Recently, Ashok Kartham, Founder and CEO of Mize, answered questions about Manufacturer's Migration to Subscription Services during a roundtable at the Extended Warranty & Service Contract Innovations Conference. This Q & A highlights the optimal structure and advantages of Subscription programs for Manufacturers to increase product quality and recurring revenue, strengthen channel relations, and enhance customer’s experience and brand loyalty.
Q: Define a Subscription Service and how it differs from a membership program.
A: Subscription and Membership are used interchangeably and have many commonalities. Both have recurring revenue and provide specific services to customers. Membership generally includes access to the number of services or privileges, and Subscription typically includes reoccurring services, e.g., Amazon Prime is a membership, but you can have different products to be delivered by Amazon every month for a subscription. For automotive, AAA is a membership, but a service contract or maintenance program is a subscription.
Q: What's your perspective on free periods on warranty products?
A: Free periods can be offered to incentivize customers to sign up or subscribe to warranty programs. It is a frequently used method to have the customer try out services and see the benefits. Lowering barriers to entry will help sign up more customers to increase revenues in the future. Assuming the risk of claims in the initial months is lower, it is a good way for customers to get started with your warranty program. When utility companies offer the appliance protection/home warranty, they often provide a free period of 1-2 months as they already have established billing method after the free period expires (auto-renewal), without requiring another signup or order by the customer.
Q: How do you see subscriptions services affecting extended warranty since the user doesn’t really own the product?
A: If the Subscription includes repair protection, you can include the cost of the extended warranty in subscription fees. Subscriptions increase attach rates as more customers sign up, e.g., Apple or Samsung can add Apple Care in addition to the device as a service (2-3-year program) for an additional cost. We have seen examples of including Extended warranties with subscriptions or providing it as an additional line item. It depends on target customer segments, cost of the device, and current attach rates for the extended warranty.
Q: What about using free periods for customer acquisition or retention?
A: Free periods for customer acquisition is a good idea used by many companies. For retention, companies have used discounts for an extended period to retain. If customer churn is prevalent, customers may still leave after the free period. The models are used by media/cable/Satellite TV subscriptions frequently - often a free month to acquire, then offer a lower cost option or additional benefit to retain.
Q: Explain revenue flow when customers are allowed to cancel at will. Is there a grace period, like a 60-day notice?
A: You can have a minimum term period for subscriptions before allowing cancellations. Most companies may use a 1-3 year minimum subscription based on what is offered at the time of signup, e.g., if there is an installation or equipment cost to get started, you can have a minimum subscription requirement before cancellation. Some states also have cancellation clauses for consumers (not the businesses offering the subscriptions) to have an option to cancel extended warranty programs during the first 60 days. Companies have also used cancellation fees and clauses; it depends on your program's parameters.
Q: How do I manage products after the Subscription ends?
A: Many companies have plans to resell or refurbish the returned products when Subscription ends. There are also companies that help manage the reverse logistics and resale market based on the volume of products. The returned products can be offered at a lower price in other channels or other markets for low-cost consumer electronics.
Q: How do you see service (repair, returns, recycle, etc.) growing, or changing, as service contract and warranty programs grow?
A: Companies need to have channels and partners established to support growth in service contract programs. Depending on the product category, depot repair or field service channels can be established with dedicated or independent service networks. Companies need to establish the strategies and models as they grow the warranty programs for integration, service execution, and logistics.
Q: If competition gets in during the renewal process, what do you do with the old products?
A: It's often profitable for old products to be refurbished, remanufactured, and sold through different channels and markets.
Q: What about Subscription rates? Is it better to offer equal monthly payments throughout vs having a higher initial payment and lower monthly payments thereafter?
A: Generally, companies tend to have a lower payment offer initially to get customers on board. If you charge higher fees in the initial months, it may lower attach rates. The pricing models require more exploration based on product categories and value to the customers over time. Since the value of protection programs could be lower in the initial months, companies either tend to have equal monthly subscription rates, or higher fees in later months as the product ages.
Q: Do subscription plans typically offer any auxiliary benefits during the first-year manufacturer's warranty? Example: food loss protection for refrigeration with power surge-induced damage.
A: Many appliance companies are offering additional value-added benefits if a customer signs up for Subscription or extended warranty programs. Even though standard factory warranties may only cover break/fix, add-on subscription programs provide more value even during the standard warranty period, e.g., if an appliance has a one-year warranty, and the customer purchases a two-year extended warranty, the additional benefits could be provided during the first warranty period as well. This helps to show the value of paying for the add-on programs.
Q: What do you think the drivers are for the migration to subscription services?
A: For businesses, it's been a move from a capital investment to a usage-based one that aligns cost and value. For their customers, it's better value at lower costs, personalized offerings, and experience based on usage data. The new generation of consumers are using subscriptions for every aspect of their lives.
The drivers are even more prevalent today, providing predictable and recurring revenue streams and long-term customer loyalty. The value multiple of subscription revenue is ten times higher than one-time revenue for company stock.
Q: What do companies need to consider prior to moving to Subscriptions?
A: Subscription is not just about the convenience of the payment mechanism for recurring payment vs. one-time. It's the ability to build sustainable value long-term. Products are underutilized, under-maintained, and undervalued. By helping customers get a better appreciation for the value of the products, you can create a viable subscription model. Companies need to go beyond break-fix to focus on value and sustainable experience for the end customer.
It starts with knowing how products are being utilized, what value customers are getting, and when products are to be maintained. Connected assets using IoT can help capture this data reliably on an ongoing basis. The data can be analyzed to build a basis and find opportunities for an optimized subscription program.
Q: Talk about the technology needed to make the transition to Subscriptions?
A: Many people think the technology needed for subscriptions is just the ability to bill monthly. Successful companies have reinforced this model by focusing on billing. The technologies to focus on enabling your service delivery network to support the new subscription models. Most assets are sold through a dealer and retailer network, and products are serviced through the network. You may need to equip these channels to promote, services, and manage the subscriptions compared to digital services companies that sell directly to the end customers.
Customers now expect that every touchpoint along their journey with your organization will provide a consistent, reliable, highly convenient experience. Ensuring the expected customer experience is delivered throughout the lifecycle is key to the growth of subscription services.
Q: What core subscription models exist today?
A: There are a few core models for manufacturers to offer subscriptions. Converting from CapEx to an OpEx model shifts from charging a one-time payment to recurring payments for convivence. Adding Software (digital Content)-As-A-Service to their existing products and parts. Solution bundle offerings focus on the function of a product as the service, not on the product itself;
Wrapping contract-based services like maintenance and warranties together with a XaaS model, providing a complete bundle solution to the customer, is often most advantageous for both businesses and customers.
Q: How do subscriptions differ in the way consumers use products today?
A: Anything a customer uses and replaces over a predictable period is a candidate subscription replenishment model. Service agreements such as maintenance, usage-based like power by the hour, or outcome-based agreements such as product time, streamline regular maintenance cycles, and provide coverage for unforeseen issues.
Offer subscriptions to maximize the entire product/service lifecycle value. Integrate various offerings in addition to selling components, products, services, or parts to get to XaaS. This will lead to long-lasting customer relationships.
Q: How does the value proposition for Subscriptions stack up for consumers?
A: The value drivers include saving consumers money, adding value and convenience, and increasing product uptime. Payment aligns with product value - the consumer is more about usage versus ownership. Utility, mobility, convenience, and speed are all far more important to consumers today than product ownership.
There's also value in the context of product integration – when products are used in tandem with other products.
Q: Is there evidence that Subscription Services perform well for companies?
A: According to the Subscription Trade Association, 75% of direct-to-consumer organizations will offer subscription services by 2023. The subscription commerce economy has a 17.33% compound annual growth rate.
A few examples from Mize's experience; Mize enabled Blue Star, India's leading air conditioning and commercial refrigeration company, to manage Annual Maintenance Contracts to generate predictable revenue streams. Mize also enabled the subscription-based Service tips web portal and mobile app for professional service companies, their trusted technicians, and CSR's. Powered by the CX Platform and Knowledge Smart Blox to troubleshoot and service Electrolux's appliance brands.
Tim Nissen has built companies through marketing in categories including technology, manufacturing, energy, commercial real estate and business services.