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What are Subscription, Pay-per-Use and As-a-Service business models?
Goodbye ownership, Hello usership
Over the past few years, companies across various sectors have developed a wide range of Subscription, Pay-per-Use and As-a-Service business models to deliver more value to customers by selling access and performance instead of ownership.
Driven by the success of subscription-based B2C services such as Netflix and Spotify, more and more companies across industries are looking for ways to move from a CapEx to an operating expenditure (OpEx) model that offers greater convenience, flexibility, and cost savings.
In these models, a company's offerings - such as hardware, software or services - are not sold as one-off products but as ongoing solutions that can be charged to customers in a recurring way. Pricing can be either subscription-, usage-, output-, or performance-based (or a mix of it).
Every company seeks to establish a "forever deal" with the customers they serve. They want predictable recurring revenue, direct relationships that avoid middlemen, and behavioural data that allows them to continue planning for the future.
It is a major shift in a company's mindset that has the potential to generate dramatically higher value - but which also involves deep changes throughout the company, requiring a thorough business model transformation.
What is the idea behind Subscription, Pay-per-Use and As-a-Service models for physical products?
Consider what the majority of us do with our cars. We make an effort to bring the car in at the recommended 10.000km maintenance service intervals to get the oil changed, tires checked, etc.
But whether I faithfully bring my car in for routine maintenance or whether I ignore maintenance and have to bring the car in for significant repairs, which generates more income for the car dealership? It is a ruse of a question. The reply is "both". Nevertheless, let's imagine that my car operated on an “as-a-Service” model. The car dealer is now motivated to keep the car functioning for as long as possible. Since I only pay for the hours that the car is functional, the dealer does not benefit if my car breaks down and idles on the side of the road.
The main distinction with the subscription economy is this. Now, it serves the interests of both the customer AND the dealership to ensure the best and most efficient operation of the vehicle. When a customer understands that their dealer shares their interests and the situation is genuinely a win-win, the whole foundation of the relationship is altered. When that occurs, I want my dealer to be successful. I wish to give them information on my car's performance. I would want to let them know that I intend to drive to go skiing in the mountains and ask them for tips on how to get my car ready. I want to help them assist me since we are on the same team.
Examples of Subscription, Pay-per-Use and As-a-Service models in various industries
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Examples of pricing models used across industries
In the majority of cases, prices are either based on subscriptions (fixed recurring fee), usage, or outcome.
Subscription-based pricing
Payments are based on a fixed amount due every period of time. Examples include: Payments are based on a fixed monthly fee in exchange for access to the equipment. All associated services such as installation, maintenance, spare parts, etc. are included.
Usage-based pricing
Payments are based either on units of time or on usage intensity. Time-based models: The provider bases payments on a set amount per unit for a fixed period of time. Examples include: Payments based on the running hours of a machine. Usage-based models: The provider bases payments on the intensity of equipment usage. Examples include: Payments based on the used volume (m³) of compressed air or on the tons drilled.
Outcome-based pricing
Payments are based either on operational or financial success. Operational outcomes: If the provider performs well-defined discrete tasks this model can be interesting. Examples include pricing based on produced parts or completed cycles. Financial outcomes: If the provider can establish a direct link between the equipment and measurable financial results this model can be interesting. Examples include pricing based on generated revenue by the equipment or based on achieved savings thanks to the equipment.
Subscription-based pricing
Payments are based on a fixed amount due every period of time. Examples include: Payments are based on a fixed monthly fee in exchange for access to the equipment. All associated services such as installation, maintenance, spare parts, etc. are included.
Usage-based pricing
Payments are based either on units of time or on usage intensity. Time-based models: The provider bases payments on a set amount per unit for a fixed period of time. Examples include: Payments based on the running hours of a machine. Usage-based models: The provider bases payments on the intensity of equipment usage. Examples include: Payments based on the used volume (m³) of compressed air or on the tons drilled.
Outcome-based pricing
Payments are based either on operational or financial success. Operational outcomes: If the provider performs well-defined discrete tasks this model can be interesting. Examples include pricing based on produced parts or completed cycles. Financial outcomes: If the provider can establish a direct link between the equipment and measurable financial results this model can be interesting. Examples include pricing based on generated revenue by the equipment or based on achieved savings thanks to the equipment.
The benefits of Subscription, Pay-per-Use and As-a-Service models.
Win-win-win: Benefits for companies, its customers, and our planet.
Benefits for manufacturers
- New, predictable, recurring revenue streams
- Complementary to transactional sales model
- Higher company valuation
- Monetising complete lifecycle of products
- More collected data about customers
- Increased customer loyalty (lock-in effect)
- Higher margins thanks to more services
- Sustainable business model
- Strategic differentiation
Benefits for customers
- Always a modern or up to date product
- Reduced investment hurdles: many small payments
- Convenience
- Personalised experience
- Exploration and discoverability
- Transforming CapEx into OpEx
- Reduced operational risk
- Flexibility and scalability
- Peace of mind
Benefits for our planet and sustainability
- Incentive to prolong lifetime of products
- Incentive to design easily repairable products
- Eases access to second-hand market of products, as providers stay the owner
- Incentive to implement end-of-life strategies (reduce, reuse, remanufacture)
- Comply with policy makers' regulations
Manufacturers
Benefits for manufacturers
- New, predictable, recurring revenue streams
- Complementary to transactional sales model
- Higher company valuation
- Monetising complete lifecycle of products
- More collected data about customers
- Increased customer loyalty (lock-in effect)
- Higher margins thanks to more services
- Sustainable business model
- Strategic differentiation
Customers
Benefits for customers
- Always a modern or up to date product
- Reduced investment hurdles: many small payments
- Convenience
- Personalised experience
- Exploration and discoverability
- Transforming CapEx into OpEx
- Reduced operational risk
- Flexibility and scalability
- Peace of mind
Planet & Sustainability
Benefits for our planet and sustainability
- Incentive to prolong lifetime of products
- Incentive to design easily repairable products
- Eases access to second-hand market of products, as providers stay the owner
- Incentive to implement end-of-life strategies (reduce, reuse, remanufacture)
- Comply with policy makers' regulations
Are you ready to distrupt your industry ?
Assess the potential of a Subscription, Pay-per-Use or As-a-Service model for your company.
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