Manufacturing in a Subscription Economy

Zipcar

For more than a hundred years, makers of razors have used a standard marketing model. Sell the razor handle at a low price, and lock users into a proprietary razor blade cartridge and a higher margin.

Dollar Shave Club is challenging that model. This web retailer uses scrappy viral video marketing to disrupt the way razor blades are bought. It doesn’t sell handles at all. But you can sign up for a razor blade subscription service, with three tiers of pricing, all at much lower cost than most other razors currently available on supermarket shelves.

The lowest tier is the one dollar per month deal, for which you get four basic cartridges mailed to your home. For six dollars you can upgrade to four-blade razors, and nine dollars a month will get you top-of-the-line six-blade razors. Having a stack of cheap fresh blades in the bathroom drawer sure beats making an emergency run to the pharmacy and suffering sticker shock.

The subscription-based relationship has been a staple in the media and software industry for decades, and it’s beginning to take hold in other industries too.

Let’s take automotive. Think about buying a car versus subscribing to a transportation service. Zipcar—introduced in Boston a decade ago and now an international success—offers access to short-term vehicle use in major cities.

It’s a popular solution for people who don’t own a car but need to travel where public transportation doesn’t connect. Pay a membership fee to belong and buy only the hours of transportation you need. Zipcar uses over 30 makes and models of vehicles, including BMWs, Audis, and Prius hybrids.

Home appliances offer another great opportunity for a subscription-based system. A monthly subscription fee could cover maintenance and repairs, and replacement if necessary. After a certain time, consumers could trade in their old noisy fridge for a new model.

This business model is expanding as companies look for ways to grow market share and create a predictable revenue stream.

Analyst firm Gartner predicts that by 2015, 35 percent of large global companies with non-media digital products will generate incremental revenue of five percent to 10 percent through subscription-based services and revenue models.

Subscription revenue streams can help to smooth out seasonal revenue peaks, generate incremental revenue from add-on services, and strengthen the customer experience and customer loyalty, according to Gartner’s Building a Strategy for the Subscription Economy report.

A subscription model can also lower the upfront or apparent cost of a purchase, according to Denis Pombriant, principle consultant with Beagle Research and author of The Subscription Economy: How Subscriptions Improve Business.

“It creates a larger market to sell into and it creates more demand,” Pombriant says. “During the economic downturn, subscriptions have been a great way for vendors to keep demand up and keep their operations running.”

Subscription-style relationships show up in unlikely places. For example it’s common for aircraft manufacturers to provide “power by the hour” service for business and commercial aircraft. For a fixed fee, the engine manufacturer provides maintenance, support, and even full engine replacement when it’s needed. That way jet operators can forecast costs.

Capgemini Consulting’s Martin Putters notes that the subscription economy also feeds the cradle-to-cradle manufacturing movement. Rather than disposing of products when they fail, a subscription service can ensure a milling machine or industrial pump is automatically replaced at the end of its life.

“There is a very clear connection between the concepts of cradle-to-cradle and subscription economy,” Putters says. “When thinking about reverse logistics to realize reuse of materials it is easy to take the step of linking subscriptions to the usage of certain products.”

Cradle-to-cradle could also be good for the environment. Desso, a Dutch carpet manufacturer, is boosting its recycling efforts to use 100 percent recycled materials by 2010.

“The most important thing is we move from a linear economy to a circular economy,” says Desso CEO Stef Kranendijk.

Whether manufacturers choose to embrace the subscription model or not, consumers will be more likely to demand it moving forward.

“It’s really a subscription culture and even companies that don’t offer subscriptions have to deal with customers who understand subscriptions and want to know why they can’t get products and pricing and service and support more attuned to their needs,” Pombriant says.

The next big thing for subscription economy could be surprising.

Manufacturers should think creatively, Pombriant says. Ask how you can deliver your product as a subscription, he says. “If you can answer that question you probably have a new market.”

Photo credit: Andrew Harrer/Bloomberg via Getty Images

About Gary Wollenhaupt

Gary Wollenhaupt is a freelance writer covering innovation in manufacturing, marketing, and sustainable green building technology.
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One Response to Manufacturing in a Subscription Economy

  1. RazorBladeClub.com is an example of how consumers want to move towards a subscription based economy. Its’ about saving money and value also.

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