Catalant White Paper Details Shift to Outcome-based Subscriptions in the Industrial Sector
There’s a change occurring in the manufacturing and heavy equipment industry. The traditional business model that long-time industry leaders are accustomed to is morphing. While this shift may seem like a threat to industry incumbents and the ways they operate, this disruption is actually creating new opportunities for the many enterprises within the industrial sector.
Catalant helps leading enterprises capitalize on new opportunities like those created by the emergence of subscription-based models and the increasingly influential industrial Internet of Things by providing access to the exact expertise or knowledge needed in real-time. Energy and industrial executive Tulio Scacciati is one of over 30,000 experts in the Catalant network who brings his expertise to bear on projects with leading industrial sector clients. With Tulio, we’ve developed a new whitepaper including case studies and best practices for industrial enterprises witnessing this business model transformation. Tulio’s research highlights that the changes underway are opening doors for enterprises that are ready and willing to accept disruption.
Traditionally, original equipment manufacturers in the industrial sector have seen their products as a foundation for their servicing revenue. Manufacturers sell their products at low, single-digit margins – or even at a loss. Later, the manufacturer makes a profit from additional sales with higher margins – think spare parts, preventative maintenance, upgrades, and repairs. In this business model, original equipment manufacturers aim to increase their volume of installed base sales to expand and grow their market for higher margin services. In other words, these manufacturers sell more products at a lower price, and then they plan for servicing revenue to make up for their losses.
The industry is being transformed by the introduction of subscription-based business models. Similar to subscriptions in the software industry, a subscription, or “all-inclusive” sale in the industrial space brings consistency and predictability to both the enterprise and its customers’ cash flows. Today, subscription-based models are commonly found in capital-intensive industries. This is because high capital expenditures (CAPEX) can be easily replaced by contractual agreements that last for years at a time. These contractual agreements can be considered an operating expense, and enterprises manage them through yearly budgets and negotiations. Through budgeting and contract negotiations, enterprises sometimes even eliminate the need for a lower product cost overall.
Moving from a business model that operates on CAPEX to a business model that simply manages operating expense (OPEX) contracts is changing how customers purchase products and engage with the enterprise. With contractual agreements that mimic subscriptions to the manufacturer’s product, customers can improve and plan their cash flow, cut down on business risk, and increase their productivity due to the improved reliability of the service or product. Large global manufacturing companies are embracing this subscription-based model. As this shift begins to take hold, industry leaders expect that businesses will shift from products to outcome-based services, where businesses compete on their ability to deliver measurable results to customers.
This shift is also a result of the industrial sector’s increasing adoption of the Internet of Things (IoT). The introduction of IoT in this space and its use of predictive data, analytics, and information in the cloud allow industrial enterprises to track and analyze pertinent information in real time. There will be room for both legacy products and new technology as the IoT claims a bigger stake of the market, and this allows industry leaders more readily participate in and adapt to the change.
The shift to an outcome-focused economy and a subscription-based business model creates benefits to both its adopters and the adopters’ customers. Still, there is some uncertainty about how adopters will take on this challenge.
The continued development of the industrial IoT is causing companies to re-think the fundamentals of go-to-market strategy. This shift represents an enormous opportunity for companies in the sector and places a premium on the ability to execute quickly. Catalant looks forward to putting your teams in a better position to get work done in a fast-paced environment.