How Changing Consumption Habits are Forcing SMEs to Rethink Their Business Model

17/04/2015

By Tamsyn Attiwell, VP Global Services, Zuora

In the 21st century, changing consumption habits are changing the SMB business landscape, perhaps forever. There is a massive shift 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. We call this new business environment the “subscription economy.”

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 physical 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 the internet of things. 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 SMB community.

Customer transformation

If SMBs are looking at the huge commercial opportunities of subscription services as a way to re-market their existing product catalogue, they’re completely missing the point. The broader message of the subscription economy is that stand-alone products don’t cut it anymore. Consumers, particularly younger ones, increasingly view owning something as simply managing the decline of a physical asset. They value access over ownership. According to a 2014 report by The Economist Intelligence Unit, 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.

Other than picking a colour or slapping a monogram on it, a stand-alone product can’t be personalised. A product can’t learn your behaviour and preferences. A product can’t be constantly upgraded, so that it gets better and better – instead, it simply gets obsolete, another victim of the old landfill economy.

The point isn’t to ask “What can my product do?” but rather “What does my customer really want, and how can I deliver that as an intuitive service?” That’s the secret to effectively monetising the subscription economy.

Relationship Transformation

However, one of the greatest challenges in moving to a subscription business model is the legacy systems on which businesses previously operated. Success is no longer gauged by counting how many product units have been sold. Rather, success is derived from generating recurring business, which can only come from gaining greater customer insight and using this to build mutually beneficial propositions. You need to be measuring how many customers are using your service on a regular basis and how successfully you are monetising those relationships.

To achieve this, companies need a new set of software applications that will facilitate their transformation. In the 20th century manufacturing era, SMBs invested heavily into enterprise resource planning (ERP) and customer relationship management (CRM) suites to support sales automation, customer service, inventory management, supply chains, and accounting.

These systems weren’t designed for the 21st century services-based world we now live in. In a world where every customer is now a subscriber, companies must adopt new technology to manage billing, collections, accounting and metrics on subscriptions that they can track through the entire subscriber lifecycle. An emerging class of software called relationship business management (RMB) systems achieves exactly this.

RMB systems lower the barrier for SMBs to enter markets, because they don’t require investments in hardware, infrastructure, logistics or warehouse space. As they are provided through the cloud as software as a service (SaaS), SMBs can simply switch them on and scale them up as necessary in exchange for a recurring fee. This enables SMBs to constantly change their products and services according to market demands, and create more tailored offers for their customers. Such a level of flexibility and scalability means SMBs can often be faster and more competitive than larger organisations.

Business Transformation

Subscription services have gone mainstream faster than expected and so have the opportunities they bring to SMBs. Companies that want to become or remain leaders in their industries and enjoy the financial, market, technology, and customer loyalty benefits of deep, long-term subscriber relationships need to begin planning their transformation today. As Charles Darwin once said, it’s those that are most responsive to change that survive — and in today’s constantly transforming business climate, change is the only constant we can be sure of.