June 5, 2017
Every once in a while, a perfect storm hits a market. Usually it’s when a new trend or concept appeals simultaneously to both customers and suppliers. When that serendipity strikes, even long-standing models are forever transformed. That is what’s going on today in tech sectors, from IT, to industrial equipment, to transportation, to healthcare. Subscription-based offers are eating their old transaction-based siblings at a breathtaking rate.
In my infographic, “Navigating the Digital Transformation Journey,” I outlined 6 key steps to thriving in this changing market. Today, I’m going to talk about the most fundamental underpinning of the new subscription economy and the first step on this journey, “Customer Use Cases,” or in other words, why customers love it!
From the customer’s perspective subscriptions are a dream. Simply sign up, begin to use, and get value. There are no upfront commitments, big capital outlays, or risk. If the subscription doesn’t deliver value, then simply turn it off.
From the supplier’s perspective subscriptions are also magical. Why? Because they create recurring revenues. Imagine being a company who starts the beginning of each fiscal year knowing exactly where most of their revenue is going to come from! Having a predictable, recurring, high-margin business is a beautiful thing, and it’s one that Wall Street sees value in – more value than in a capital transaction business of the same size.
From the customer’s perspective subscriptions are a dream. Simply sign up, begin to use, and get value. There are no upfront commitments, big capital outlays or risk.
So what does it take to succeed in the world of recurring revenues? How is optimizing that business model different than the traditional product sales world we all grew up in? This blog series will detail how companies in all of these industries can better navigate the world of recurring revenues.
There will be six parts in the series each aimed at examining a critical aspect of the recurring revenue business model and your technology-as-a-service offers:
It used to be that everyone bought their technology. Both corporations and consumers went through basically the same motions. Check it out ("it" could be hardware, software, equipment, music, video or cars)! If you think you’ll like it, then buy it and take it home with you. Once you get it home (or to the office), it’s up to you to try to figure out how to make it work. Sometimes you succeed and sometimes you don’t. Sometimes you get all of the value, sometimes you just get a taste of it. But in any case, it’s yours. You own it. And, you own the primary responsibility for translating your new asset into something that brings real value to your life or your business.
In the corporate world, this unfolding drama could take years and cost tens of millions of dollars for a single solution. Customers construct the RFP, vet the vendors, negotiate the contract, implement the solution, train the staff, fix the problems, and guess what? Sometimes they succeed and sometimes they don’t. Sometimes they get all the value, sometimes they just get a taste of it. But in any case, it’s theirs. They own it.
Sometimes you get all of the value, sometimes you just get a taste of it. But in any case, it’s yours. You own it. And, you own the primary responsibility for translating your new asset into something that brings real value to your life or your business.
Subscriptions offer an alternative, and a stunningly simple one that centers on the following value propositions:
For most business line executives (as opposed to the IT execs) the allure of a technology is the business outcome it can produce, not the headaches and complexity that come along with that journey. I would submit that they have two fundamental wishes:
Often, traditional purchasing models forced them to encounter the time, cost, and frustration of dealing with the complexity of implementation and management of the technology. Technology-as-a-service (Xaas) offers represent the opportunity to side-step some or all of that complexity. Some XaaS offers allow business buyers to avoid involving the IT department altogether. While this might not make the IT department happy, it does expand the corporate technology landscape in amazing ways by allowing any executive with an operating budget to become a technology decision maker. That’s why we see tech budgets rapidly de-centralizing away from the IT department and into LOB budgets.
Technology-as-a-service offers help executives get far closer to their two fundamental wishes than anything that came before them. While only the simplest of these offers are truly “turn on and turn off” offers that require little or no implementation time, nearly all of them share elements of faster time-to-value in their long list of benefit statements. What’s more, the promise of value by as-a-service vendors includes a commitment to helping customers systematically improve and broaden the business outcomes they get by adopting the technology.
Technology-as-a-service offers help executives get far closer to their two fundamental wishes than anything that came before them.
Through their Customer Success departments, suppliers are now committing resources to working with customers perennially to ensure more and more features are being adopted and more users are improving their mastery of the advanced capabilities of the offer. That’s because, on the one hand, suppliers fear subscriber churn. And on the other hand, they are directly compensated for expanding adoption by the customer – the more the customer uses, the more they pay. Both of these are new business model considerations for most tech companies. Their corporate reaction to these aspects of their new recurring revenue business is nothing short of spectacular from a customer experience perspective. Customers who used to “go it alone” now have technology business partners that are proactively monitoring and optimizing their business outcomes all year long.
Technology-as-a-service offers give customers new ways to pay, reduced risk, faster time-to-value, less complexity to manage and greater total value driven by suppliers who are with them on their journey to improve business outcomes. It’s no wonder these offers are growing at a double-digit pace while traditional on-prem, cap-ex offers are shrinking.
But it’s not all cake and ice cream. Customers see the benefit of the model, but they also have very real concerns. At the same time, most traditional product suppliers see these new models as both opportunity and threat. Many are not sure what it means to their current way of doing business. Getting from the old financial model to the new one can be extraordinarily tricky. And so far, not many technology-as-a-service companies are actually profitable – certainly nowhere near as profitable as the traditional product sale + maintenance models that preceded it.
The bottom line is this: Navigating the world of recurring revenues is a complex journey. At TSIA, we are helping hundreds of companies on their way. Stay tuned to this blog series to hear our perspective on each of the six critical aspects of the recurring revenue business model and discover the best practices for how to master it.
Read more posts in "The Digital Transformation Journey" series:
Organizational capabilities that technology services businesses must master
J.B. Wood is president and CEO of TSIA. He is a frequent industry speaker and author of the popular books, Complexity Avalanche (2009), Consumption Economics (2011), B4B (2013), and Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business (2016), and has appeared in leading publications, such as Fortune, The New York Times, and The Wall Street Journal. He works with the world's largest technology companies on strategies to extend their innovation platform beyond the lab and into the customer experience, particularly in the age of cloud and managed services.
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