I was recently working with a designer of baby-strollers (I won’t mention the brand here). My conversation partner was the head of product, a true engineer who loves crafting premium quality products. He got a little upset as he was talking about his product development; He had experienced a lot of pressure from his product marketing team, which kept urging him to “take out production costs” as the topline sales pricing had to be brought “in line with the market”. Due to this margin squeeze he was forced to lower product quality, to such a degree that he was not building products he loved. Definitely, the technical lifetime was decreasing drastically. One could say the product was “designed to be outdated”.
Well, what if that product was offered as part of a subscription service, where customers pay on a monthly basis for use of a service? What would be the benefits of such a business model? And how would the product be built differently?
Let me give you 5 reasons why I believe that subscriptions are a strong business model for a manufacturing brand, the examples I use are from actual cases that we have worked on recently. The subscription model – based on use of the product, rather than ownership – incentivizes a producer to build and maintain high quality products. In contrast to the traditional transactional model, revenues continue for as long as the product provides value to the user.
Monetize premium product quality
Swapfiets offers a simple bike-as-a-service for 15€ per month, all repairs are covered and in case you get any problems, your bike is “swapped” within a few hours. Their bikes are simple and engineered to last – so customers get minimal disturbance and the company gets minimal repairs. With some simple product modifications, such as taking out the rear seat (which often causes breakage), the bike now lasts longer than a traditional bike: It is basically “designed to last “ and their premium product quality is now rewarded with monetary gains.
Solve your customer’s problems
Nutreco, one of the world’s leading animal feed producers, has started to empower local farmers with a “precision feeding” digital service. They understood that their customers are less interested in the physical product: feed and additives, but more in the outcome it brings: healthy animals and cost-efficient operation. The design of a cloud-based subscription service now brings realtime dietary recommendations to the farm, at a fraction of the traditional costs. That is solving the needs of the customer.
Service based subscriptions have the power to renew the relationship with your customer. Where the product used to be at the center of your business, the subscriber’s need are now taking that position. The service and experience is built around those needs, with many more points of interaction and opportunities to gain insights and data. It’s no longer a one-off transactional relation, but an ongoing partnership.
Take control of the full product lifecycle
Maybe you noticed that Dutch smartphone brand Fairphone has recently collected 2,5M€ in a very successful crowdfunding campaign. Through this funding they aim to roll out “Fairphone-as-a-Service”, a service subscription to their sustainable phone. As Fairphone remains the owner of the phone, they can control the full product lifecycle – re-distributing returned phones to a next customer and ultimately re-cycling the components as input materials for the production of a new phone.
In a – usage based – subscription model, the lifecyle of each individual product is controlled by the producer. Future production costs will decline and the company benefits during the full lifecycle of the product. And the 2nd hand resale market eventually disappears, bringing that monetary value back towards the producer.
Create a profitable recurring revenue model
Aerocat is a dutch pioneer within the airline industry, who revolutionizes on-board catering with their Airline-trolley-as-a-Service proposition. In this very conservative industry, where business casing rules decision making, they managed to design an offering that translates service innovation into a recurring revenue stream.
Lead the circular economy and create free publicity
Mudjeans is the world’s only “circular denim brand”. They apply the core principles of the Circular Economy into both their production process as well as their business model. As inventors of the lease-a-jeans concept, they acclaimed quite some fame through free publicity. By showcasing their authentic story, they gain a lot of traffic to both their online and retail stores.
The business case for a subscription model is strong. It is a way to generate recurring revenue, more stable and forecastable compared to a transactional model, where factors such as competitive moves or seasonality influence the financial performance. Ongoing customer relations enable new opportunities for cross- and upsell and usage data can be used to avoid customer leakage (or “churn”).
A leader in the Circular economy can still gain a lot of “free” traffic. In a world where customer attention becomes increasingly expensive, free media and publicity can impact your sales conversion significantly.
If you are a retailing or manufacturing brand, you should consider whether these subscription related benefits could be applicable to your industry as well. My expectation is that the subscription economy will accelerate in the next years and now is the time to capture that leading position.