In the Economy of Things (EoT), the number of connected products is exploding and the billing system of choice for most EoT companies is the Subscription Model. But what happens in a Subscription Business? It is far more than just a different way of billing. The fundamental financial basis is that a CAPEX-oriented Business world moves to an OPEX-based Economy. What does that mean? On the one hand, this CAPEX-to-OPEX shift is a massive change in the financial model underlying a company. On the other hand, the interests of customers and companies are converging and increasingly merging. Why? Since both are now interested in a successful product usage and a satisfactory outcome for the client.
CAPEX-to-OPEX: the financial shift
Source: iq! Management Consulting
In a subscription model, the structures of costs and results are radically changed for both the manufacturer and the customer. The customer has previously spent a higher investment to purchase a good (and in a B2B model depreciate it over a number of years). In a subscription, operating costs for the use of the same good are billed. The manufacturer, who previously sold goods and machines, is now bringing “outcome” to the market. In other words, in this rental model he also takes care of the customer’s results, as these guarantee continuous use. For example, Heidelberger Druckmaschinen AG, which for some time now has been billing per printed sheet, has a massive interest in ensuring that its customers print as much as possible and thus achieve the best possible results. Although the manufacturer has to forego the investment sum for the time being, it has continuous, stable and secure Sales over time. The marketing of new or additional products in an existing customer relationship is also much cheaper than the huge marketing machinery necessary while promoting the sale of a new product.
CAPEX-to-OPEX: the convergence of goals
Common interests of Companies and Customers in the EoT
Source: iq! Management Consulting
In a subscription model, the seller of a product becomes a business partner. This results in a stronger distribution of risk between both parties. By billing the use, it is now up to the manufacturer to take care of the availability and quality of the machines. So it is now the task of Heidelberger Druckmaschinen to drive the performance/ output of the machine; whilst the print shop can concentrate on sales and marketing. However, the company benefits greatly from being able to track product usage in detail. This makes the offerings more customer-centric and less feature-loving. By controlling usage, the company can now invoice all supplies and accessories directly to the customer. In the past, these products were often purchased from other manufacturers.
This constellation is made possible by intelligent products that enable parallel use by different customers.
Switching to a subscription-based model is not easy and has far-reaching consequences. The entire customer relationship is changing and the commitment on the part of the manufacturers is increasing enormously. However, if this change of business model is taken seriously, completely new opportunities will open up to generate stable sales in the long term. In addition, products can now be much more easily aligned to customer requirements and developed together with them. iq! has accompanied many companies through this transformation and is happy to serve as a discussion partner while companies are preparing for the Economy of Things.