Last week, Zuora, a publicly traded company that helps businesses offer subscription services, released research showing that in its customer base IoT subscriptions were growing faster than those for telecommunications services, software as a service, and many others. Part of this growth comes from the fact that these IoT subscriptions are newer and smaller, thus any growth will look huge.
The subscription economy index defines IoT companies as original equipment manufacturers (OEMs) that are taking advantage of sensors and connectivity in order to diversify their revenue mix with digital services. An example would be GE charging for hours of uptime on a jet engine as opposed to charging for an engine.
Tien Tzuo, CEO of Zuora, says that the trend toward selling subscriptions as opposed to physical products is disruptive for industries but one that companies aren’t jumping into with both feet. While some are — certain car companies, for example, are offering the option to subscribe to a car service instead of buying a car — he thinks most businesses will have to offer an array of services that replace the need for a physical product.
“We don’t think those [one-to-one replacements] are long-term plays because it doesn’t fundamentally change anything,” Tzuo says. “You just end up paying more for a subscription. It’s more interesting to see products that are becoming part of systems, where I can monetize a system and add on services attached to that system.”
As an example, he cites a Fender guitar that a customer would buy that may or may not have connectivity. Fender can now offer buyers a series of how-to classes around guitar playing through an app and charge for that. Customers get a value-added experience associated with a device and product makers get a direct relationship to a customer.
And not all companies want to monetize those direct relationships yet. In appliance brand Kenmore’s case, connectivity is about better understanding how a product works and possibly helping determine when to call for a repair.
Tzuo sees this as the first or second step toward transitioning from a product company to a services company. Most companies are at that first or second step already, but may never move beyond them. So while there are tons of businesses in the media and software sectors that have moved from selling a product like an album or a box of software to selling a subscription to those items in digital form, purely physical product makers may stop at add-on products.
That’s because physical products are such a huge element of the customer experience. Music and software transitioned easily to digital because you can listen to a song on the computer or download software online. You can’t turn a bike or a couch into a service without incurring costs associated with building those things. And that affects the shape of your business.
Which, says Tzuo, is why we see a lot of the industrial giants and big consumer brands spinning out innovation companies aimed at tackling the services and subscription ideas. Having a separate company is easier than trying to manage a subscription business and a product business at the same time.
As a dedicated lover of physical products, and one for whom ownership of a device still seems important, I’m glad we won’t move to an all-subscription economy anytime soon.