The concept for the future is called the subscription model
Gründerszene.de February 19, 2019: Subscription models are celebrated as the business concept of the future.
But on the way to recurring payments, companies have to overcome a few pitfalls.
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-time purchase of a product.
In addition to more insight into customer behavior, it also gives companies 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 only dared to venture into this new terrain with hesitation.
Because behind the decisive processes, especially in IT and accounting, there is an enormous amount of effort.
Ingo Hentschel, Head of Key Account & Sales at nexnet – a company that specializes in business process outsourcing (BPO) and bulk transactions – explains why there is so much potential in the subscription economy and why subscription models exist in almost every industry function.
He also explains what hurdles await companies and how they overcome them.
Ingo, the subscription economy is being celebrated as a big trend business model. Can you explain in detail what exactly is behind it?
“The hype is related to the longing of many companies to bind their customers to a permanent obligation. Sounds bad, but it’s simply the well-known subscription principle.
There are many advantages for companies here. It’s always difficult to convince new customers – subscriptions are a good solution because it’s relatively easy to keep customers.
And there are always a few ‘dead customers’ in the pool who pay but don’t use the services. This model is already very well known in the B2C sector, keyword streaming portals. Now it is gradually arriving in the B2B market.”
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, realized early on that customers would rather pay a monthly basic fee for a comprehensive range of films and series than buy the respective DVD.
This principle works in almost 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 in terms of the subscription economy compared to the USA?
“Unfortunately, as is so often the case, the Germans are not the first movers here.
While the US has recognized the potential of subscriptions and subscription provider revenue has grown to $2.6 billion, we are still too focused on the old economy.
Therefore, in many cases, the credo applies: ‘It’s not that easy to change a functioning business!’
Only subscription models offer the flexibility that companies need to meet the new demands of their customers. However, some traditional sectors of the economy – for example the automotive industry – have kept a watchful eye on the new opportunities.
Just think of BMW and Mercedes, who are already successfully using a subscription-based business model with their car-sharing services.”
The road to a functioning subscription model is considered rocky. What exactly do subscription-based business models demand from companies?
“It’s true – they’re not as simple as subscription-based business models might sound.
There are many things to consider when designing them. The most important thing is: There must be a very obvious added value for the customers!
If I enter into a continuing obligation as a user, there must be a clear advantage for me.
The best example here is the development of the subscription models of software companies: In the past, you bought the license for a lot of money and had to live with not always having the latest version. 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. When it comes to IT, there are certainly some adjustments that need to be made, right?
“Definitely. The IT effort is extremely high.
It is often underestimated and is therefore a ‘show-stopper’ when implementing subscription-based business models.
The models have to be followed in a completely different way in terms of process and make completely new demands on customer relationship management. The new transactions must also be delimited completely differently in terms of debits.
In many cases, the financial accounting departments are not prepared for all these new requirements.”
Keyword finance: The subscription economy is also about subscription billing. How should companies deal with this?
“Billing is about much more than producing invoices.
The mediation component is particularly important here, in which various performance data streams have to be brought together, for example from consumption-dependent goods on the one hand and the hardware provided on the other.
In addition, the staff should also pay attention to the different country requirements: ‘Where do I settle the sales tax? What has to go where on the invoice? How do you deliver the invoice?’
The financial accounting departments have to deal with all these questions. And that is not an easy task.”
How exactly does nexnet support companies in their step into the subscription economy?
“We offer modular solutions that fit the respective needs. We provide support in the areas of master data management and CRM as well as in the provision of payment methods.
Because how the customer wants to pay is an important factor. Another important point: Since our own accounting is often not designed for the special requirements of Subscription Economy, we offer our customers synergetic accounts receivable management including payment clearing , so that the customer ultimately gets exactly the solution that is individually tailored to them.”
Article image: Eyeem