Subscription and X-as-a-Service Models Explained

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Goodbye Ownership, Hello Usership

In recent years, companies across various sectors have embraced Subscription and X-as-a-Service (XaaS) models. These models shift the focus from selling products to providing ongoing services, offering customers access and performance rather than ownership. This transformation fosters predictable recurring revenue, direct customer relationships, and valuable data insights for future planning.

In these models, a company's offerings - such as hardware, software or services - are not sold as one-off products but as ongoing solutions that can be charged to customers in a recurring way.

Every company seeks to establish a "forever deal" with the customers they serve. They want predictable recurring revenue, direct relationships that avoid middlemen, and behavioural data that allows them to continue planning for the future.

It is a major shift in a company's mindset that has the potential to generate dramatically higher value - but which also involves deep changes throughout the company, requiring a thorough business model transformation.

The Idea Behind These Models

Consider what the majority of us do with our cars. We make an effort to bring the car in at the recommended 10.000km maintenance service intervals to get the oil changed, tires checked, etc.

But whether I faithfully bring my car in for routine maintenance or whether I ignore maintenance and have to bring the car in for significant repairs, which generates more income for the car dealership? It is a ruse of a question. The reply is "both". Nevertheless, let's imagine that my car operated on an “as-a-Service” model. The car dealer is now motivated to keep the car functioning for as long as possible. Since I only pay for the hours that the car is functional, the dealer does not benefit if my car breaks down and idles on the side of the road.

The main distinction with the subscription economy is this. Now, it serves the interests of both the customer AND the dealership to ensure the best and most efficient operation of the vehicle. When a customer understands that their dealer shares their interests and the situation is genuinely a win-win, the whole foundation of the relationship is altered. When that occurs, I want my dealer to be successful. I wish to give them information on my car's performance. I would want to let them know that I intend to drive to go skiing in the mountains and ask them for tips on how to get my car ready. I want to help them assist me since we are on the same team.

Benefits of Subscription and X-as-a-Service Models

Benefits for
Manufacturers

Stable Recurring Revenue

More Loyal Customer Relationships

Strategic Differentiation From Competitors

New Market Segments

Data-Driven Insights

Benefits for Customers

Lower Upfront Costs

Latest Technology

Flexibility and Scalability

Operational Peace of Mind

Simplified Lifecycle Management

Benefits for Our Planet

Resource Efficiency

Lower Carbon Footprint

Alignment of Incentives (Provider and Customer)

Sustainable Equipment Lifecycle Management

Business Model Part of the Circular Economy

Examples of Subscription and X-as-a-Service Models Across Industries

Engel

Injection-moulding-as-a-Service

Offers Injection-molding-as-a-Service, allowing customers to pay based on usage, eliminating upfront costs. This model eliminates the upfront cost of purchasing the equipment and provides customers with greater flexibility and lower costs compared to traditional machine ownership. The model is based on a usage fee that is determined by the number of cycles of the machine and the duration of use.

Heidelberger Druckmaschinen

Industrial-printing-as-a-Service

Provides Industrial-printing-as-a-Service, where customers pay a monthly fee for print volume instead of purchasing machines. For a predetermined monthly print volume, the consumer pays a fixed fee. Heidelberger offers customers the equipment, workflow, consumables pre-matched to their requirements, internal expertise from print professionals, and continuing support through the Heidelberg Subscription.

Rolls-Royce

Power-by-the-hour

Implements a Power-by-the-hour model, charging airlines a flat hourly rate per engine while managing maintenance and check-ups. In 1962, Rolls-Royce developed the Power-by-the-Hour model, otherwise known as Engine-as-a-Service (EaaS).

Signify

Light-as-a-Service

From selling light bulbs towards selling an illuminance level per square meter. Customers pay for the service (e.g. annually) instead of buying LED lights. The subscription offers customers lighting for an annual fee, while Signify retains ownership of all fixtures and lights. Signify installs, maintains, services, upgrades, repairs, replaces, and ultimately recycles the light bulbs.

HILTI

Holes instead of drills

From selling drills towards selling holes via a fleet management programme.

The industrial equipment manufacturer Hilti offers their products in a subscription-based deal that includes product availability, maintenance, and possible replacements. It is essentially a guarantee that work on construction sites is never interrupted due to malfunction.

MICHELIN

Tires-as-a-Service

In 2013, Michelin launched a Tires-as-a-Service offering called EFFITIRES. This system provides a combination of outsourced tire procurement and a payment model based on usage (pay-per-driven-km). Such a system has been praised by customers such as Go-Ahead Group and HE Payne, who have found it to be beneficial in financial planning and cash flow optimization.

Challenges and Considerations

Business Model Shift

Transitioning from a traditional sales model to a subscription/XaaS model requires significant changes in business strategy, operations, and culture.

Customer Education

Clients may need education on the benefits and workings of subscription models to overcome resistance to change. They also need help in how to procure XaaS.

Pricing Strategy

Developing an effective pricing strategy is crucial to balance profitability with customer value.

IT Infrastructure

Implementing IoT and robust IT systems to support real-time monitoring, subscription management and subscription billing is essential.

Risk Management

Managing financial, operational, and market risks is critical for the sustainable success of subscription models.

Legal & Compliance

Navigating legal and regulatory requirements for subscription services can be complex and requires careful planning.

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Understanding Subscription and X-as-a-Service Models

Goodbye Ownership, Hello Usership

The Idea Behind These Models