How ‘As-A-Service’ Models Can Improve Business Outcomes
There’s a common adage that today, “every company is a tech company.”
Thanks to advanced technology like the internet of things (IoT), artificial intelligence (AI) and machine learning, entire industries are evolving. Even traditional verticals like manufacturing, construction and mining are digitizing as more and more organizations start to adopt these technologies.
In my opinion, one of the greatest benefits of bringing on more advanced technology is not only the profound insights they provide but also the flexibility for businesses to adjust how they operate. Take, for example, “as-a-service,” or servitization, business models.
This business model was initially pioneered by the software industry and dubbed Software-as-a-Service, or SaaS, and it allowed software companies to lease their products. Instead of buying the software outright, customers could purchase a license to use the software as needed.
Now, as the CRO of an IIoT company that helps businesses implement “as-a-service” models, I believe other industries can take advantage of similar setups.
Traditional business models revolve around a transactional one-time product sale. After the initial purchase, there’s an extended period of waiting for the customer to come back and replenish or upgrade on their own.
This arrangement limits the ongoing relationship to mostly when there is a problem or a sales opportunity. Apart from any one-off servicing needs or upsell opportunities, there aren’t always many moments in time available to interact with your customers and maintain that ongoing relationship.
Without consistent engagement, your business may miss out on new trends, ways to improve your product or pain points your customers are experiencing. In an ever-growing competitive landscape, you risk becoming stagnant as others swoop in and adapt accordingly.
Why ‘As-A-Service’ Makes Sense For Business
The novel coronavirus pandemic is an example of a scenario no one could have anticipated. All of us are adapting to a new normal in 2020, and for many businesses, the future is uncertain.
While the health crisis is unprecedented, it offers a glimpse into how enterprises can cope with drastic changes. And, in my opinion, we’re likely to see more businesses switch to servitization in the aftermath, which can offer stability and efficiency.
With “as-a-service,” instead of focusing on a one-time sale, you can create an ongoing subscription and OPEX (operating expense) model. Your business can both get more touchpoints with the customer to strengthen the relationship and also align the goals of your customers with your goals and a shared business outcome.
For example, if your customer is a cafe, they might want to use your espresso machine to sell coffee. As a coffee machine manufacturer, you can sell a subscription and charge per cup of coffee (“Coffee-as-a-Service”). If you also cover all repairs and maintenance, as well as take responsibility that the machine runs, then you are 100% aligned with your customer. This setup can allow you to encourage long-term contracts and make your customers unlikely to look for a competitor.
A subscription-based model puts the responsibility for servicing, updates, replacements and repairs back on the provider. While this may sound counterintuitive, many companies are faced with growing expectations around price and quality. And with this model, they can build trust and true partnerships with their customers. Here’s how to capitalize on its other benefits.
Enhancing Your Prediction Capabilities
Revenue projections are usually based on a combination of historical factors and statistics to formulate a number. Yet, these are often inaccurate or don’t account for unpredictable moments in time.
When you create a subscription model, you should put processes in place to prepare for uncertainties, from fluctuating supply and demand to customer accounts. The goal should be to better anticipate change and highlight what you or your customers need at a certain point in time.
This is a best practice I’ve seen multiple times from companies selling physical or hardware products, where a focus is usually more on increasing sales volume and margins. In some cases, this shift might mean giving up on high-dollar-value services for even lower margins in the short-term.
Adapting To Customer Needs
Lifecycle management is an essential component of a subscription model. While servitization may mean less revenue up front, it can offer more stability and predictability in the long-term.
By providing leasing options, you can open up more opportunities throughout the product life cycle, as you can gain near real-time access into actual usage of your products.
For example, you could adopt a schedule so you can plan any downtime for when it’s least disruptive, or proactively stay in touch with customers to predict maintenance needs or faults. Furthermore, you can work to create additional usage options, customer markets or improved designs based on data you obtain from customers.
Minimizing Business Risks
If customers don’t need to make up-front investments, businesses can better manage financial risks by providing more straightforward pricing and more flexible contracts, especially in challenging times like during an economic recession or during the COVID-19 health pandemic.
In capital-heavy industries, like manufacturing or supply chain, you can also create a servitization model to replace high capital expenditures (CAPEX) with multi-year contracts. You can manage these contractual agreements as operating expenses (OPEX), which could bring tax benefits, as well as new opportunities for purchasing and engagement with customers.
For some, the transition to “as-a-service” means having a smarter business. To make this model work for you, it’s essential to have a sound strategy in place. Start by carrying out risk assessments and calculating price points based on your customers. This data will help you draw up contracts, including withdrawal criteria, that will take your customers’ specific situations into account.
Don’t wait for your competitors to make the switch to servitization. According to 2014 data from a study conducted by Accenture, pure-play SaaS companies realized 32% year-over-year revenue growth, compared to 4% for companies using more traditional software.
As this study shows, your future growth may rely on how you take advantage of “as-a-service” models today. By creating an intelligent subscription-based model, you can keep pace and develop solutions that scale and adapt to changing technologies and customer preferences now and into the future.
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