Following on from my last article on using technology as an enabler, this article will explore how technology business models are being used in businesses that aren't typical tech businesses.
The subscription business model
Many people are familiar with the SaaS software business model. SaaS means software as a service, where instead of buying software and then installing it on your own infrastructure, you pay a monthly fee and get the software delivered via the web (the cloud) running on someone else's infrastructure. If you use accounting products like Xero or QuickBooks Online, or Google for business, then you are paying under a SaaS model.
The ‘as a service’ business model is otherwise known as a subscription model. Subscription is very powerful in the sense that it allows people and businesses to access the products and services they want without the often high capital requirements. Instead of large purchases going through as a capital cost and sitting on the balance sheet, it is generally an operating cost and is expensed. In essence, we pay for what we use by ‘renting’ the service for as long as we want or need, and can increase or decrease the level of service - or cancel it entirely - as we see fit.
The benefits of the subscription model
SaaS has democratised software by enabling the mainstream small and medium-sized enterprises (SMEs) access to solutions that were previously the exclusive domain of big business.
Take, for example, simPRO Enterprise. Before we switched to a SaaS model, we used to sell licenses (known as the perpetual license model), a typical deployment for an average small business costing $20,000 to $30,000. Now, for that same system on a SaaS model, a business is typically looking at less than $5,000 for setup and training and a only few hundred dollars a month. Now that it is within reach of the average SME electrical contractor or plumber, we have more than tripled the number of new clients we bring on each month. All because of a change in business model.
This model falls into what is known as the subscription economy and is now being applied by businesses of all types, not just software companies. Merchants that offer subscriptions enjoy many benefits, such as:
- Certainty of revenue - instead of starting each month with zero revenue, you start the month knowing how much you will bill and collect. That means you can commit to a certain amount of expense or debt to fund and grow the business, and know the labour you need.
- Greater engagement with clients - you deal more frequently with your customers under a subscription model.
- Additional revenue streams - when you have the trust of your customers and have proven to deliver, it is often easy to promote different services or move customers up to different tiers of service.
- Company valuation - often the value of your business increases as it can now be valued on future revenue, not on past profits or a discounted cash flow basis. That certainty of revenue is very attractive to the right buyer.
Can a contracting business operate with a subscription business model?
The subscription model has been around for a long time with the likes of newspapers, magazines, and even insurance. Now, it’s pervading more business types than ever before. Take a look at the following companies out of the field of software that have embraced business as a service:
Audi are currently trialling a subscription model that allows clients to pay a monthly fee to use the car they want. For example, you may be on a bronze level subscription and pay $X a month for the choice of one of the lower model cars; let’s say you choose an A3 because you live in the city and it’s where you do most of your driving.
Say you have family coming to stay for a few weeks. No problem - just upgrade your subscription plan to silver, take the A3 back, and pick up an A6. Or, if you're going away for a long road trip, simply upgrade to gold, and swap the A6 for a Q7.
All servicing is done by Audi, as is roadside assistance, rego, and insurance. You never own the car, but you never need to worry about it either.
simPRO user Blui has modified the acronym of SaaS to Security as a Service. Blui offers a range of access CCTV and control monitoring systems that have a subscription model attached, making it easier to choose them to supply, manage, and maintain your CCTV and access control.
Don’t have time to do all those mundane chores around the house like cleaning the gutters, changing light bulbs, and checking smoke detectors? Then why not pay a subscription to have it done monthly by someone else? You can with My Hassle Free Home.
Freshly Roasted Coffee Beans
Even Starbucks is getting in on the act with a subscription service to have freshly roasted coffee beans delivered to your place each month. Never drink stale coffee again!
Men's grooming as a service? Yes: with Dollar Shave Club, pay a monthly fee and have razor blades delivered to your door. Pretty simple, but pretty darn clever.
Why does the subscription model work?
Great businesses reduce friction and increase flow. Subscription models can help you achieve that. The two primary functions that make this model successful are:
- Plain old price elasticity. If you reduce the upfront cost, you get more clients.
- Reducing friction in the transaction. If the customer is already paying you each month for razor blades (or security equipment or Audis), then it is easier for them to pay you again next month than to look for an alternative. To leave you they will need to overcome their natural inertia to actually change vendors and cancel their account with you.
It's about making it easier for your clients to choose to use you, and then to continue to use you for the service.
The subscription model in your trades business
Find a part of your business where you can lock in the capacity to have something delivered as a service, making it easy for clients to spend money with you each month.
Consider the capital cost that may come with that. In the case of Audi or Blui, they must own the equipment before they can offer it on a monthly plan. So consider items that you already own, or talk to a finance partner that could create a fund for you to finance the equipment while you build the steady recurring cash flow.
Be prepared that some accountants and financial advisors may not be up to date with the demand for and acceptance of the subscription model, so be sure to help educate them with this article and other easily available research on the internet.
Don’t have any of your ideas? Here is a list of 10 businesses you can get into.