Subscriptions in the manufacturing industry

Industrial Subscriptions, also referred to as Equipment-as-a-Service or XaaS (Everything-as-a-Service) are business models in which hardware, software and complementary services are bundled into a complete offering over a multi-year period.

In exchange, customers pay a recurring fee that is either subscription-, usage- or output--based (or a mix of it).

Since physical goods are different from traditional software subscriptions such as Netflix, Spotify, and Salesforce; manufacturers need guidance; a step-by-step plan to execute their business model transformation.

This "how-to" guide, our Subscription Action Plan, provides a practical step-by-step way for manufacturers to develop their own subscription business model.

Subscriptions for hardware, software, and complementary services

Numerous variations of subscription models exist. Manufacturers can bundle hardware, software, and complementary services into a single subscription or offer sperate standalone subscriptions.

Hardware only subscriptions are known as rentals or leasing.

Software only subscriptions are known as Software-as-a-Service (SaaS) or digital products.

Services only subscriptions are known as maintenance agreements.

The biggest potential lies when bundling hardware, software, and complementary services into a single subscription. These models are also known as Equipment-as-a-Service or XaaS (Everything-as-a-Service). Manufacturers bundle their hardware, software and complementary services into a multi-year subscription. In exchange, customers pay a recurring fee that is either subscription-, usage- or outcome-based (or a mix of it).

Though, individual subscriptions for either hardware only, software only or services only have also proven to be successful.

Customers prefer subscribing to outcomes

As early as 1962, Rolls-Royce invented 'Power-by-the-Hour', a complete subscription for their jet engines. Instead of selling jet engines, Rolls-Royce offers its customers (airline companies) a functioning engine on a fixed-cost-per-flying-hour basis. All associated products and services included.

For certain products, customers are happier subscribing to an outcome/solution rather than purchasing a product with the burdens of ownership.

The Subscription Economy is here.
Where are you?

SIGNIFY

Light-as-a-Service

From selling light bulbs towards selling an illuminance level per square meter.

Light bulbs are widely considered a commodity and convincing someone to pay a premium for them is hard.

By creating a subscription and offering its products as-a-service; Signify is able to differentiate themselves and deliver much more value to customers.

Signify installs, maintains, services, upgrades, repairs, replaces, and ultimately recycles the light bulbs.

With more and more companies needing to comply with certain regulations and sustainability goals, guaranteeing energy savings and a safe disposal of light bulbs – while providing accurate data on them – becomes much more valuable to customers. The program allows Signify to capture more usage data while still being able to reuse or recycle lighting products and systems.

Customers pay for the service (e.g. annually) instead of buying LED lights. The subscription offers customers lighting for an annual fee, while Signify retains ownership of all fixtures and lights. This eliminates the customer’s initial investment when switching to energy-efficient LEDs, resulting in savings in energy costs and carbon emissions.

HILTI

Holes instead of drills

From selling drills towards selling holes via a fleet management programme.

The industrial equipment manufacturer Hilti offers their products in a subscription-based deal that includes product availability, maintenance, and possible replacements. It is essentially a guarantee that work on construction sites is never interrupted due to malfunction.

Subscription services increase the customer’s perceived value by guaranteeing working tools, but, on top of that, Hilti is able to reduce costs and improve margins.

Customers are locked into Hilti’s world of products and services, but not in a hostile way. These locks can be created by technological mechanisms or critical connections of products and services.

It’s like a car rental service that allows you to move around a major city without worrying about restrictions such as parking, insurance, and maintenance.

MICHELIN

Pay-per-driven-Kilometre

From selling tires towards selling driven kilometres.

The idea of the model is to offer transportation companies a comprehensive tire management solution for their fleet of vehicles. Customers pay a recurring usage-based fee for the leasing and management of tires.

Tires sales were largely standardised and quickly became a commodity. Michelin tires had superior technology, but it was difficult to capitalise on it. Michelin switched its value proposition to a more customisable subscription model and was able to differentiate itself from its competitors and charge a premium.

In addition to an increase in their margins, Michelin has access to vast amounts of data used to improve their products and offers.

TARKETT

Carpet-as-a-Service

From selling carpets towards selling a floor covering solution.

Tarkett develops modular systems where carpet tiles can be interchanged from heavy-utilisation to light-utilisation zones. Plus the carpets are digitised and offer interesting insights.

The most effective way to retain the value of products is to maintain and reuse them. This can include sharing-based business so that users have access to the product instead of owning it, and more people can use it over time. This may involve reuse through resale. It can mean maintenance, repair, and refurbishment cycles as well.

Manufacturers love Subscriptions

New, recurring, predictable, revenue streams.

Strategic differentiation and restrained competition.

Deeper customer relationships and more customer insights.

Higher margins thanks to a higher proportion of sale of services.

Increased customer loyalty (lock-in effect), cross- and add-on sales.

Sustainability and used equipment potential (+ improved corporate image).

Higher company valuation

Complementary to traditional product-selling model.

Customers love Subscriptions

Reduced investment hurdles: many small payments vs. one big payment

Flexible and scalable vs. burdens of traditional ownership.

Transforming CapEx to OpEx.

Outsourced operational risk towards subscription company.

100% tax-deductible.

When infrequent usage, does not make sense to buy.

Planet Earth loves Subscriptions

Incentive to prolong lifetime of products.

Incentive to implement end-of-life strategies (3 R's).

Incentive to increase product utilisation.

Reduced raw material and energy consumption.

Incentive to design easily repairable products.

Compliance with policy makers' regulations (e.g. European Commission's Green Deal).

Let's discuss your subscription potential!