How Subscription Models are Growing in the Manufacturing Space

This Q&A article – featuring Zuora’s GM of EMEA, John Phillips, was originally published in Supply Chain Briefing.

 

Tell us a little about Zuora’s Subscription Economy Index? 

Zuora’s Subscription Economy Index is an analysis we run twice a year that tracks the health and growth of subscription businesses across various industries including, but not limited to, Manufacturing, IoT, SaaS, publishing, media and more. We analyse and measure the metrics of hundreds of different companies around the world in order to understand how subscription-based models are faring in relation to their S&P 500 counterparts.

Given the current period of economic uncertainty that all businesses are facing, our latest report – which was released last month and features new data for the last 6 months ending June 30th 2020 – was particularly interesting. When the global pandemic struck, no industry was left unscathed. Drastic changes to buying behavior meant that every business was forced to adapt quickly in order to keep afloat.

Our latest SEI found that, amid this uncertain time, subscription businesses proved to be resilient. In fact, subscription companies continued to outperform their product-based peers by wide margins, growing revenues nearly 6X faster than S&P 500 companies (17.82% versus 3.16%). Overall, subscription sign-ups are on the rise, and while the S&P 500 companies saw sales contract at an annualised rate of -10% in Q2, the Index reveals that subscription businesses actually expanded at a rate of 12%.

What were the key findings this year in terms of manufacturing?

Despite facing a number of challenges amid today’s pandemic – including supply chain, workforce and demand disruptions – the SEI  suggests that the outlook for the sector is strong, as manufacturers look to reinvent their business models around digital offerings.

Following a brief pause in operations at the beginning of the pandemic – as many factories were forced to close – most workers were deemed essential and were able to return to work. This led to an uptick in revenue, especially for manufacturers monetising with subscription-based digital services, who outperformed their S&P counterparts as they rebuilt after shutdowns (7% revenue growth vs -8.1% revenue decline for S&P counterpart in Q2 2020).

In manufacturing, subscriptions are typically tied to a service, often those made available through IoT devices and technology. They’re valuable because they can extend the lifetime of products, providing customers with more data insights (such as machine utilisation and workforce monitoring) and a reduction in operating expenses. For example, instead of selling a product as a one-time transaction, a manufacturer may sell regular maintenance, safety analysis or location tracking for devices as a subscription.

The rebound among these subscription-based manufacturers we recorded within the report could have been in part due to the tactics a recurring-revenue model enables. For example, many increased their free trial offerings in Q1 and Q2 2020, which allowed them to address customer needs and eventually increase demand after a multi-week manufacturing pause.

Why do you think  IoT subscriptions in particular grew for manufacturers throughout the pandemic?

Historically, much of the growth of digital subscription services in manufacturing has been prompted by the need for companies to look for ways to increase efficiencies and cut costs. The pandemic brought with it serious gaps in the global supply chain as factories were forced to shut following concerns around employee health. This, alongside the resulting financial crisis that we are currently facing, has only compounded the need to maximise ROI.

This is where IoT comes in. Many manufacturers are adopting it, alongside other forms of automation, in order to reduce worker density and increase machine productivity in an effort to ensure safety and continuity should there be a future outbreak. Subscriptions have been around for decades. However, the rise of the IoT has maximised their value and increased their popularity. As mentioned above, the stability of the recurring revenue model has been a key growth strategy during the pandemic, and many manufacturers have shifted more of their business to subscriptions.

As well as using the connectivity of IoT to improve operations, some manufacturers sell after-market connectivity that tracks the condition of a product in the field. For example, Caterpillar produces connected machines with integrated sensors that gather data. This data helps customers optimise the use of their fleets and reduce the overall cost of ownership. As a result, the company has new recurring revenue streams, closer relationships with their customers, and the largest connected fleet in the world, with more than 500,000 connected assets in the field.

Another company truly using IoT to its advantage is Honeywell, which has evolved from a traditional manufacturer solely focused on products, into an industrial software and services company in recent years. Most recently, the company launched Honeywell Forge, an Enterprise Performance Management software that provides insights to operators of buildings, airlines, industrial facilities, and other infrastructure. It is being built on the premise that one day the entire physical world is going to be connected. This belief is one of the key drivers of the current rise in IoT subscriptions across the industry.

How can manufacturers looking to adopt a subscription-based model ensure that it is a success post pandemic?

In the second half of the year, manufacturers must continue to assess their toolbox of pricing strategies and other elements related to the subscriber experience—such as shifting from free trials to tailored customised packages—to retain customers and continue to grow accounts and revenue.

Pricing plays a critical role in the success or failure of a subscription service. Research from the Subscribed Institute shows that companies that adopt some level of usage-based pricing, charging customers based on how much they use a product or service, grow faster than peers. In fact, companies with usage-based pricing making up between 1-25% of overall revenue grew by 25% YoY.  Companies need to be aware of their customers’ needs and deliver based on this. After all, if customers are left wanting more out of an offering (or needing less), you risk the chance of turnover.

Manufacturers should also look to use data insights to better understand their customers and customise experiences. One of the main benefits of a recurring digital service is the incredibly rich customer data that can be obtained from it. The more a customer uses a service, the more manufacturers are able to learn to further understanding of customer preferences and usage patterns. This can help to establish closer relationships with customers and enable manufacturers to provide more personalised experiences which will stand out from the competition and encourage customers to continue to invest in their offering.

 

For more Subscription Economy insights, subscribe to Zuora cofounder and CEO Tien Tzuo’s weekly newsletter, Subscribed Weekly, here.

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