From Product-Centric

Introduction

This article is an illustration of why and how a manufacturing company (from then on, we will call it ‘Company A’), making products in the electrical industry sector, chose to launch a digital transformation aimed at developing and selling digital offers based on a subscription model.

Company A has built its reputation on the quality of its physical products to manage electrical distribution and automation. Today products can do a lot more than manage energy efficiency. They can provide data captured from sensors that are analyzed and published with various stakeholders. Company A is proposing those services for maintenance, corrective diagnosis, and other purposes, basically helping the customer on how to optimise the use of energy and save costs, how to embrace new environmental challenges such as climate change, etc. This information can either be sent and processed in the Cloud (aka IoT) or be processed at the edge within the device itself or another local software (such as a SCADA).

To use and access this information, users must subscribe to digital offers which they get access via a web or a mobile application. They can also activate digital modules(1) on their product such as a circuit breaker and get local access through a secure connection to the device.

One of the key assets of the company is its installed base : knowing where its products are installed and how the customer is using them. Enriching its CRM base is therefore essential for future activities, and this is one of the reasons why Company A embarked in the subscription economy. We will see in the first section all the reasons why a company has a lot to gain from adopting a subscription business model. In the second section we will look into more details at the subscription engine, and its specific capabilities essentials to adopt the subscription model. Then, how this subscription engine or middle-end is integrated in the global IT architecture of a company, is the topic of the 3rd section. And in the final section, we will detail the complexities of the ERP systems interconnections to enable the subscription model in a product centric company.

For many years the dominant market strategy was product centric. A vast majority of companies choose to : make a product, add a margin and sell it through several distribution channels. The business objective was to sell more and more units.

Nowadays, when we are talking about Amazon (ex: Amazon Prime), Google (Google Play and YouTube Premium), Facebook (Subscription Group), Apple (Music, TV, Podcast), Netflix, Spotify, IBM (Watson), General Electric (Predix),  there is no doubt about the success of their business model. They are selling subscriptions to their customers; in other words, they are receiving a recurring payment for the continuous delivery of a service. So why is this subscription model working so well ?

Subscription models help to expand your customer knowledge base. An essential step in the subscription process is customer registration. It is an opportunity for the company to collect rich data (consistent with the GDPR) and information about its customers. This data will help increase its CRM base and add precious knowledge about its customers.

Today, knowing the customer is essential. Firstly, because the customers have access to all kinds of information on the internet and digital world. Customers already know companies and products, they have access to other customers’ opinions at the click of a mouse. Secondly, because it enables companies to build offers closer to customers’ needs.

Then, customers are expecting seamless product delivery. Customers expect to have the latest and better version of their product without purchasing again manually. Moreover, the product or service must be personalized (ex : Netflix with movies suggestions or box services like Birchbox). Being pleasantly surprised is a feeling your customers should have. It makes the customer feel an expert is behind his/her needs and it is easier to achieve these goals with a subscription model.

Subscription-based pricing is attractive to customers. The  consumption based paradigm (possession) is seducing less and less because customers prioritize the immediate and continuing satisfaction. Moreover, having a recurring payment, hence a divided price, for an innovation service is the best value for a customer.

With a subscription revenue model, the income is steady as long the company strategy is customer centric, so the customer is willing to continue paying for the service. Due to the subscription rate and churn rate, the predictable revenue is easier to forecast and more reliable. Having some visibility on the revenue is clearly an advantage to manage expenses and build a mid or long-term strategy. In the traditional one-time model, it’s more difficult to smoothly balance revenue versus expenses.

Customer acquisition cost is decreasing because customers are staying longer with the company (versus one-time purchase). Moreover, if the price of the subscription is low (about 7€ / 5$), users will continue to pay even if they are not using the service anymore: this is known as being “too lazy to cancel”.

With the subscription model, it is easier to convince customers. You can build a freemium offer or propose some trial which is difficult to put in place with a onetime purchase. A per-usage recurring payment is a model your customers can be seduced with. The possibilities to show your customers that your offer is worth purchasing are more diversified. In addition, in the case of B2B, the spending for subscriptions will fall in the OPEX budget rather than the CAPEX budget, which is easier to trigger in times of hardship.

From a linear relationship to a channel with a product centric vision, we are now looking at a circular and dynamic relationship focused on the subscriber :

Old Business Model

New Business Model

Companies in a wide range of sectors are mutating to this new subscription model: this innovation allows manufacturers to monetize services and retailers to monetize data. However, changing the vision is not enough to ensure the new circular model is a success. This is what we will examine in the next section.

In a traditional product centric business model, companies have envisaged quote-to-cash as a linear process : following a quote, a customer decides to order a product, the company sends an invoice, the customer pays the amount, and the revenue is recognized within the accounting books for this customer and that product.

In a subscription business model however, a company shifts from a one-time sale – a linear business process- to a flexible recurring product purchase, hence providing visibility on a source of revenue.

For this circular business process to be successful, the company must master each stage of the purchase, as specific to the subscription economy.

Quote: For a successful quote the pricing must reflect the different customer needs such as different consumption and pricing models (usage or period-of-time based), bundles with other products or services, outcome-based or tiered pricing… Moreover, the quote should have several versions to manage the negotiation with the customer: discount value, discount terms, base products and options, contract terms…

Provision/ Fulfill: Provisioning a subscription (aka service provisioning) is the digital process to provide and make available to the customer the service he has subscribed to, in a couple of minutes. Depending on the offer model, the result is to activate the service on a platform, send a license information (through a license creation and management system) or others.

Invoice: The bill must accurately reflect the changes to the subscription, but also the consumption and pricing model (usage or period-of-time used). Depending on the offer model, the invoice could be sent monthly or yearly. Moreover, the invoices must include all the legal information requested by the selling entity applicable law.

In this diagram and in most BtoB strategy of digital solutions, the customer is facing 2 different journeys : order through an eCommerce platform front-end or via the inside sales team.

^[1] Company in the electrical industry sector

The first customer journey is to register and connect to the eCommerce Portal. The portal offers to the customer to subscribe to the services. The specific configuration and features of the offers aim at facilitating the customer journey through the front end. Companies like Oracle ATG, Shopify, Adobe Magento or BigCommerce are proposing eCommerce web applications for business transactions. This front-end portal is exchanging information with the CRM.

The CRM is the database of contacts and organization information. Ideally, the CRM should have 0 duplicates to ensure good data quality. One organization ID of the CRM should match with one company ID in the eCommerce platform. The sales team can use the CRM as a front-end to order for the customers: this is the second customer journey. Because the end users could be electric installers, contractors or electricians, and as they are not all techno savvy, Company A offers to help them manage their subscriptions via customer care. Subscriptions are linked to organizations in the CRM to help sales teams follow customers. SalesForce is the number one CRM but other competitors like Oracle, SAP, Sugar CRM or Microsoft Dynamics are interesting alternatives.

The middle-end of the eCommerce portal is the subscription engine, where all the following activities are managed:  the digital offer catalog and pricing, subscription management, billing, revenue recognition and quoting. A subscription engine allows you to gain agility in the « order to cash » process and in the pricing logic. Connecting the ERP and CRM system to the subscription engine is essential to reduce risk and time to market. When there is license management attached to the digital offer, the subscription engine synchronizes with the software entitlement engine (for provisioning). Zuora is an exhaustive subscription and billing engine but there are other competitors like BlueSnap, Recurly, Salesforce Billing and CPQ, Stripe…

The system that manages the licenses includes the creation, start and end dates (for renewable ones), etc. The license is then associated to the equipment, or device, where it will run. The customer must provide the unique serial number of the device at the beginning of the purchase funnel to obtain a license. When a subscription is amended (e.g: renew or cancel), the licensing software should update the information too. Flexera, Snow License solutions, Duke are examples of licensing software.

The subscription engine also sends all accounting, and financing information to the local ERPs. ERP (Enterprise Resource Planning) systems are such standard systems to manage operations that very few companies can do without. The king of these systems is known as SAP. It is widely used to manage payroll, accounting and manufacturing processes. In the Company A infrastructure the business transactions are linked to the financial transactions, especially to allow for financial auditing. See below the core and additional modules of ERP systems a company may select:

To sell digital offers, ERP systems and finance rules are fully part of a complete subscription system implementation. In the next section, we will see why a unified digital supply chain is necessary.

For a manufacturing company such as Company A^[1], used to sell physical products, enabling subscriptions with a best-in-class subscription engine has not been enough to lead to immediate success. The core of its accounting, financial and manufacturing activities are performed by an ERP system. The problem is : the journey through the Enterprise IT systems of a digital product is not the same as the one for a physical product. To improve the customer journey as well as the country’s implementation of the digital offers, the company worked on providing a unified digital supply chain by implementing a specific yet global operating model for digital offers. Below we detail the shortcomings and solutions found in 2 major areas :

Manufacturing & Master data:

• Shortcomings: Like any industrial business based in several countries, the company started by connecting its subscription engine and digital offers eCommerce platform to each of the countries ERP systems. A specific team was in place in each country to manage and follow the digital offers locally. Consequently, the digital offers references were duplicated in each of the local ERP so that they could be used for the sales order. This duplication required coordination with the several country teams. Local ERPs are geared towards managing stocks and selling physical products. But the story is different with digital products: there can’t be any stock management and inventory. Therefore, these references had to be created as service materials, with no plant data and no supplier data.
• Solution: With one ERP and one global subsidiary dedicated to digital products, SKUs(2) only need to be created once, and no longer duplicated in each of the ERP where the offer is intended to be deployed. It greatly improved the management of Master data. The aim was to minimize and progressively eliminate effort at country level to order digital offers and distribute licenses.

Finance, Tax & Legal :

• Shortcomings: As increasingly countries adopted the eCommerce platform, many connectors had to be built from the subscription and eCommerce engine to the local ERPs to ensure the financial traceability. It increased the need for new development and therefore the possibility of bugs.
  Moreover, some countries did not adopt a specific payment method (such as credit card) due to a lack of a common finance strategy. The digital transformation requires human resources adaptation with additional responsibilities, including in the Finance Department.
  Concerning the Legal Department, there is also additional work because the sales legal documents have to be written in accordance with the law of the selling entity, all these documents had to be duplicated.

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^[1] Company in the electrical industry sector

For a manufacturing company such as Company A^[1], used to sell physical products, enabling subscriptions with a best-in-class subscription engine has not been enough to lead to immediate success. The core of its accounting, financial and manufacturing activities are performed by an ERP system. The problem is : the journey through the Enterprise IT systems of a digital product is not the same as the one for a physical product. To improve the customer journey as well as the country’s implementation of the digital offers, the company worked on providing a unified digital supply chain by implementing a specific yet global operating model for digital offers. Below we detail the shortcomings and solutions found in 2 major areas :

Manufacturing & Master data:

• Shortcomings: Like any industrial business based in several countries, the company started by connecting its subscription engine and digital offers eCommerce platform to each of the countries ERP systems. A specific team was in place in each country to manage and follow the digital offers locally. Consequently, the digital offers references were duplicated in each of the local ERP so that they could be used for the sales order. This duplication required coordination with the several country teams. Local ERPs are geared towards managing stocks and selling physical products. But the story is different with digital products: there can’t be any stock management and inventory. Therefore, these references had to be created as service materials, with no plant data and no supplier data.
• Solution: With one ERP and one global subsidiary dedicated to digital products, SKUs(2) only need to be created once, and no longer duplicated in each of the ERP where the offer is intended to be deployed. It greatly improved the management of Master data. The aim was to minimize and progressively eliminate effort at country level to order digital offers and distribute licenses.

Finance, Tax & Legal :

• Shortcomings: As increasingly countries adopted the eCommerce platform, many connectors had to be built from the subscription and eCommerce engine to the local ERPs to ensure the financial traceability. It increased the need for new development and therefore the possibility of bugs.
  Moreover, some countries did not adopt a specific payment method (such as credit card) due to a lack of a common finance strategy. The digital transformation requires human resources adaptation with additional responsibilities, including in the Finance Department.
  Concerning the Legal Department, there is also additional work because the sales legal documents have to be written in accordance with the law of the selling entity, all these documents had to be duplicated.

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^[2] Company in the electrical industry sector

• Solution: Having a single vendor legal entity and finance & accounting ERP, dedicated to digital offers, helped centralize the financing, accounting and tax management of the digital offers. A common finance strategy could finally be applied, and this allowed for a single process to be used for credit note, as well as a single invoice version.  All payment methods could be set up and maintained only once. Only one set of legal documents had to be produced, instead of one set per selling entities. It also simplified the IT architecture by having just one connector to one ERP. Having less finance specific rules also meant that less time was spent checking and maintaining the system.

See below the overall solution with additional details and only one ERP :

Conclusion

Company A’s core activities consist of the manufacturing of physical products to manage Electrical Distribution and Automation. But for a few years now the company has started a digital transformation to sell associated services. Those services – maintenance, corrective diagnosis, electricity usage optimisation, power quality analysis, etc – are very often sold as recurring subscriptions.

The subscription business model is part of a win-win strategy between the customer and the supplier. The company gets more information on its customer and in return the customer gets better service. For Company A, knowing its customers and where they have installed their electrical products are key information. Implementing a subscription business model allowed the company to enrich its CRM with precious information. Based on their usage, the company is also able to upsell different and more appropriate digital products to its customers. It can adapt its pricing to make the services more attractive. Recurring payments for renewal, digital products upgrade and downgrade, all these capabilities are delivered by the subscription engine. In addition to the subscription engine, the overall architecture includes state-of-the-art CRM, licensing management, and financial ERP capabilities.

Being an international company, with many selling entities, the company originally connected its subscription engine to each of its country ERP. This caused a lot of additional work in terms of Master data management. A digital product had to be artificially created as a service, in order to fulfill some of its characteristics (no supplier, no plant data). The financial traceability was also duplicated in all the local ERPs. To solve all these shortcomings, it was then decided to create a specific selling entity for the digital products. This allowed for a single financial strategy to be put in place.

The new subscription model has many advantages and is the present and future of business models. Company A understood and operated successfully this model even though some adjustments had to be made regularly to achieve financial standardization.

Definition :

• Digital Module is a piece of software that, by installing on MicroLogic X, provides additional functionality and software modularity of the MasterPact MTZ circuit breakers.
• SKU or Stock Keeping Unit is originally used for supply chain and physical products. However, it’s used too as the unique reference of a service.

Sources :

• Book, Le business model de l’abonnement, Tien Tzuo
• Source : Zuora, public offering registration form, https://www.sec.gov/Archives/edgar/data/1423774/000119312518085792/d481302ds1.htm
• https://www.forbes.com/sites/forbestechcouncil/2019/08/12/whats-behind-the-rise-of-the-subscription-model/#10d1c0c035c3
• https://www.researchgate.net/publication/221407798_Best_Of_Breed_IT_Strategy_An_Alternative_To_Enterprise_Resource_Planning_Systems
• Benchmark : https://www.trustradius.com/
• Benchmark :https://www.g2.com/
• Benchmark :https://www.getapp.com

Authors :

Engagement Leader, Business Analyst et Project Manager, Anne-Sophie est consultante senior chez Hardis Group et possède plus de 20 années d’expérience.

Consultante projets digitaux et transformation, Céline dispose d’une expérience de plus de 6 années en marketing et systèmes informatiques