The Subscription Business Model: Does It Make Sense in the Manufacturing Industry?

This year, Zuora’s latest SEI revealed that subscription businesses have demonstrated newfound resilience and outperformed their product-based peers, expanding at a rate of 12%.

It’s no surprise then that more and more businesses in the manufacturing sector are looking to deploy a subscription business model. But what exactly is the subscription economy and what does it truly mean for manufacturers who want to become more customer-centric in the new normal? 

The appeal of subscription-based business models

Subscription business models facilitate constant and prolonged access to goods or services in exchange for recurring revenue, typically in the form of monthly or yearly subscription fees. It is a business model that enables companies to collect multiple, recurring payments from customers who need extended access to certain services instead of making one-time payments to possess and handle the product on their own.

In manufacturing, subscriptions are commonly offered for services such as regular maintenance, location tracking, safety analysis, or machinery and equipment monitoring. Customers find these services attractive because they can leverage them to extend the lifetime of products, reduce operational costs, and gain more data insights.

Additionally, the proliferation of IoT devices and software integrations demands constant collaboration between manufacturers and customers to ensure business continuity and uptime. This makes manufacturers and customers mutually dependent. And now more than ever before, customers want to feel that their providers are there for them, especially in times of crisis.

This is why, during the pandemic, many companies on both sides of the fence found stability in subscription-based models. For manufacturers, the recurring stream of income has become a key factor for growth while, for customers, subscriptions have been proven to be cost-effective and supportive.

As businesses shut down and the industry became increasingly volatile, customers started to recognize the value of having access to services and support from suppliers rather than owning a product that involves maintenance and operational expenses with little to no customer support.

But not all customers feel the same. And most manufacturers can’t afford to transition to a business model that is 100% subscription-based.

Subscription models don’t always make sense for everyone

For all of their benefits, subscription-based models have their own challenges. First and foremost, it’s important to acknowledge that most customers are still programmed to operate based on the traditional pay-per-product mindset. A decent chunk of your customer base will not be interested in your flexible consumption or subscription models and will continue to prefer to acquire your product and handle it on their own. 

This is in part due to traditional programming, but the need to be in total control over acquired assets is also making customers hesitant. It’s understandable, considering that, via subscriptions, customers must share their control and data with their vendors or suppliers. That’s why trust is essential in this equation. And this is where the membership model comes in to make things more stable and reliable for customers.

The subscription economy is increasingly seen as another facet of the membership economy, which, just like the subscription model, replaces traditional transactional relationships with longstanding solid collaborations between vendors and customers. Membership services can elevate the customer-vendor relationship to a whole new level where premium offerings are created and tailored to the specific needs of each client, ensuring long-term support from both sides of the fence.

Key considerations for a successful subscription model

On top of the aforementioned customer-related challenges, manufacturers should also make the following considerations as they plan their subscription model strategies:

• Align your subscription models with your existing business relationships. This means evaluating more types of servitization models, including unlimited subscription, predefined subscription, outcome-based contracts, freemium services, pay-per-use offerings, and subscription plus overages. Don’t pressure yourself into creating a universal model that will negatively impact your business. Instead, make sure you create a range of subscription offerings for the customers and members that truly desire them.
• Reevaluate your pricing strategies. In other words, think about the subscriber experience in terms of transitioning from free trials to customized packages. Your customers will value personalized services much more, so you can price your offerings based on how much they use them or how valuable your services are to them.
• Leverage data insights. By managing a large number of subscribers and equipment users, you can tap into product data and get inside the minds of your customers to better understand their experiences, behaviors, and preferences. Doing so will help you create more profitable relationships with clients, provide them with truly personalized experiences, and innovate based on their needs. Ultimately, this will turn into a strong competitive advantage that will encourage your clients to continue to invest in your offering.
• Identify the right KPIs. Legends say that you can apply B2C and SaaS KPIs to your subscription model, but that is not entirely true. Some of those KPIs don’t make sense in the manufacturing industry. So, consider combining traditional SaaS KPIs with traditional manufacturing KPIs and identify the ones that can make your subscription model truly successful. These can include key performance indicators such as customer acquisition cost, annual recurring revenue, monthly recurring revenue, average revenue per user, customer lifetime value, or annual contract value.

Last but not least, remember to optimize your services and supply chain. The subscription model is intrinsically customer-centric, so ensuring that customer expectations are met should be your primary objective. If you can always ensure maximized uptime and competitive pricing, your subscribers will never doubt your reliability and prompt servicing. This is indeed as challenging as it sounds, especially when you’re faced with crises as well. The key is to be flexible enough to adapt to shifting demands and unpredictability.