Subscription models are being hailed as the business concept of the future. However, companies have to overcome a few pitfalls on the way to recurring payments.
How the old-fashioned subscription idea is leading companies into the future
Digital subscription models are on the rise worldwide: The so-called subscription economy is the answer to the new consumer behavior in which customers prefer the continuous use of services to the one-off purchase of a product. It provides companies with more insight into customer behavior and more predictable revenue streams. While the subscription market in the USA has grown by 100 percent in the last five years alone, German players have so far been hesitant to venture into this new territory. This is because the key processes, especially in IT and accounting, require an enormous amount of effort.
Ingo Hentschel, Head of Key Account & Sales at nexnet - a company that specializes in business process outsourcing (BPO) and mass transactions - explains why there is so much potential in the subscription economy and why subscription models work in virtually every industry. He also explains the hurdles companies face and how they can overcome them.
Ingo, the subscription economy is being celebrated as a major trend business model. Can you explain in detail what exactly is behind it?
"The hype is linked to the desire of many companies to bind their customers in a long-term relationship. It sounds nasty, but it's simply the well-known subscription principle. There are many advantages for companies here. Convincing new customers is always difficult - subscriptions are a good solution, as it is relatively easy to retain customers. And there are always a few 'customer corpses' in the pool who pay but don't use the services. This model is already very familiar in the B2C sector, for example streaming portals. Now it is gradually arriving in the B2B market too."
Why are subscription-based business concepts so lucrative across all industries?"The subscription economy is primarily seen as a game changer because there are no limits to the creativity of product managers. However, there must be intelligence behind the offer so that added value is actually created for the customer. Streaming portals, for example, discovered early on that customers prefer to pay a monthly basic fee for an extensive range of films and series instead of buying the respective DVD. This principle works in virtually every industry - hence the enormous potential attributed to the subscription economy."
Can you explain why German companies still have so much catching up to do when it comes to the subscription economy compared to the US?
"As is so often the case, the Germans are unfortunately not the first movers here. While the USA has recognized the potential of subscriptions and the turnover of subscription providers has risen to 2.6 billion US dollars, we are still focusing too much on the old economy. Therefore, in many cases the credo applies: 'You can't change a functioning business that easily! Yet only subscription models offer the flexibility that companies need to meet the new demands of their customers. However, some traditional industries - such as the automotive sector - are keeping a watchful eye on the new possibilities. Just think of BMW and Mercedes, which are already successfully relying on a subscription-based business model with their car-sharing services."
The road to a functioning subscription model is a rocky one. What exactly do subscription-based business models demand of companies?
"It's true - subscription-based business models are not as simple as they may sound. There is a lot to consider when designing them. The most important thing is that there must be an obvious added value for the customer! If I, as a user, enter into a continuing obligation, there must be a clear advantage for me. The best example of this is the development of subscription models by software companies: In the past, you bought a license for a lot of money and had to live with not always having the latest version, so to speak. Nowadays, there is the subscription model, where you have to pay monthly fees, but you always stay up to date.
In order for this business model to pay off, smooth processes must also be ensured in the background. There are certainly some IT adjustments that need to be made, aren't there?
"Definitely. IT costs are extremely high. It is often underestimated and is therefore a 'show stopper' when implementing subscription-based business models. The models have to be tracked completely differently in terms of processes and place completely new demands on customer relationship management. The new processes also have to be delineated completely differently in terms of accounts receivable. In many cases, financial accounting systems are not even prepared for all these new requirements."
Keyword finances: The subscription economy is also about subscription billing. How should companies deal with this?
"Billing is about much more than just producing invoices. The mediation component is particularly important here, where different service data streams have to be brought together, for example consumption-based goods on the one hand and hardware provided on the other. In addition, staff should also consider the different country requirements: 'Where do I invoice VAT? What has to go where on the invoice? How do I deliver the invoice?" Financial accounting departments have to deal with all of these questions. And that's no easy task."
How exactly does nexnet support companies in their move into the subscription economy?
"We offer modular solutions that are tailored to the respective needs. We provide support in the areas of master data management and CRM as well as in the provision of payment methods. After all, how the customer wants to pay is an important factor. Another important point: as in-house accounting is often not designed to meet the special requirements of the subscription economy, we offer our customers synergetic accounts receivable management including payment clearing, so that the customer ends up with exactly the solution that is tailored to their individual needs."
Article from: Gründerszene.de from February 19, 2019
Article image: Eyeem
