revenue model.
One that I am really excited about is airlines. Surf Air is called the “Netflix of Aviation,” and members get limitless access to flights for a monthly fee. It’s an example of building a business by starting with customer wants and needs, attacking pain points with a machete, and growing a loyal subscriber base. There are already subscription-based companies in real estate, education, finance, and pet care.
The reality is ownership is dead; now it’s really about access as the new imperative. ~ Zuora CEO Tien Tzuo
Here are some examples of industries and their “as-a-service” models.
The question is, what can’t be turned into a subscription model? I personally think almost anything, regardless of product, can be turned into a subscription model.
Subscriptions Put the Consumer at the Center
It’s not about the physical product. It’s what the consumer is trying to achieve.
It makes business sense for both companies and consumers to engage in this model. A recurring subscription model puts more emphasis on the company to keep innovating their products and capabilities that make their consumers happy.
Even the way products are sold is changing because of this model. Consumers increasingly have the technology to make better decisions without an expert. For Otis and other industrial manufacturing companies, they are giving their consumers self-serve platforms, so consumers can take corrective action with a click of a button, without ever consulting with the customer support team. This also means, through the portal, they can easily re-order products from the company. No need for sleazy salespeople.
- Only pay for what they use. They don’t need to own it.
- Increased flexibility to use the product how they want it.
- Deeper data insights into what the consumer is actually using fed directly into your systems.
- Predictable revenue. You now know based on new sales and churn (and other factors) what you’re going to make.
- Opportunity for new service offerings and new revenue streams.
A Change in Business Models
- This could result in fewer upfront costs for the hardware, but increased revenue over a longer duration.
Customer and Product Analytics Are the Core of Subscription Revenue Success
Otis and other industrial companies, like Caterpillar, rely on data to improve their products and offer new service lines. At Vokal, we’ve seen firsthand with our clients how using data can improve revenue by testing different variations of their products using software A/B testing. It has increased revenue and made feature decision making a democratic process since the data doesn’t lie.
Here are some questions to ask yourself and your team as you explore how you can add an “as-a-service” model to your current traditional products:
- What could we do with more usage data from our consumers?
- What additional services could we offer in addition to our core assets?
- How can we serve our consumers better?
- Who could we license this extra data collection to?
- For example, Accuweather has a premium subscription for companies that need access to real-time weather data.
It Starts and Ends with the Customer and That’s Why Subscription Services are Here to Stay
Renting vs. owning has been a discussion for a long time, but it’s really heating up. Home and car ownership used to be a no brainer, but now consumers have options and can choose what’s best for them.
Additionally, a few bold few Traditional B2B companies, like Otis and Caterpillar, are leading the way with combining hardware and software to introduce new revenue streams and better experiences for their consumers.
But, in the end, it comes down to building positive customer experiences with your brand. Why should they call customer support, when you can offer a better experience through one of your digital properties. Why go to a car dealership and negotiate with a pushy salesman, when you can buy a car online and pay with Apple Pay (Tesla)?
The subscription trend is forcing companies to focus on their customers, and that’s why I I believe that every company, even the ones that have been around for 150+ years, will turn into a subscription company. If you feel like this doesn't apply to your business, you might need to start thinking outside the box, or lose big.