Companies like Netflix, Spotify, and ClassPass have permanently changed how people consume entertainment and other services. Subscription services have become pervasive in our daily lives, and this trend is expanding into new realms.

Subscriptions and as-a-service business models have crossed over into the B2B world, where businesses want the flexibility and value of subscription and usage billing models from their vendors. As a result, businesses across many industries are looking toward subscription and recurring revenue models. Product-based companies, for example, are transitioning to bundles that include products, services, and subscriptions.

What is XaaS?

With an as-a-service business model, sometimes called everything-as-a-service (XaaS), a company sells and delivers its offering as an ongoing service in the form of subscriptions and pay-as-you-go models. A number of monetization methods can be used, including recurring fees, consumption or outcome-based fees, and one-time fees.

Instead of having customers pay up front for a product or service, the XaaS model allocates costs to better align with the ongoing value received by customers, especially with consumption pricing models. For customers, XaaS services offer the flexibility of making operating expense rather than capital expense purchases so that expenditures can be spread out over time.

From a vendor’s perspective, having predictable and reliable revenue streams makes it easier to manage cash flow. The investor community favors recurring revenue streams, resulting in higher valuations for companies embracing subscriptions. From a seller’s perspective, having a pay-as-you-go model makes it easier to sell to companies that don’t have the budget or appetite for purchases requiring up-front payments.

While the high-tech, media, and telecom sectors have been early adopters of as-a-service offerings, a growing trend is evident in industries such as transportation, healthcare, manufacturing, insurance, medical devices, and semiconductors. The shift toward as-a-service is more than a change in monetization models; this type of transformation requires a radical shift in mindset within the entire organization.

Organization-wide mind shift

As a company shifts to an as-a-service business, it becomes imperative to build long-lasting customer relationships. This type of change impacts all parts of the organization. Here are some examples of changes that departments will need to address to transition to a subscription-based model:

Sales

In an as-a-service world, increasing revenue per customer is important. As a customer pays more by adding new services or upgrading to a higher-priced plan, the uplift in revenue is amplified over time. Customer loyalty is built as a customer gains more value and remains a customer for a longer period of time. As a result, two types of sales are relevant for as-a-service companies: landing new logos to increase the number of customers and increasing revenues from existing customers with cross-sell and up-sell sales motions. Cross-selling and upselling activities can sometimes be part of the customer success area of the business.

Customer success

Customer adoption after the initial sale is important, especially since as-a-service models are typically based on subscriptions with usage components. If a subscription service is not adopted by customers, there is a risk of service cancellation or nonrenewal of contracts. Customer churn rate becomes a critical indicator of success since it has a magnified impact on revenue and margins. This means the customer success team must focus on maximizing customer adoption by ensuring that customers realize ongoing value from their subscriptions.

Marketing

When transitioning to an as-a-service business model, a company needs to redefine the value it is selling to customers. Marketing must create compelling product messaging and packaging that support both customer acquisition and retention activities.

Let’s walk through two examples.

If the customer wants to build and maintain home projects:

• Under the old model of marketing a product or service, the offer to the customer is to own the best do-it-yourself tool set available today.
• Under the new as-a-service model, the value lies in on-demand access to the latest physical and digital tools and services.

If the customer wants to increase office productivity:

• Under the old model of marketing a product or service, the offer to the customer is to purchase the best available office supplies today.
• Under the new as-a-service model, the value comes from on-demand access to the latest physical and digital office tools and services.

Based on these examples, the as-a-service option brings greater value to customers by:

• Offering ongoing, on-demand access to products and services as needed
• Providing access to the latest available products and services
• Offering multiple pricing options to meet customer needs while meeting profitability goals.

Finance

Financing will become increasingly complex with XaaS and subscriptions. Offering customers multiple pricing options (for example, pay-per-use, pay-per-outcome, reselling partner products, add-ons, allowances, one-time fee, recurring fee) and billing options (for example, advance payment, payment after usage, payment by installment) will complicate financial processes, including accounts receivables and revenue recognition. Processing customer-specific pricing or discounts must be automated rather than manually creating customer bills. Automating the end-to-end quote-to-cash process is imperative for minimizing revenue leakage while ensuring accurate customer billing and financial compliance.

Product development and R&D

Product-based companies need to change how they design and build their products. With the focus on customer lifetime value, products need to be designed and built to ensure ongoing customer satisfaction. The new business model also requires collaboration with other departments. For example, usage-based offerings require product design that includes Internet of Things (IoT) collection of usage data from the device while making sure finance has the usage data and tools to accurately bill customers. If maintenance services are included in an offering, the services and operations teams need to be notified to ensure timely and accurate service delivery.

IT

The transition to an as-a-service model requires infrastructure to support a company’s goals of acquiring and retaining customers. Subscription models increase the complexity and number of transactions that need to be processed. The business needs the agility and flexibility to create and launch new offers in real time while offering customers an optimized experience. As IT evaluates the technology requirements to support XaaS, new capabilities that will be required in the future – such as entering new markets or countries, integrating with other systems required for billing, and processing high volumes of transactions – can be quickly addressed.

Workforce mind shift

Shifting to an as-a-service model requires the workforce to develop new skill sets and encourage a culture of greater collaboration and adaptability. While the transition may present new opportunities for career growth and advancement, concerns about job stability and the reluctance to change may be seen. Effective change management, clear communication, and continuous learning are pivotal to the workforce’s well-being and a smooth transition to an as-a-service model.

Taking the next step toward XaaS

There is no one-size-fits-all approach to transitioning to as-a-service and subscription business models. Some companies decide to try it by adding a subscription component to their existing product or service businesses. Others decide to fully transform their businesses. Whichever approach is taken, it is important to realize that XaaS is a different mindset and way of operating a business. The most successful companies are those that invest time in planning, discussing, and making sure the entire organization is on board.