“By 2020, all new entrants and 80% of historical vendors [in the software market] will offer subscription-based business models,” Gartner estimated in May 2018. A blatant contrast to earlier times, when a new software update had to be sold every 18 months.
Adobe creates a subscription model
Source: iq! Management Consulting
Adobe has „swallowed the fish”
It is a blatant step to replace a Cash Cow that has been working for 30 years with a new subscription model that has not been tried and tested very much. On the one hand, the high up-front payments of product sales are collapsing. Not a very nice idea for managers, who are mainly measured on the basis of short-term results.
On the other hand, the introduction of the new model creates new costs. Accounting must be converted to the billing of monthly subscription fees. Sales teams that are prepared to negotiate with large retailers now have more and more end customer contact. Product update cycles are dramatically shortened. The entire organization must learn and be retrained. New technological support is necessary.
The Fish model explains the financial mechanics of the Subscription Economy
Source: Technology-as-a-Service Playbook: How to grow a profitable Subscription Business
This initially results in a rather depressing “Loose-Loose-Situation”: Sales collapse and costs rise.
But after a certain transition period, the picture changes: initially high investments are replaced by a leaner cost structure: the high development and marketing expenses of the product launches give way to a moderate investment in the operation of CRM systems and a continuous development of the Software.
Not only will revenues become more stable and “secure”, they will also exceed product revenues as the number of subscribers increases. In addition, it will be easier to cross-sell and up-sell, as there will be direct “always-on” contact with users.
Those who have swallowed the fish are rewarded by the stock market: subscription-based companies are now valued 2-3 times higher on average than product-based companies. And thus Adobe’s stock skyrocketed after a while, too.
Adobe’s stock performance after the introduction of a subscription model
In just a few years, the software industry has successfully adapted to the service business. But this change in business model and user preferences affects all industries equally. Every manufacturing company should ask itself how it can sell the use of its products instead of the products themselves. Because all markets will be affected by this massive shift.
iq! supports many B2B and B2C manufacturers with this transition. Experience has shown that a usage-based model can not only significantly increase sales related to the main product (e.g. a printer). Consumables (e.g. the printing ink) are also easier to sell. In many industries, for example, customers purchase just 10% of their consumables, who have highly interesting margins, directly from the manufacturer. Switching to subscription sales dramatically increases the proportion of consumables sold per customer.