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Turning customers into subscribers –How to successfully make the shift
Johan Treutiger, Niklas Brundin, Greg Smith, Ingrid af Sandeberg, Alexandra Nybonn, Rick Eagar

As manufacturing firms face ever-increasing global
competition and pressure on margins, the prospect of
capturing more value through services – rather than justproducts – remains a key strategic priority. Manufacturing
companies that employ bestpractices can make 45–65 percentof their revenues through services,with EBIT margins of 18 percent ormore1, and typically well in excess
of product margins. There aresome long-established, well-known
examples of the product-to-service
shift, including Rolls Royce’s Powerby-the-Hour model for jet engines
and tool manufacturer Hilti’s Fleet
Management model, in whichcustomers are guaranteedavailability of equipment when it isneeded at a monthly fixed rate.
In recent years, trends in digital technologies, changing
customer behaviors, and threats from new data-richcompetitors have brought urgency for manufacturing
companies to move still further into services, and to form
deeper and closer relationships with customers throughsubscription models. However, this isn’t always as easy as itsounds. Not all customers like the idea of being tied to one
supplier, and new service-based business models do notalways deliver the expected returns. In this article we lookat some of the challenges for companies moving towards
subscription-based business models and highlightan approach they can adopt to increase their likelihoodof success.
1. Source: VDMA (2014): Zukunftsperspektive deutscher Maschinenbau; Arthur D. Little

What customers expectfrom manufacturingbusinesses is changing,moving away fromoutright purchase- tosubscription-basedmodels. This offers
opportunities and risks
for traditional players,providing them withaccess to greater
customer insight, butalso lowering barriers
for competitors. Basedon case examples, thisarticle looks at how
manufacturers can makethe shift to subscriptionbased businesses.

Why subscription models are becoming more important
Manufacturing companies traditionally provide products that
customers buy to solve problems, meet needs and performfunctions. While a service model implies shifting from productownership to product access on a reactive, pay-per-use basis,a subscription model means having a proactive, long-term
customer relationship with recurring fees, as shown inFigure 1.

AspectProductService

Subscription

Customerperspective

I will solve
my problem

Get myproblem solved

I don’t want to see
the problem everagain

Offering focus

CAPEX

Occasional
OPEX

Run-rate
OPEX

Value
proposition

Ownership

Reactive,on demand

Proactive,
prevent demand

Data point
accessOne –at point of sale

Several –on use basis

Continuouscollection

Key successfactors

Be top of mind when need occurs(infrequent)

Figure 1: Product, service and subscription models

In recent years, subscription models have become much
more important due to a combination of powerful market-pull
and technology-push factors:•M arket pull – Changing customer expectations:Customers, whether in the business or consumer market,
are increasingly demanding more tailored user experiences,which means manufacturers need to achieve much deeper
customer insight. Business customers are more likely tolook at products as a means to achieve “jobs to be done”
than as assets they need to own. Enabled by effective
external-partner ecosystems, companies are increasingly
keen to focus on their core differentiators (their “raisond’etre”) to maintain flexibility and avoid unnecessary
CAPEX, externalizing whatever is non-core2.
2. Refer to the lead article “The company of tomorrow” in this issue for further details.

Build trust andcontinuously
improve experienceTurning customers into subscribers
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•P
 roduct ownership is less important than the quality andcustomizability of the experience for consumers as well –hence, for example, the rise of mobility-as-a-service (MaaS)
instead of car ownership and streaming services instead ofrecorded media.
•T echnology push – Connectedness and data: Availabilityof connected, smart devices is causing value to shift from
hardware to software. The ability to generate and analyze
data with unprecedented sophistication provides huge
opportunities for companies to gain insight and create newvalue within customer relationships, especially those thatare long-term.
For traditional manufacturing companies, these rapidly
evolving trends offer up many new opportunities to gainbusiness advantage.
However, there is also a significant threat in terms of newcompetition. Previously, competitive advantage relied on
manufacturing and distribution efficiency on the one hand,and customer knowledge accumulated over time on the other.
However, the value of experience is eroding in an economy
in which manufacturing capabilities can be outsourced
efficiently (or built up rapidly) and data on customers’ needs,
preferences, and usage patterns can be collected elsewhere.
Therefore, now competition is not solely from companies
providing similar products, but also new players that canidentify and address the customer’s basic need for which
products are used. An example of this is the growth ofsubscription-based carpools and MaaS solutions, whichhave started to erode the tradition car-rental market. Other
examples of potential new competitors include Amazon andGoogle, whose voice assistants increasingly tap into thewealth of information surrounding purchase decisions, suchas the circumstances that may spark the idea of a purchase,what questions are important during the research phase, andwhat triggers the buying decision. This quality of data canenable development of new and radically different solutions
that address customer needs before the customer evenrecognizes them as needs. Manufacturing companies need toensure that they are not left behind in the face of these newcompetitive threats.

The benefits to companies
Manufacturing companies that have operationalized
subscription models which exploit their full potential can enjoy
a variety of benefits, for example:•G reater customer insight: Deeper understanding ofcustomer needs and behaviors, which is fundamental toeffective product and service innovation.
• Stronger customer relationships: Greater customer
intimacy, increased loyalty and customer stickiness, highercustomer satisfaction.
•B etter margins: Increased value-add to the customer,
which enables premium higher-margin services.
•M ore growth: The potential to grow revenues throughbroadening the service range, as well as recruiting newsubscribers.
•G reater stability: less volatility, stabler and morepredictable cash flows. For example, new AI applications
enable companies to optimize offerings and pricing, and as aresult, prevent churn and maximize life cycle valueSignify and SKF are two examples of companies which havemonetized the subscription model.

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Box 1 – Signify and SKF – Monetizing the subscription
modelLight manufacturer Signify, formerly Philips Lighting3, offers
major customers such as airports, malls, and office complexes
the opportunity to subscribe to light-as-a-service through its
Managed Services concept. Rather than purchasing, installingand changing lights and fixtures themselves, customers avoid
CAPEX (and maintenance fees) through outsourcing this toSignify for a lower recurring (OPEX) cost. During the contract,
Signify retains ownership of the products and is responsible
for managing all the customer’s lighting needs. Typically,customers see total cost reductions of around 50 percent,as the new business model enables tailoring the light supply
based on consumption. Signify also offers connected lighting
solutions in which each luminaire contains an IoT sensor thatcaptures data – regarding not only lighting needs and “bulbhealth” to enable predictive maintenance, but also activity
levels and environmental parameters within buildings. This, inturn, enables customers to analyze this insight and tailor theirown offerings. Signify is now targeting the consumer market
with a subscription model.
Bearings company SKF also demonstrates the benefitsof a subscription model. Its new Rotation for Life concept
offers customers production by the hour, including service,seals, and lubrication4. Through performance contracts, SKF
ensures customers’ rotating machinery operates as agreed
and process performance targets are met. IoT sensors,currently monitoring over 4 million measuring points,
equip the bearings. This allows condition monitoring andpredictive maintenance, which elongates product life spans
while reducing down time and operational costs. Expected
reductions in customers’ TCO are illustrated in Figure 2.
President and CEO Alrik Danielsson stresses the importanceof data for the concept’s success, but also concludes that“there has to be a significant mind-set shift at bothmanufacturer and customer level for performance
contracts to flourish.”

3. Signify website, Philips Lighting brand website
4. SKF Group website

Savings
Downtime

KPI
Downtime

Total costof ownership

Products &services

Total sum ofSKF Rotation
for Life fees

Bearing costof capital

Figure 2: SKF Rotation for Life customer total cost of ownership(TCO) structure, adapted from SKF Group website

The new business models from Signify and SKF sharecommon characteristics. Both offer tailored customer
experiences that are constantly updated with the latest
features, with maximized up-time and often lower TCO.
At the same time, they are building continuous customer
relationships (and revenues) and can lower their operationalcosts through predictability and prioritization of effortsaccording to what drives value for their customers. They have
refocused incentive programs so employees are no longer
motivated to sell more products year on year, but rather, todevelop top-quality, sustainable products – which also drives
a move towards circular business models. This delivers
advantages for the manufacturer, its customers, and theenvironment.

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The challenges of moving to a subscription model
However, as well as the success stories, there are many
examples of manufacturing companies struggling to makethe shift towards service-based models and failing to reachprofitability, when both transforming from old businessmodels and establishing new ones from scratch. For example,
Michelin Tires launched Michelin Fleet Solutions, offering
customers tires for a monthly fee, including replacements
and maintenance5. The venture proved challenging due tomultiple factors:•D ifficulties in demonstrating benefits for customers.
• Internal resistance through misalignment of incentives. The
sales force was hesitant to adopt the new offering because
its primary KPI was still the number of new tires sold.
•C omplex cost structures proved difficult to manage, as
did the added intricacies of the relationships and split ofresponsibilities with distributors along the value chain.
The combination of these challenges led to transformationof the concept. Michelin has now relaunched it with IoT
connectivity, using sensors to measure pressure, temperatureand speed, which allows it to provide customized dataofferings to customers. Time will tell whether this reworked,
improved effort will prove successful.
Other examples include German automotive supplier Dürr,
which was unable to monetize its product-to-service efforts
due to lack of internal cost control6. Intel’s web-based
services division was discontinued within a few years,and Siemens’ Business Services division had difficulties
generating sustainable profits.
5. Harvard Business School; International Institute for Management Development
6. University of Cambridge; KTH Royal Institute of Technology

In general, companies that struggle to make the change
often fail to:•S pend enough time formulating deep understanding ofcustomer perspective and benefits•D evelop the necessary capabilities to address critical datastrategy issues•A lign the whole organization behind the new businessmodel (as opposed to just the delivery model).
Delivering on growing customer expectations, and thus
remaining competitive in a converging industrial landscape,increasingly requires access to data around product usage.
Yet, most traditional manufacturing companies are not set
up to collect and leverage relevant data.
How to overcome the challenges
To successfully introduce a subscription model, companies
need to focus on four priorities:
1. Develop deep insight into customer needs and desires
The starting point for successful transformation is gaining
deep understanding of customer needs, including thosethat may be inferred rather than expressed, and identifying
whether and how a subscription model could address thoseneeds. Typically, this means developing a truly customercentric perspective, looking much more broadly beyond
product-related services, towards customer objectives,
desires and constraints. This needs to include understanding
the nature of customer resistance to subscriptions –customers will not commit to subscriptions if they do notsignificantly help them. For example, if customers believe
a company will use their data and information to createcustomized offerings which exceed expectations, they are
more likely to commit.
2. Place data at the center of the strategy
Companies should focus on how data is to be gathered,analyzed and exploited in any move to a subscription model.
Offering superior, customized products and services comes
directly from customer-insight generation, which requires
adequate quantity and quality of relevant data, as well as
appropriate skills to analyze it. Competitive analysis from aTurning customers into subscribers
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data perspective becomes critical, alongside reviewing thecompany’s value proposition portfolio in relation to customer
behavior to establish where the subscriptionized businessmodel could fit in. Subscription-based models require newtechnological capacity, such as using sensors to capture data,
data analytics, and AI capabilities to create superior, tailoredofferings. They also need capabilities within manufacturing,in terms of adopting techniques such as DevOps and agile
production.
3. Align internal functions and processes
For a successful business-model shift, an organization’s
internal departments must be adequately incentivized andaligned with a shared vision that clearly recognizes the movefrom product oriented to data oriented. Sales, operations,and R&D must all work towards the same vision and becompensated not based on the number of products thatcan be pushed out – but on, for example, total profitability or
number of subscription customers. Business transformation
is key. A business-model shift entails a significant change
in many internal processes, and often involves new sales
channels.
4. Adopt a step-by-step approach
As with any new business trend gaining traction, there is
temptation – especially for incumbent firms – to dive in headfirst. After all, incumbents have the capital to make it happen
and are (rightly) cognizant of the risk of being surpassed by
new market disruptors. However, this often leads to focus
on the delivery model itself (the what), rather than the entire
business model (the how and the why). In our experience,companies that have been successful have taken sufficient
time to assess the strategic position before acting (as in 1and 2 above).
Although customization is a key value-add from thesubscription model, not everything can be customized atonce. Companies can prioritize and create one “wow”
dimension at a time, until they gain the required amount ofdata to create truly tailored offerings. For example, the firststep could be a set-up in which the subscription depends on
use frequency and intensity, while different fee levels aretrialed. By incrementally building understanding of whichcustomers use which model, when, and how, firms canincrease the level of customization per subscription stepby step.

Insight for the executive
To remain differentiated in an increasingly competitive andconverging industrial landscape, companies must gain
access to, and generate insight from, customer data inorder to deliver superior and customized offerings. Adopting
a subscription-based business model is a key method ofachieving this. However, implementing a subscription model
requires a fundamental shift in a company’s overall businesslogic and incentive alignment, creation of new internal skills
and capabilities, and agility to adjust in a transformed externalecosystem.
With data access a key competitive advantage, productcompanies in both B2B and B2C markets will have tore-evaluate their competitive landscapes, looking out forplayers with similar or better customer insight – on relevant
parameters – rather than focusing on players with similaror better product or service offerings. This establishes
a continuous customer relationship, which enables datageneration, accumulation of customer insight, and ultimately,improved offerings. For many manufacturing companies themove to subscription models – not just services – will be thekey battleground for ensuring future competitive advantage.

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Johan Treutiger
is a Partner in Arthur D. Little’s Stockholm office and amember of the Strategy and Organization Practice.
Niklas Brundin is a Partner in Arthur D. Little’s
Stockholm office and a member of the Automotive andManufacturing Practice.
Greg Smith is a Partner in Arthur D. Little’s London office
and global head of the Digital Problem Solving Practice.
Ingrid af Sandeberg is a Manager in Arthur D. Little’s
Stockholm office and a member of the Travel andTransportation and Technology and Innovation
Management Practices.
Alexandra Nybonn is a Business Analyst in Arthur D. Little’s
Gothenburg office and a member of the Operations Strategyand Transformation Practice.
Rick Eagar is a Partner Emeritus of Arthur D. Little.