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Sticking Point 21437759

The Sticking Point with Industrial Subscription Models

Jan. 7, 2022
Companies like Volkswagen and Cisco already know this: Nothing will accelerate until an organization's executives draw a line in the sand.

The race is on. The subscription model is moving from B2C to the B2B and industrial world. But there is a major difference. Most industrial companies have a different DNA and experience a tough time transitioning to recurring business models and deploying best-in-class subscription offers.

People often ask me what the number one sticking point is. My answer is simple. Nothing will happen or accelerate until an organization’s top executives draw a line in the sand and publicly state that subscriptions are a strategic goal for the organization. I call that the top executive mandate. It gives a direction to the digital, marketing, software and sales teams but also to the support function.

For example, on April28th,  during a second-quarter fiscal year 2021 conference call with financial analysts, the CEO of Rockwell Automation announced the goal of reaching 10% of total sales in the form of annual recurring revenues by 2025 (Rockwell Automation - Q2 FY21 Earnings Conference Call, p16). That goal did not go unnoticed by the organization. It put the teams in execution mode and generated a lot of buzz.

Putting such goals in place is the best way to stimulate thinking and action when things are stuck in perpetual pilot or conversation mode. For industrial companies, transitioning to different business models while maintaining a successful status quo is extremely hard. It challenges the culture and makes team uncomfortable. So, the executive mandate is key to give them the motivation to reach a goal and to make the effort to do so. There is no more discussion or hesitation.

Here are other examples of executive mandates in the industrial world worth noting.

Vizio Holding Corp. is ramping up investment in its software business amid growing consumer demand for streaming content. Vizio, which was founded in 2002, earns the bulk of its revenue—about 90%—from selling hardware such as internet-connected TV sets and sound bars, but its software business promises fatter margins. The software unit’s profit margin was 73.7% for the quarter ended March 31, substantially higher than Vizio’s hardware business, at 10.6%.

Volkswagen will ramp up its software, mobility-as-a-service and battery tech to stay competitive in the coming decades. Laying out the company strategy recently, CEO Herbert Diess emphasized a top-to-bottom transformation in everything from manufacturing to revenue streams. If revenue was historically driven by sales of internal combustion engine vehicles, Volkswagen CFO Arno Antlitz said the rest of the decade will bring income derived not only from electric vehicle sales, but also software, autonomous driving and even ridesharing. To that end, Volkswagen has been busy, planning six battery Gigafactories in Europe and an €800 million ($944 million) hardware platform research and development facility in West Berlin. The company is also beefing up its in-house automotive software arm Cariad, which VW said could generate as much as €1.2 trillion ($1.4 trillion) in revenue by 2030, via subscriptions and other sales.

Cisco’s shift to cloud and subscriptions really took off in 2016, when Chuck Robbins took over as CEO. Robbins was an early and vocal evangelist for Cisco becoming a software and subscriptions company, and though the transition had a flattening impact on short-term revenues at first (because they were no longer getting that big up-front hardware cash), it was clear from the get-go that Robbins was committed to taking Cisco on the subscription economy journey. “We believe we will transition more of our revenues to a software- and subscription-based model and accelerate our shift across our portfolio,” Robbins said in earnings call at the time. The numbers prove his point. Software subscriptions now make up 78% of Cisco’s software revenue, and the company is on track to meet its pledge to have software and services account for 30% of its total revenue over the next three years.

Digitization means that experiences and knowledge from manufacturing are shared in real time, both internally and externally and between people and machines. The growth ambitions in the digital area are high in both Sandvik Manufacturing Solutions and Sandvik Machining Solutions. The 2025 target for the business area segments is to have total sales of SEK 5 billion connected to digital solutions and services. “It is not a big number for Sandvik as a group, but it is an important area for the future and partly a new position for us,” Widing said in a statement. “We have a history of innovation, so this is a natural extension of our heritage in engineering.”

There are other examples. Recently GM announced a Netflix-sized in-car subscription business by 2030. In 2017, Volvo’s CEO announced that 1 out of 5 cars would be sold via monthly subscriptions by 2023. These public announcements are of course done to inform customers and trade partners of the organization’s strategic intentions. But they also send a strong signal to internal teams that there is a to get on board the subscription bus and get in execution mode.

Stephan Liozu is founder of Value Innoruption Advisors, a consulting boutique specializing in industrial pricing, digital business and subscription-pricing models and value-based pricing. Stephan has 30 years of experience in the industrial and manufacturing sectors with companies like Owens Corning, Saint-Gobain, Freudenberg, and Thales. He holds a PhD. In Management from Case Western Reserve University. He has authored several books, including Monetizing Data, published in 2018. His latest 2022 book is The Industrial Subscription Economy: A Practical Guide to Designing, Pricing and Scaling Your Industrial Subscription.

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