# Subscription Business Models in the Manufacturing Field: Evidence from a Case Study

Veronica Arioli, Roberto Sala, Fabiana Pirola, Giuditta Pezzotta

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Veronica Arioli, Roberto Sala, Fabiana Pirola, Giuditta Pezzotta. Subscription Business Models in the Manufacturing Field: Evidence from a Case Study. IFIP International Conference on Advances in Production Management Systems (APMS), Sep 2022, Gyeongju, South Korea. pp.359-366, 10.1007/978-3-031-16411-8_42. hal-04768985

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# Subscription business models in the manufacturing field: evidence from a case study

Veronica Arioli¹[0000-0001-8013-6597], Roberto Sala¹[0000-0001-7671-6927], Fabiana Pirola¹[0000-0003-4633-7568] and, Giuditta Pezzotta¹[0000-0001-7983-8356]

¹ University of Bergamo, Department of Management, Information and Production Engineering, Viale Marconi, 5, Dalmine (BG), 24044, Italy
veronica.arioli@unibg.it

**Abstract.** Manufacturing companies operate in global environments where competition is increasingly aggressive. To remain competitive, they need to differentiate themselves by updating and expanding their offerings to customers, for instance through the digitalization and servitization phenomena, which allow companies to innovate business models in this direction. This paper deals with an analysis of the subscription business model, which has recently attracted the attention of manufacturing companies for the possibility to establish long-term partnerships with customers by providing services on a continuous basis in return of recurring payments. After a first analysis of the literature on this topic, the effective implementation of the subscription model in the manufacturing environment is analyzed through a case study. The analysis shows that the development of subscription models is strengthened by the utilization of digital tools since they enable processing customers' data for new service offering generation, leading companies to differentiate their business towards customer-centric solutions. In conjunction, the case study shows how barriers to the implementation of subscription models in the manufacturing sector are still present. Despite this, the Covid-19 pandemic has highlighted the potential of this offer, allowing companies to stay in touch with their customers, and to maintain, or even increase, the revenue streams.

**Keywords:** Subscription business models, Digitalization, Servitization, Covid-19 pandemic.

## 1 Introduction

In the last years, companies in the manufacturing sector had faced an increasing competition which had negatively impacted their profits [1]. This competition had brought companies to constantly find new business models to adapt to different scenarios since it became clear that the traditional business models, based on transactional product sales, were no longer efficient [2]. The servitization phenomena helped companies in this direction, shifting the attention from products to services to generate new revenue streams and value for all the stakeholders. Moreover, the digitalization phenomena pointed out the potential of technologies to expand businesses towards
new service solutions [2]. Despite this, for manufacturing companies, it has been dif-
ficult to adequately leverage the benefits of digitalization and servitization in provid-
ing new business models’ solutions able to create added value to the entire supply
chain [2]. In 2020, the Covid-19 pandemic hit hard all areas of the economy and soci-
ety, dictating unprecedented new challenges [3], [4]. Sectors such as education, tele-
medicine, delivery of goods, have faced strong issues due to the pandemic, and they
found in online platforms the solution to take one the new challenges [5]. In such a
situation, where social distancing became a necessity, digitalization and adoption of
Industry 4.0 technologies have seen exponential growth [6], [5], and similarly the
development of new services accelerated [7]. Thus, the added value brought by these
phenomena has finally emerged.

Nowadays, business model innovations can create stronger differentiation than product and process in the manufacturing industry [1]. In this context, subscription business model, that aims at exploiting the added value of services provided on the basis of customers’ requests, for which they pay periodically [8], has been very successful in many industries and has begun to attract the attention of manufacturing companies, the model.

In this context, the objective of this paper is to describe the state-of-the-art of sub-
scription business models in the manufacturing sector to identify the main require-
ments for their implementation. Following, the application of a subscription model in
a company is analyzed. The paper is structured as follow: Section 2 explains the
methodology adopted to investigate the topic. Section 3 is focused on the literature
review. Section 4 deals with the development of a subscription model in a company
while Section 5 shows the results achieved. Eventually, Section 6 concludes the pa-
per, also delineating future research directions.

## 2 Methodology

The methodology adopted in this study was split in two consecutive phases. Firstly, a literature review was conducted to define the state-of-the-art on the subscription models and identify the gaps. In particular, it was deemed appropriate to describe the context that led to their development. To run the search, SCOPUS has been utilized as research database. Keywords such as “Subscription business model”, “business model”, “servitization and digitalization”, “customer-centricity”, “remote assistance”, and the related synonyms, were exploited to construct the queries, along with the operators “AND” and “OR”. The obtained initial pool of articles has been filtered by reading the titles and the abstracts in order to eliminate all the papers not properly related to the topic of interest. Moreover, a final snowballing procedure identified other papers which have been added to the final pool. Table 1 shows the procedure that led to the identification of the pool of papers object of the analysis.

Then, to concretely understand the added value of subscription models, and the
challenges of their implementation, a case study in the manufacturing sector has been
explored. Participatory observation in company Alpha that was implementing a new
remote assistance service and started to deliver it through different options of sub-
scription business model (usage-based, tiered, and unlimited, according to [9]) has been

employed to build the case study. The authors utilized interviews among the customer service department to collect data about the needs, and analysis of historical data about the service intervention, in order to, firstly, understand the as-is situation, followed by the definition of commercial proposal and the development of the supporting tools for the new service.

<table><caption>**Table 1.** Papers' numbers and filters.</caption><thead><tr><td></td><td>n. of documents</td></tr></thead><tbody><tr><td>Initial pool</td><td>637</td></tr><tr><td>Title filtering</td><td>219 (-418)</td></tr><tr><td>Abstract filtering</td><td>88 (-131)</td></tr><tr><td>Content review</td><td>41 (-47)</td></tr><tr><td>Duplicate removal</td><td>36 (-5)</td></tr><tr><td>Snowballing</td><td>(+4)</td></tr><tr><td>Final set of papers</td><td>40</td></tr></tbody></table>

## 3 Literature review

From the analysis of the literature, it clearly emerges that servitization and digitalization are increasing fields of discussion and research. The two phenomena are extremely interconnected and complementary [10]: on the one hand, digital technologies enable to structure new services, configuring themselves as the means to offer the service; on the other hand, they intrinsically provide functions and added values that can only reach the customer thanks to the services and, therefore, from this point of view, it is the service that acts as the means to make digital travel.

The predominant business models in the manufacturing sector are based on the sale of products and after-sales services [11]. The customers' requests, which are continuously changing, have brought to identify new ways to capture the values of products and services, through new business models which fully exploit the added value of services [12]. The industry mentality is shifting from models characterized by a "product centricity", where the product is the main revenue proposition, to ones where the business is oriented to customer satisfaction, namely "customer centric" models [13]. Industry 4.0 has helped in this innovation process of business models, since it allows information about the customers to be extracted from data analysis [1]. This is confirmed by authors such as [14] and [15], which show that the evolution of business models in the manufacturing field is oriented to offering digital solutions. In particular, with plant automation and interconnection, a positive impact could be achieved on both the technical, managerial, and communication aspects of the intervention [16]. However, companies do not necessarily need to use the most innovative smart technologies to be successful, but it is crucial to identify which digital features are right for them, allowing for improved customer engagement [7].

In this context, new forms of business models have been developed with the common purpose of recovering from the decline of "physical" sales, by shifting to services as sources of new profits [17]. Among these, Product-Service Systems are widely investigated in the manufacturing context, being new form of service-oriented business models [18]. More recently, a new method of business that focuses on access rather than ownership, has undergo an increasing trend within industries, the so-called
Subscription business model. Despite this, today this is under investigated and, thus, it represents an interesting research field. The origin of the subscription models belongs to the XVI century, but they started to attract businesses only in the early 2000s with the development of streaming services such as Netflix and Spotify [19]. After their launch, other companies became interested in these business models, and the recent emerging popularity of subscription business models also drove the manufacturing sector to become interested. Different authors have studied the subscription business models in the manufacturing sector, providing the definition [8], [14], [20]. They agree when listing the main characteristics of a subscription business model, which can be summarized as follow: (i) the ability of meeting customers' needs and establishing long-term relationships with them; (ii) the ability of tailoring company offerings to current needs and predicting future ones, through the information on customers captured from the continuous analysis of the flow of data generated by subscriptions; (iii) greater financial predictability, and consequently, greater expenditures' flexibility for both the firm and the customer; (iv) the importance of digital technologies.

Subscription business models are widely used in other industries; concerning this, [21] revealed that following the outbreak of the Covid-19 pandemic, the subscription rate for services, in the delivery, gym, TV & film, and music industries, increased considerably. Nevertheless, their implementation in the manufacturing context faces different challenges. Firstly, the changing nature of customer requests which are difficult to be perceived in advance without recurring to data analysis, which forces the providers to continuously innovate the business model, and, mainly, the lack of references for introducing supporting tools enabling the new business solution at the operational level [20]. As highlighted by [1], mutual dependencies between the provider's business model, its organization and customers exist, but no management model is able to illustrate the complexity of these interdependencies in subscription models. However, as studied by [8], one of the most promising fields of application of subscription business models in manufacturing is related to maintenance activities.

## 4 Case study

Company Alpha is an Italian manufacturing company that produces balancing machines, process control systems for machine tools and process monitoring systems for diagnostics. In recent years, the customer service of Alpha has assumed greater importance inside the company thanks to the servitization process that Alpha is undergoing, leading the company to consider the adoption of subscription models for the remote assistance service. The implementation of this subscription-based service has been analysed to gather the main characteristics and barriers highlighted by the literature on subscription models in the industrial field.
## 4.1 "Help Desk 24/7"

The transition from the traditional on-site assistance and maintenance services towards the remote assistance was triggered by the internal analysis within Service department of Alpha which showed that most of the problems were solved by telephone support. Thus, the company started considering the introduction of a new helpdesk service. Although the advantages of remote assistance were evident (i.e., reduced physical interventions, and reduced time of interventions given the possibility to avoid travels), multiple barriers for its implementation have been identified: (i) internal, due to the lack of resources and the absence of a revenue model for the remote service; (ii) external, due to the customers that did not recognize the necessity of the 24/7 assistance to justify an additional economic expenditure. The Covid-19 pandemic forced to overcome these barriers and both the company and its customers started recognizing the value of the remote assistance. Therefore, Alpha understood that the time was right for the implementation of the new remote assistance "Help Desk 24/7". Consequently, it invested in digitalization and innovated the business offer through the provision of subscription-based services to overcome the crisis.

The new Help Desk service aims to provide remote service support on company Alpha's equipment to all customers through dedicated service contracts in line with customer needs. This new service, which came into effect on September 1st, 2021, provided three types of remote assistance subscription contracts from the customers who could choose the one that best suits their needs, namely:

* Help Desk Time (HDT), a usage-based subscription model [9] where the support service is based on hourly billing (50€/half an hour);

* Help Desk Limited (HDL), a tiered subscription associated with the serial number of the machines, that allows to use a fixed number of hours (20 h/machine) in a year for which the hourly billing can decrease based on the number of installed machines (from 500 € to 350 €/ machine);

* Help Desk Open (HDO), an unlimited type of subscription associated with the customer, that allows to use the scheduled hours (20 h) on all the owned machines (1750€/customer).

In all cases, only remotely managed interventions with a positive and out of warranty result were invoiced. The expected results were that customers owing higher number of machines started to subscribe for remote assistance, especially to HDO contracts, thus contributing to establish long-term relationships with customers and obtaining fixed additional incomes increasing the service company's profit.

## 4.2 Redesigned process flow

To comply with the main challenge related to the introduction of subscription models, which, as suggested by the literature, consists of the lack of management model supporting the transformation towards subscription-based services, lots of efforts have been employed to find the adequate way of managing the new remote assistance within the Service department. It was necessary to create a computerized structure for the registration of service tickets, the selection of those to be invoiced, and the
reporting of active subscriptions. Moreover, to have a general overview of the results achieved and analysed the performance of the Help Desk service, internal KPIs were selected and computed from the tickets database. The collection and analysis of data

allows for a wider understanding of the customer requests, which is fundamental for adapting firm's business proposal to the actual needs and, also, predict the future ones.

In Figure 1 is represented the logical flow from the customer first contact to the opening and closure of the ticket for assistance, and all the documents of interest. Documentation for managing the service was made available in a shared folder on Google Drive, which allows technicians to work simultaneously and avoid additional capital expenditure for the company.

<figure><img src="image_3.png" /><figcaption>**Fig. 1.** Logical flow of the new service and the documents of interest. “Ticket management” contains the information about the remote assistance that are necessary to fill all the other files. It dialogues bidirectionally with “Subscription register” to verify the contracts and the residual hours. The master data of the balancing machines allows the automation of the two worksheets.</figcaption></figure>

## 4.3 Results and Discussion

Following the case study presented in Section 4, the first results from the data analysis of the Help Desk Service of company Alpha are summarized in Figure 2. The charts cover the period from the moment the Helpdesk 24/7 was launched, that is on 01/09/2021, to 01/12/2021. As shown in Figure 2 (a), a high percentage of remote interventions have a positive result, meaning the technicians have been successful in the remote assistance. The average time for the remote assistance has resulted to vary with respect to the different types of requests, Figure 2 (b). This information is helpful for the service department to identify the main issues, the average resolution time and, thus, the areas of future improvements to suit customers' requests. Figure 2 (c) shows the distribution among types of customers, and these results are not surprising since the HDO subscription has been specifically designed for customers with a higher number of machines requiring assistance at global level and not just to solve issues of a fixed number of machines (for that the HDL is more appropriate). Thus, as emerged from literature, the predominant feature of this business model emerged, namely, the ability of customizing the offerings to best suit specific client requests.

Despite the literature does not provide a reference model for the management of subscription models in industry, company Alpha has demonstrated that there is no need for expensive investment in facilities to adopt this model, but more of an investment in digital tools, remarking their key role in the definition of subscription models. The company plans to redesign the business management system, because the
proper management of data is vital, especially for these new business models. However, only around 3% of the machines in the registry resulted associated with a subscription contract when the results were collected, reflecting the external barrier related to the customers' perceived value which still exists. Therefore, marketing campaigns should be intensified to spread the potential of the new service among customers.

<figure><img src="image_4.png" /><figcaption>Fig. 2. Help Desk 24/7 implementation's results.</figcaption></figure>

## 5 Conclusion

Subscription business models are becoming increasingly important in the manufacturing sector. More generally, it is possible to assess that the global pandemic of Covid-19 has triggered a series of innovations aimed at renewing business models in the perspective of servitization and digitalization, from which subscription-based business models can also benefit. The use of digital tools allows to better collect and process data that become essential for a company to generate new service solutions structured on the basis of the customer needs. From both the literature and the case study, service customization appears to be a key feature: specifically, standard subscriptions should be provided and then tailored to specific customer needs. Further knowledge about these service solutions should be shared by researchers, as well successful case studied to help companies aiming to implement a subscription model for differentiating their businesses.

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