24/03/2014

By Kevin Kimber, VP EMEA, Zuora

In the 21st century, changing consumption habits are changing the SME business landscape, perhaps forever. There is a massive shift underway in the way we – as both consumers and businesses - are looking to consume goods and services. In particular, we increasingly value the convenience and flexibility of subscribing, renting or sharing services through pay-as-you-go models rather than buying products outright.

Today, we subscribe to streaming music on-the-go, rather than build up bulky CD collections. We rent rooms, flats and houses through services like AirBnB on a per-day basis for exactly the time we need them. In business, we share our workspace with other companies to have better control over our cap-ex. Why invest in digital storage when we can use a subscription service like Box? And if we perceive transaction costs as too high, we’ll move to a competitor with a better offering, because we aren’t locked into long-term contracts.

This trend is already impacting every industry - from financial services and healthcare, to media, retail and technology. And it means the rules of business have had to be fundamentally rewritten from the bottom up. This provides significant opportunities – as well as new challenges - for the SME community.

A world subscribed

Indeed, a recent survey of 293 business executives in the US, UK and Australia, conducted by the Economist Intelligence Unit, demonstrates the extent of this shift in the business landscape. Four out of every five (80%) businesses surveyed are currently seeing changes in how their customers prefer to access their services. As a result, over half (51%) are integrating new pricing and delivery models such as subscriptions, sharing and rental goods and services, rather than selling products outright.

The survey also makes it clear that it is not just consumer and business demand for more flexible and tailored services which is driving this phenomenon. Businesses are also recognising the significant long-term economic benefits they can gain from tailoring their business models to new consumption habits. 12% of respondents say these new delivery models already represent more than half of their revenue. Critically, this number is expected to grow rapidly, as 84% anticipate that this share of revenue will increase somewhat or significantly over the next two years.

Out with the old, in with the new

However for this to be realised, SMEs will need to transform significantly. Not least, notions of how a business should be run and managed must change. Success is no longer gauged by counting how many product units have been sold. Rather, success derives building valuable customer relationships, which only come from gaining greater customer insight and using this to build mutually beneficial two-way relationships. You need to be measuring how many customers are using your service on a recurring basis and how successfully you are monetising those recurring relationships.

SMEs will be measured on the forward-looking revenue potential of their customer base, rather than backward-looking revenue generated from shipped products. The health of a business is shown by what it is likely to make this year, the next year and the next, not what it has shipped, earned and spent in the previous period.

It also means that the legacy systems that SMEs once ran on must be re-thought. Enterprise resource planning (ERP) suites in particular were designed for the 20th century manufacturing era rather than the 21st century services-based world we now live in. ERP systems don’t help you price recurring services, don’t support a model where customers are amending their services, and don’t provide key metrics such as churn or renewal rates. These systems are just not adaptable for a new economy where flexibility is critical to business competitiveness.

The changes in how consumers prefer to access goods and services open up a great market opportunity for SMEs. However, they require new models of thinking, and new flexible systems which allow you to understand your customers and tailor and price your services to them specifically. This change won’t be easy but, in today’s transformed business climate, success depends on it.