Subscription & pay-per-use in industry – business models with high potential
The pressure that the industry is under is increasing all the time. Operating companies that want to remain competitive in the long term must make their production more flexible and streamline processes. Subscription and pay-per-use offerings can provide significant support in achieving these goals.
But how great is the potential of such business models for mechanical engineering companies and their customers? And what are the challenges?
Subscription business models have been a longstanding standard in the consumer environment. One such example is Netflix, the world’s leading streaming service. Pay-per-use is now also a common billing method in the software environment – for the use of cloud resources, for example. Yet there is also enormous potential for flexible usage models and digital add-on services in the industrial sector. In mechanical engineering, more and more such offerings are currently popping up:
Instead of selling machines, as had formerly been the customary practice, it is now their functions and performance that are being sold.
The customer only pays for the actual use, while the manufacturer ensures the functionality of the machine. The provider company therefore achieves additional revenue potential by placing data-based services and maintenance services with their customers.
Customers get continuous access to the latest machine technologies. They only pay when the machine is in operation. High initial investments and the corresponding capital commitment are completely eliminated. Instead, costs always rise and fall in line with current capacity utilization thanks to pay-per-use. Expenditure therefore shifts from one-off investments (CAPEX) to plannable, ongoing operating expenses (OPEX). This also reduces the investment risk. In times of volatile markets and pronounced uncertainties, this is a clear advantage.
Thanks to the new business models, businesses involved in mechanical engineering are more likely to be able to meet the increasingly complex and individual requirements of their customers. This reduces the complexity of new product launches or upgrades. And users are more than willing to pay a reasonable amount for this new form of flexibility. Furthermore, the billing model, in which monthly payments are usually agreed, has a clear added business value:
Subscription models ensure easily calculable and stable revenues as well as additional sales potential through cross-selling and up-selling.
In addition, the subscription approach creates a greater degree of customer proximity – not least, such models also generate information. Companies gain valuable insights into user behavior on an ongoing basis. On this basis, it is possible to further optimize machines and services. The resulting machine data can also be used to implement rapid remote support or predictive maintenance. This ensures less downtime and thus cost reductions.
The “Subscription Economy” has long been a topic addressed by management in many companies in industry. The standard case in mechanical engineering is that a certain system is delivered to the customer's shop floor. The systems and services required for operation are also provided by the supplier. The latter includes commissioning, instruction, training and maintenance work. Then again, in terms of billing, various pay-per-use models exist, some examples being:
As an interim conclusion: Subscription and pay-per-use business models present a wide range of opportunities for businesses – especially in the engineering sector.
In order to tap into the enormous potential, however, a cultural shift is needed first. Besides the traditional, engineering-driven enthusiasm for new machines, focus must be placed on the service concept. Management must therefore ensure that customer needs are given greater weight. Generally speaking:
Subscribers are only going to be found for appealing, functional, and economical solutions in the long term.
To reach this goal, companies need transparency regarding the satisfaction and behavior of their customers. Some providers address this issue with the help of customer accounts or apps that can be used to obtain targeted feedback. However, it is particularly advisable to use the information from the machines, which are already digitally networked, to evaluate the usage behavior of customers. As a rule, the necessary data is available. All that needs to be done is to implement suitable tools to analyze it.
Organizational challenges are also associated with the new business models. This applies in particular to billing – because it must be just as flexible as the services themselves. While most companies in the industry were used to selling machines and issuing a one-time invoice for them, a different approach is required for subscription and pay-per-use. Now the actual usage has to be determined and mapped within the billing documents. In addition, in some cases individual agreements such as usage-dependent discounts must also be taken into account. This is too much for traditional business solutions such as ERP systems. They are simply not suitable for flexible, usage-based billing. To make matters worse, billing is further complicated by the large amount of data involved. For example, every small transaction of a machine generates a new data record. Let's assume that a mechanical engineering company operates several hundred highly automated systems for its customers worldwide, all of which communicate with the cloud. Traditional billing systems cannot cope with this huge influx of data.
The rise of the subscription economy
The successful implementation of usage-based business models requires consistent customer orientation, clever analysis of usage data, and a modern management solution for the technical and commercial processes behind the new business models. All of this implemented, it offers enormous potential – also for the industry.