Gründerszene.de, 19. February 2019 Subscription models are being celebrated as the business model of the future. Yet the on the road to achieving recurring payments, companies have to overcome a number of snares.
How the apparently old-fashioned subscription idea is leading companies into the future.
Digital subscription models are triumphant worldwide: The so-called subscription economy is the answer to the new form of consumer behaviour where customers prefer the continuous use of services to one-off product purchases. Alongside more insight into customer behaviour, it also provides companies with predictable revenue streams. While in the USA the subscription market has grown by 100 percent in the last five years alone, German players have as yet only taken tentative steps on this new terrain. For behind all of the crucial process, above all IT and accounting, there is an enormous amount of hidden effort.
Ingo Hentschel, the Head of Key Accounts and Sales at nexnet – a company that specializes in business process outsourcing (BPO) and high-volume transactions – explains why so much potential lies in the subscription economy and why subscription models work in almost every sector. He also talks about what obstacles are lying in wait for companies and how these can be overcome.
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Ingo, the subscription economy is being celebrated as a major business-model trend. Could you explain in detail what exactly lies behind this?
“The hype is connected to the desire of many companies to tie there customers into a long-term debt-relationship. That sounds awful, but it’s simply the well-known subscription principle. For companies, this offers a lot of advantages. Convincing new customers is always difficult – subscriptions are a good solution, because you can retain customers relatively easily. And there are always a couple of ‘customer’s bodies’ in the pool – who pay, but don’t use the services. In the B2C area, this model is already well known, as in the buzzword streaming portals. Now it’s gradually coming into the B2B market, too.”
Why are company concepts on a subscription basis so lucrative across different sectors?
“The subscription economy is considered to be a game changer above all because there are no limits to the creativity of the product managers. However, there has to be some intelligence behind the offering, so that an added value really is created for the customer. Streaming portals, for example, realized early on that customers would rather pay a monthly fee for a comprehensive range of films and series instead of buying the respective DVD. This principle works in just about every sectors – hence the enormous potential that’s ascribed to the subscription economy.”
Can you explain why German companies still have so much catching up to do in the area of the subscription economy compared to the USA?
“As is so often the case, the Germans are not the first movers here. While the USA recognized the potential of subscriptions with the result that the sales of subscription providers have risen to 2.6 billion dollars, we are still focused on the old economy. So in many cases, companies are sticking to the motto: ‘You can’t just change a functioning business so easily!’ But it’s only subscription models that provide the flexibility that companies need in order to meet the new demands of their customers. Some traditional sectors – for example, the automotive industry – have been keeping a sharp eye on the new possibilities, however. Just think of BMW and Mercedes, who have already successfully built a business model on a subscription basis.”
The road to a functioning subscription model is said to be hard. What exactly do subscription based models require?
“It’s true – subscription-based models aren’t as simple as they might sound. There’s a lot to consider in designing them. The most important thing is: there has to be a clear added value for the customers! If as a customer I enter into a long-term debt relationship, there has to be a clear advantage for me. The best example for this is the development of the subscription model by software companies: you used to acquire a license for a lot of money and sort of had to live with not having the most up-to-date version. Nowadays you have the subscription model where, although you have to pay monthly fees, in return for this you always stay up-to-date.”
For this business model to pay off, you have to ensure that processes work smoothly in the background. In the case of IT there are presumably going to be some screws that have to be adjusted, right?
“Definitely. The IT outlay is extremely high. It’s often underestimated and is often a deal-breaker. In terms of the processes involved, the models have to be tracked in a completely different way and present totally new challenges to the customer relationship management. In debit terms, the new processes have to be demarcated in a completely different way. In many cases, the financial accounting departments aren’t prepared for these new challenges at all.”
Regarding finances: the subscription economy is also about the issue of subscription billing. How should companies approach this?
“Billing is concerned with much more than producing invoices. Of particular importance here is the component of mediation, where the various performance data streams have to be brought together, for example, use-dependent goods on the one hand, and provided hardware on the other. Apart from that, the staff should also consider the differing requirements from country to country: ‘Where to I invoice the VAT? What has to be on the invoice and in which position? How do you deliver the invoice?’ With all of these questions you have to deal with financial accounting departments and other technical departments. That’s not an easy proposition.”
How exactly does nexnet support companies in their stepping into the subscription economy?
“We offer modular solutions that suit the respective requirements. In doing so, we provide support in the area of master data storage and CRM as well as in the integration of payment methods into the accounting context. Because how the customer wants to pay is an important factor. A further important point: as one’s own accounting department is often not geared to the specific requirements of the subscription economy, in a synergistic way we offer our customers Credit Management including Payment Clearing, so that in the end the customers get exactly the solution that is tailored individually to them.”
Article picture: Eyeem