The expert view: digitising business – transforming business models from products to services

The expert view: digitising business – transforming business models from products to services

Digital transformation is driving businesses to rethink their products and offer them as services. However, this is more complicated than it first appears. It means rethinking customer needs, value propositions and pricing. Opening a second Business Reporter breakfast briefing on the topic of digitising business, Jamie Longmuir, of Gemalto, asked an audience of top executives at London’s Goring Hotel how they are adapting to changing customer behaviour.

“Customers don’t talk in terms of ‘problem’ and ‘solution’,” said an attendee from a major enterprise software company. Instead, the vendor needs to ask what they hope to achieve and work towards that. Digging deeper, it becomes clear that customers expect vendors to deliver value more consistently.

One attendee said his company asked its customers to consider a Venn diagram of their needs and the product’s features. Features outside the circle of the customer’s needs are ones they shouldn’t pay for. Too often, the intersection between features and needs is small.

Putting the customer first

Attendees said they are seeing a shift from an application-centric approach to a value-centric one. Customers using a service like Amazon’s AWS, for example, choose only the components that deliver value, giving them a clear ROI because they are not paying for features that they don’t use. At the other end of the scale are disruptors taking one niche process and doing it really well. Both solutions are offered as subscription services.

It’s easier for venture capital-backed Silicon Valley start-ups, with no legacy business to protect, to develop these services, attendees argued. Established firms, in contrast, face a tricky cash flow period as they transition from a product-based model, in which they get paid for an order, build the tool and then supply it, to a software-based one, where they build the tool and recoup the cost over time through subscriptions.

A change in development processes is necessary, moving away from big products launches every few years to a more regular roll-out of smaller, better targeted products. This poses a workflow management challenge for firms that have been used to working in a certain way for a long time. Getting the right packaging, pricing and billing for software in today’s economy is critical.

Creating a subscription service

Pricing is a challenge in itself. A subscription service is not about taking a product, dividing the price by seven and calling it a ‘seven-year subscription’. It requires a close fit with customer needs, quick fixes in the event of problems and a continual assessment to ensure that it is delivering value.

The vendor has to stay engaged with the customer, attendees said. As one attendee said, focusing on continually offering value makes vendors more accountable and prevents them taking customers for granted. However, vendors should be aware that customers can take subscription services for granted, forgetting how significant their problem was before they subscribed. Good customer communication means also reminding them of the benefits they are getting.

This requires an organisational shift. Companies that are used to selling products – especially hardware – will need to rethink and perhaps retrain their sales teams. Shifting to a subscription model can be a challenge for sales staff. One attendee said that in his experience it can take a year for a sales person to adjust to selling this way.

He added that companies must “operationalise the entire sales process for subscription” if they are to make it a success. This is difficult and easily overlooked. Vendors need to consider where they can automate parts of this process and what tools will help them.

The subscription customer is an informed customer

One benefit of the business model shift is that vendors have much more data that they can use to help them shape and sell the service. Knowing how the service is used helps not only with pricing but also with pro-active maintenance, service contracts and product management.

It can also be useful to share data with the customer. An attendee from a global enterprise software retailer said that understanding how they use their subscription would tell companies whether they are getting maximum value from it.

That leads to considering consumption-based billing, which customers are becoming more interested in. For the vendor, that requires a focus on software license management – often a cross-functional initiative that means teams across the business need to understand the underlying strategy. Then they can consider multi-tier sales channels, electronic software distribution and, along with those features, retain the flexibility in their licensing models to ensure that customers get what they want.

The detail of switching from a product-based model to a service model is challenging. Businesses require an in-depth understanding of both their customers and their product. What are the customer’s real needs and how does the product address them? Which parts of the product are ‘repeatable’ and can be offered to other customers?

There are tools available that can simplify, automate and control key parts of the process and vendors should add these to their toolkit where they can. Identifying the need to change is a vital step, but the change itself is still a big task.

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