Is subscription the new normal for B2B? Part 1
In our personal lives, we have for a long time now had the habit of renting instead of buying. It has become the new normal for us. Netflix and Spotify are two examples where we subscribe to services to get better access than we would have had if we were to buy each movie or album ourselves. This is not really a new trend, but it is something that is rapidly changing the world and our buying behavior.
But how does this effect B2B companies? What do we need to do to keep up with this change, to be ready when this behavior becomes the new normal in business to business too?
Consumption models
To understand this, we got some help from Lars Hellberg, Senior Product Manager at Jeeves and Paul Ahlgren, Regional Leader Nordics & Baltics, at Amazon Web Services (AWS). So, before we dive into the change about how to go from selling products to renting them as services, we want to sort out what a consumption model is and what they have looked like historically. A consumption model simply tells us how we buy and consume products and services.
Products
The most common model is to buy a product that someone has manufactured. For that product, you pay about what it costs to make it and the supplier then takes out a marginal on top of that. When a company buys the product it is often called an investment.
Services
Over time, the products have become complex and it is now common to offer them with a range of services instead. It is still basically a product, but when it comes to services you add on an operating cost too, for example to maintain and service the product, often paid for by an hourly rate. The more services that enter the product range, the more important it becomes for a company to maintain a good relationship with the customer to continue to deliver added value to the products.
Charge for the added value your product delivers
The modern customer is looking for a solution to a problem, not necessarily to buy a product. What is interesting for the customers is the added value the product brings and as a supplier you can this way put a different price on the product. Instead of charging for the manufacturing cost, you charge for the value that the product brings the customer. In other words, you suddenly sell a service and not a product you make it possible to charge for it as a subscription, as long as you continuously deliver added value to the customer. For suppliers, this will be another pay stream. For customers, this will be an operating cost that can vary depending on how much you use the service. Customers can also avoid large investments upfront this way.
- This is how AWS founded its business model 15 years ago. That was when we realized that this is the way forward, you can see the product as the hardware and the added value and what you deliver to the customer as the service. This is a transformation that has been going on for a while but is now starting get more and more attention also within B2B, Paul says.
So, in the same way as consumers subscribe to services, we see the same pattern within B2B: you rent instead of buy. This also means that the suppliers must be on their toes and constantly develop the services so that the customers want to continue paying.
- This is as we said, nothing new. Historically, we have for example Roll-Royce, famous for luxury cars but also manufacturer of aerospace & boat engines. As early as in the 60's they started selling not their engines, but the uptime, power-by-the-hour, a fixed cost per flight hour. This also allowed airlines to return engines when aircrafts for example were to be cancelled. They simply paid for what they were using. As often, this is hence not a new idea: it has been around for some time. But when it comes to renting instead of buying, the technological development has now made it a good time even for smaller companies to move to this model, Lasse continues.
Advise for changing consumption model
How do you then move from selling pure products to selling the products as services within B2B?
The change must come from the management team
It is not enough for a person from the IT department to lead this development, no matter how good they are. The really big challenge is that most companies see this change as a technical issue, but it is really more of a leadership challenge. Of course, technology is part of the change but there must be commitment from the first day from the management to reach your goals. It must then run through the entire company.
Educate your staff
Invest in staff training: they need to be taken out of production to understand the new technology, allowing for rapid and cost-effective change. We are not talking about a three-day course, but you have to invest in the staff over a longer period of time. You have to make sure that everyone in the organization is in on board and that this is a change that you go through together as a team.
Challenge the business model
Look at your business model and dare to challenge it. Simplify as much as possible but also set the right and relevant goals to achieve real change. Set aggressive goals and try to get something out on the market as quickly as possible. A common problem is that many people want everything to be ready before going live but when it comes to this change it is important to only do as much as is necessary before taking the change to the market. Speed matters in business!
Get in touch with your IT suppliers
This transformation is something that your IT providers should be talking about and have in their road map so get in touch with them to see where they stand and what they have to say. How can they help you in this journey?
This is a broad topic, so we have divided this article into two parts. In the second part we will talk about what this change leads to, what this transformation means for all departments of your company and how it can affect sustainability issues.