Growth Insights for CEOs

Profitable, Recurring Revenue Streams - Part 2

Posted by The Chief Outsider



business-as-a-service.jpg

Transitioning Your Business Model to Grow Your Business-as-a-Service

More and more companies are realizing that transitioning their business to an as-a-Service model is the answer to driving higher growth and more profitable and stable revenue streams. In Part 1 of this article series, you learned how to know if it's time to think about embracing an as-a-Service model.

In this installment, we will cover what an as-a-Service business is, who is doing it and why. Future articles will cover how to take your as-a-Service business to market efficiently and effectively and what are the key metrics to track and capabilities to nurture to ensure you execute this transition successfully. 

This series makes no assumptions about prior experience with as-a-Service models. It is equally applicable to companies that have software or technology at their cores and those that don’t. A massive amount of content has been written on related topics and the main goal here is not to repeat or replace that, but to simplify and help you begin – or at least consider – the journey.

Part 2 – What is as-a-Service and Why? 

To put it simply, an as-a-Service business model is one where customers ‘subscribe’ to an offering that they receive the value for over time vs. paying a one-time fee and receiving most of the value up front. Such business models have been used in the classic services sector for many years but the more recent innovation is that companies that had previously sold their offering as a one-time ‘product’ are now converting to subscription business models. 

Often such models are referred to as Something/Anything-as-a-Service or XaaS. For the remainder of this series I will use the XaaS acronym to generically refer to such models. 

Somewhat related to this concept are so-called ‘on-demand’ businesses that may not charge an ongoing subscription fee but are always available to use, just like a XaaS service would be. Obvious examples are Uber and Lyft, which provide on-demand Transportation-as-a-Service. Although Uber does not (currently) charge an ongoing subscription fee to its customers, many elements of this model are similar to a true XaaS business and much of the discussion in this series still applies.

Who is doing it? 

XaaS is not a new concept. Early examples of the business model include:

  • Office machines/copiers (initially selling subscriptions to service and supplies, and later to the entire solution including the machines themselves)
  • Cleaning services (where individuals or businesses subscribe to daily or weekly cleaning of their homes or businesses)
  • Magazines and newspapers have long delivered Information-as-a-Service via subscription
  • ‘Club’ models including book-of-the-month and record-of-the-month clubs that have been popular for decades

Beginning in the late-1990’s, the easy distribution of digital content enabled by the Internet has created many consumer-oriented XaaS offerings, some of which you probably use without realizing they are XaaS, including:

  • Music subscription services like Spotify and Apple Music
  • Online subscriptions to newspapers and other content that used to be in print
  • Cloud-based storage services including photo and hard drive backups
  • Your Internet Service Provider (ISP) subscription is also an example of a XaaS model
  • Even social media solutions like Facebook can be thought of as examples of XaaS models. The only tweak is that – instead of paying with cash – users pay with their privacy and personal information, which Facebook then monetizes 

By the early-2000’s, software companies began offering their products as ongoing, subscription services (Software-as-a-Service or SaaS). One of the pioneers of this transition from installed, licensed software to cloud-based SaaS is Salesforce.com which was founded in 1999 and went public in 2004 on the tag line “No Software”. Since then, the majority of new software companies have utilized a SaaS model and most legacy software companies have been busy transitioning to that model. 

The current wave of XaaS model transitions is happening in businesses that you would not automatically think of as being obvious candidates. These include:

  • The incredibly popular Amazon Prime offering, providing the outcome of Free/Fast-Delivery-as-a-Service (among other benefits)
  • Venerable General Electric’s push to replacing the outright sale of jet engines with the subscription-based ‘power by the hour’ concept. Similarly, GE’s lighting division has now become an Energy-as-a-Service business
  • And the recent repositioning of office supply retailer Staples to become an ‘office services provider

As you can tell from these examples, almost every possible kind of business is embracing the XaaS model these days. No matter what the offering, the advantages to both buyers and sellers described next remain fundamentally similar.

Advantages of XaaS 

Markets (including both sellers and buyers) are increasingly adopting XaaS models due to some very clear benefits.

Advantages for buyers:

  • Lower up-front costs – customers pay over time as the value (outcome) is received
  • Less risk – ability to (eventually) turn off the service when it’s no longer needed
  • Higher quality – service providers are highly motivated to retain the ongoing business of their customers

Advantages for sellers:

  • Subscription services provide more predictable, recurring revenue streams (and what business doesn’t want that!)
  • Higher margins in the long run – as sales/marketing costs are mainly incurred upfront vs. a non-subscription model where the offering is re-sold/re-purchased every month, quarter, or year
  • Greater chance to up-sell or cross-sell to customers – and customers are ‘stickier’ 

The point about customers being ‘stickier’ is worth elaborating. This is a funny way of saying that customers are stuck with you for the long term. For offerings that aren’t sold as a subscription, the buyer must make a repurchase decision every single time. At that decision point, it is possible (and often tempting) for the buyer to reconsider other options or discontinue the new purchase altogether. But with the subscription model it is simply easier for the buyer to continue with the status quo (as long as the outcomes remain valuable).

From your own personal experience, how many subscriptions of all sorts (i.e., magazine, cable, phone) do you stick with just out of natural momentum? If you are like me, it’s quite a few. The same dynamic applies with B2B purchases where the inclination to stick with what works today is even stronger since the risk of change can be significant. 

Sounds good? Increasingly, the market thinks so too.

Characteristics of a XaaS model

In general, XaaS models exemplify the following four characteristics:

  1. Provide recurring/subscription revenues. Customers agree to pay a recurring fee for ongoing access to the offering. Frequently such models charge a monthly fee with a minimum one-year commitment to the service. (More on XaaS pricing in future installments of this series.) Note that many companies that provide what we think of as ‘services’ are not automatically XaaS businesses. For example, a house cleaning service that offers $50 cleanings at customer request is not a XaaS business – although it may be an on-demand business if the service is truly available whenever the customer requires it.
  1. The focus is on outcomes, not features. Successful XaaS models think of themselves as actually charging for the value of the outcomes that the service provides, vs. the features of the service itself. For example: meal delivery service Blue Apron enables customers to subscribe to regular deliveries of fresh, ready to cook groceries along with an associated recipe. But what Blue Apron customers are buying is not really a box of food and a recipe, what they are paying for is convenient luxury, fun, and the satisfaction of knowing they are supporting local, sustainable farmers. The food box is simply the ‘outcome delivery mechanism’. 
  1. The offering is standardized in some way and not totally bespoke. The economics of XaaS businesses make the most sense when the offering is repeatable at some scale (either to the same customer over and over again or to multiple customers or, preferably, both). Back to the Blue Apron example: customers may believe they are getting a meal personalized to their requirements but, in fact, Blue Apron is delivering the same food box to thousands of customers every day. 
  1. Offerings tend to be complete or bundled solutions. To deliver the outcomes discussed in the second point, the offering needs to be capable of delivering at least some of the value/outcomes itself, and not just as a piece of a larger offering. That is why Blue Apron does not just deliver boxes of groceries to clients but also includes the recipe on precisely what to do with the contents. You can further enhance the experience by joining their wine club ‘service’. A delivery of the food, alone, would not produce the desired outcomes.

To better assess how closely aligned your current business model is with a XaaS model, complete the following table. For each factor, assign your company between 0 and 10 points. 

xaas-business-model.png

Score yourself as follows:

  • 0 to 10 points – There is significant work to do to convert your business model to XaaS
  • 11 to 29 points – Your model and the market you play in is potentially ready to embrace XaaS
  • 30+ points – With a few tweaks and improvements, you are nearly already there 

Note that – even if your business has a current score of zero points – this does not mean that a XaaS transition is impossible or ill-advised. The advantages of such a transition may still be very significant for you. But it does mean that the level of change that will be necessary is greater and the path ahead will be somewhat more challenging. In the next installment of this series, we will break down that path into more detail.

If you have made it this far, subscribe to my blog at the bottom of this page and read Part 3 of this series that will dive more deeply into specifically how to convert your business to the XaaS model and how to take it to market efficiently and effectively.

xaas-ebook

 

Topics: CEO Choices, CEO Marketing Vision, CEO Business Strategy, SaaS

Receive New Insights Automatically

Connect With Us

Popular Posts

The Growth Gearstm

Because the best run companies often have the hardest time growing. Check out our Amazon bestseller and download a FREE sample!

Book-Mockup_02-transp