SUBSCRIPTION BUSINESS STRATEGY:  An Outcome Of IIoT-Driven Digital Transformation

FROM

Chunky Annual License Revenue

Passive One-Off Customer Relationship

One-Time Purchase

Capex Planning

Discrete Owned Manufacturing

Value Delivery Through Supply Side Aggregation

TO

Recurring & Incremental Revenue

Ongoing Active Customer Interactions

Pay Per Use

Opex Planning

Integration Of Vendor Monitored-Networks

Demand Side Network Aggregation

Key Success Factors For Companies Leveraging A Subscription Model.

  • Deliver value early and often to ensure customers continue to renew. Innovate faster. Create value more frequently.
  • Greater commitment to successful value delivery through subscription offerings.
  • Operate a platform with flexible options that allow customers to scale updown or, mix & match product options receive the most value products and services. Easier adoption and onboarding Paths. Ability to allow trials/pilot of new or different feature-options or product-options in a portfolio.
  • Robust cloud infrastructure that allows customers to subscribe to services and make a case for IT systems modernization, demonstrating implementation and maintenance cost savings.

Transformations Don’t Happen Without Organizational Challenges

The process of transforming a company to subscriptions business model can be challenging, particularly for large traditional companies built for the fading licensing or product revenues model. Several issues to consider.

  • Does taking revenues over time versus upfront, impact bottom lines.
  • Subscriptions could impact margins in the short term. Important point to consider for a public company.
  • Salespeople accustomed to selling annual perpetual licenses or maintenance contracts may struggle to adapt to a philosophy.  The result could be a longer learning-curve to move to new incentive models, often attempts to protect an outdated business model.

IoT Analytics Helps Commerzbank Offer Novel "Pay-Per-Use" Loans For Corporate Clients

Ability of machines to communicate information creating additional benefits for its client's customers.

The new “pay-per-use loan” is an investment loan whose repayment is linked to the usage of the machine.  The loan repayment schedule is calculated based on the actual usage of capital equipment, which helps preserve the user’s liquidity. If machine utilisation is low, the repayment burden is also low.  With an increase in production (and a rise in turnover) the repayment rate for the pay-per-use loan also rises.

The increased digital networking and automation of machines via the Internet of Things makes it possible to access machine capacity and production data, with a view to improve the efficiency of use for capital goods. These new technologies also make new business models possible, such as pay per use, pay per part, equipment as a service, and more.

Pay-per-use is characterised by a direct combination of usage, i.e. turnover and earnings, to the costs of the investment. The benefits to liquidity requirements are tangible on a daily basis and are an incentive to implement Industry 4.0 in practical day-to-day production.”

With flexible repayment rates the client can adjust liquidity for production and turnover. This in turn allows them to lower break-even in order to achieve better overall financial stability.

Changes Are Coming For Companies Using Subscription Models

An update to generally accepted accounting principles (GAAP) for US companies is turning out to have particularly large consequences in parts of the tech industry, which is having to overhaul the way it reports revenues and costs. The new standard, known as Revenue from Contracts with Customers, is designed to narrow the distance between US GAAP rules and International Financial Reporting Standards (IFRS).

The software industry is set to be one of the most deeply affected. Operating under highly specific industry rules for when revenue can be recognised, and with many companies in the midst of a transition from upfront licence sales to a software subscription model, the move to an entirely new accounting regime will force complex changes.

Under so-called “ramp” deals, for instance, customers pay more in the later years of a contract. But under the new rules, the revenue recognition will have to be spread evenly over the period, resulting in more sales being reported earlier. And companies that sell both hardware and software — often accounting for each element separately — will have to treat them as a single sale if they are judged to be part of a single IT system.

Analysts and investors must be on the look out for idiosyncratic effects — and to make sure they do not mistake higher reported revenues for a real change in the underlying business.

 

Subscription Business Strategy