The Shift Towards Subscription-Based Models

In the digital age, technology is transforming the way business is conducted at every stage of the supply chain. It’s the catalyst that powers a shared economy that values access over ownership.

This trend is reflected by consumers, who are showing a sharp preference for subscription-based services, while small and medium-sized companies in high-tech industries are embracing models where they pay for usage so they can keep pace with change and release capital to power their core businesses.

The shift from ownership to usage is a profound and secular change and the rise of ‘Software as a Service’ (SaaS) is redefining the way companies and their customers behave. Technology is the key enabler in a revolution that allows manufacturers to provide assets to people who need them on a pay-per-use basis.

“What happens in consumer space makes its way into the business workplace. The sharing economy is becoming more and more widespread in the business-to-business market. Businesses are more inclined towards subscription-type services than they were four or five years ago”, says Pascal Layan, COO of BNP Paribas Leasing Solutions.

Millennials are already accessing services on a pay-per-month basis and as they enter the workforce and become key decision-makers, the businesses they work in will adopt subscription based or leasing models which offer immediate access to essential assets without upfront capital investment.

Cloud-based services and Saas

This proliferation of subscription-based models in the business-to-consumer segment is particularly evident in the adoption of cloud-based and managed services, which have disrupted the traditional hardware market.

Pressure to reduce costs and meet the ever-growing demands of end customers are driving forces behind the acceleration of the use of cloud services.

SaaS allows users to subscribe and use application software in the cloud but subscription-based models also apply to cloud computing or ‘infrastructure as a service’ and operating platforms or ‘platforms as a service’.

These models mean users needing more computing capacity can access it quickly – at any level – and then reach the data they need from any device. And improvements in encryption and security mean server providers can ensure customers are better protected.

What it means for banks, start ups and SMEs

An improvement in security has been a significant factor in persuading the financial services sector, which has been slow to adapt to cloud services, relying instead on ownership of proprietary servers, to move towards a subscription-based model.

For big banks, the advantages of using cloud services, such as being able to deliver products globally and on-demand as well as reducing costs to meet tougher regulatory capital requirements, have been outweighed by risks associated with data leaks.

The benefits to start-ups and small and medium-sized enterprises are self-evident as they can rent the latest technology, thereby lowering the barriers to entry in virtually every industry so they are not constrained by working-capital requirements.

While leasing and subscription-based models used to be seen as expensive alternatives to asset ownership, they now have a critical role to play in a world where the sheer pace of technological development means small and medium-sized companies dare not risk spending capital on owning and maintaining their own servers.

What it means for manufacturers

The shift by customers from asset ownership to a subscription-based model distorts the business models of manufacturers, who bear the costs of production but only earn revenues on a monthly basis. Where previously companies would sell an asset and realise their invoice value on day one, under a subscription-type economy companies must have the capital means to offer the customer the service or the product on a two-year basis and expect that money on an annuity basis, month-by-month or quarter-by-quarter.

Often, companies don’t have the upfront capital on their balance sheet to offer a subscription service.

“Leasing solutions have a big part to play in helping manufacturers and resellers make the transition to a pay-per-month subscription model by providing capital to the manufacturer and its distribution channel on day one, then offering a hybrid subscription-like model to the end-user,” says Layan.

The so-called hybrid subscription-like model is particularly suited to hi-tech industries and highly regulated sectors such as medical supplies and biotechnology. In the radiology sector, the need to have perfectly maintained equipment that can be kept up-to-date and meet regulations favours a leasing rather than an ownership model. “Paying on a per-usage basis suits the healthcare sector, where companies adopt a budget approach,” says Layan.

Faced with this threat from the shared economy, whether for cars, equipment or music, traditional manufacturers are being forced to respond to, and embrace, different approaches to business and financing. Traditional industries that have made the leap include the automotive sector, which has responded to a market dynamic where consumers are no longer searching for ownership.