Leasing Machine subscriptions: Customer-specific manufacturing equipment
Investing large sums in large machines is no longer in keeping with the times. The subscription model is conquering the business world. Today, major players in machine and plant construction are already creating value with so-called subscriptions. Recurring revenues with subscriptions have increased almost 60-fold in Europe since 2015.
While software by subscription is already practically the norm, more and more machine and plant manufacturers such as Heidelberger or Trumpf, but also suppliers and component manufacturers, are relying on so-called subscription business models. Parallel to their traditional business, they have developed value-added options that follow this new principle.
The data technology requirements are now largely available: Machines and plants equipped with sensors and communication modules provide sufficient data that can be processed by reliable IoT platforms. On this basis, many providers are already working with condition-based monitoring, predictive maintenance and remote services or are currently implementing such extensions to their business model.
Flexible business models such as those made possible by subscriptions are also built on IoT platforms. They offer the opportunity to retain customers more strongly and for longer than with one-off transaction deals. The Research Institute for Rationalisation (FIR) at RWTH Aachen University, for example, reports a 25 to 30 percent lower churn rate when using subscription models – conversely, this means a 25 to 30 percent increase in customer loyalty.
Of course, the development and introduction of subscription models in mechanical engineering must also follow a clear strategy. And: A subscription model can only be effective where suppliers and customers are prepared to jointly exploit potentials.
The Expert Paper „Aachener Subscription-Business“ from the FIR at RWTH Aachen University lists the most important success factors:
- Identifying customers: As a machine supplier/vendor, the first thing to do is to find out which customers/users are suitable for a subscription model. Whether a customer is suitable for this depends, among other things, on the products they use, their level of digital maturity, the service structure - and whether the customer is willing to go down new paths.
- Defining a product: The supplier and the customer should jointly define the products that are suitable for a subscription model. The machine/plant represents the standardised platform on which individual services tailored exactly to the customer's needs are built.
- Managing risks – Opening up opportunities: The provider must be prepared to forego its high one-off return and instead focus on the return on investment over the course of the utilisation phase. In doing so, they assume an increased risk. Certain risks can be contractually secured, and the provider can also enter into dialogue with insurance companies. This is an effort that pays off. The provider thus opens up additional opportunities for value creation and an even more consistent orientation towards the needs of their client: The customer is interested in maximum performance, which his supplier guarantees by linking the success of their business model precisely to this.
Linking service closely to customer needs
Ultimately, subscriptions live from the fact that the provider extends their business into the machines at the customer's premises. That they closely link their services to the customer's needs. And that they obtain deep data-based insights into the customer's product use. On the one hand, they use the knowledge gained in this way to adapt their machines and services to the customer's processes in a very individual, precise and software-controlled way. On the other hand, they can incorporate them directly into their own processes and the optimisation of their products. In order to lead a subscription model to success, it is not enough for the provider to create the technical prerequisites and optimise its own processes. Rather, the provider must systematically learn from the customer and actively drive their success.
When Subscription works
There is no lack of value creation potential. It is therefore all the more remarkable that many providers have been slow to devote themselves to this element of a promising business model. However, subscription models in mechanical and plant engineering do not work quite as straightforwardly as they do for Netflix and the like. Complex machine and plant solutions are used there and the business model only generates revenue if the customer can use them at any time. Subscription therefore only works with an efficient technical service. Often, product packages are offered, consisting of machines, software and services that are integrated into the customer's production process. All this has to be included in the subscription pricing.
The revenue mechanics are also different: The provider does not charge for individual products and services or a fixed subscription price, but for the productive state, for example based on the usage time or the produced result. All this makes pricing individual and very complex due to the many variables.
Four subscription service types at a glance
Essentially, there are four basic subscription service types, which differ in terms of service type and price modelling. The added value, but also the risk for the provider increases depending on the model:
- 1. Pay-per-availability / Provision of a service. Here, the price is essentially calculated from the time unit in which the machine and services are available. Monthly subscriptions or fixed recurring fees are conceivable. Example: Use of a heating system, price per available month.
- 2. Pay per use / Use of a provided service. The usage data is recorded via IoT and serves as the basis for pricing. The provider invoices on the basis of the times the machine or system has been running - billing per minute or hour, for example. Example: Use of a heating system, price per minute run.
- 3. Pay per outcome / Result from the use of a provided service. Here, the supplier and the customer define which produced unit is billed and how. The customer pays the previously agreed price for each produced part that has successfully passed through quality assurance. Example: Production of components, price per correctly cut sheet metal part.
- 4. Pay per economic success / Economic success achieved with the service provided. The provider and the customer define success criteria, for example the increase in performance, the reduction of production costs or the saving of raw materials, time or energy. The previously defined economic success is used - for example on the basis of percentage values - for pricing. Examples: Use of a heating system, price based on saved costs.
It is also possible to combine the classic model of a one-off transaction with subscription models: the customer buys or leases a machine, for example, and obtains software as a service or other services as a subscription.
From model to system implementation
Even though some large companies such as Trumpf, Heidelberger and others now have well-functioning subscription models on the market, the majority of machine manufacturers still find it somewhat difficult to implement them in their systems. This is not least due to the fact that these business models and their pricing involve new types of responsibilities. Mastering them requires extensive IT know-how and experience with subscription models.
What is needed, therefore, is a skilled system integrator who can take on end-to-end responsibility. IT experts usually speak of four core components that build on each other and must interlock in subscription management:
- Offer Management This includes the generation of offers and pricing.
- Contract Management This includes checking the preconditions before the contract is created (for example, are all the required customer data available and correct?). Contract management also takes care of the correct processing or provision of the conditions agreed in the contract.
- Billing The billing process includes more than just invoicing. Usage data is also processed here, which, like the individual pricing models, must be processed into invoice items that are correct for accounting purposes.
- Payment Management Deals with the control and management of payment flows.
Conclusion: Mechanical engineers are being challenged to explore their potential for subscription management solutions and develop appropriate business models in the face of IoT-driven development. Their customers will expect it, and sooner rather than later. However, the development of such solutions requires profound IT and subscription management know-how. As a rule, there is no single provider of subscription management systems who can provide all components and required functions “out of the box”.