Forget Buying - The Future is Subscribed

Good morning. Remember when subscriptions were just for magazines or gyms? Now, everything has a “Subscribe" button. It’s your mattress, your oven, and even your toothbrush. Where will it end? As I write this, they are working on smart toilet bowls…

Subscription models are taking over the world in unexpected spaces. Everyone is trying to make consumers not own things but rent them and continuously pay for innovation and personalization.

This business model gained momentum in software—companies like Adobe started to move from selling software to selling licenses. Now that software companies have learned to love that model, we see more and more hardware companies experience the beauty of continuous revenue and much higher margins on software products.

It’s easy to see why the business model makes sense. But are consumers ready for this change? Let’s dive into the world of Everything as a Service - XaaS.

5-minute-read

Everything as a Service - XaaS is Flipping Ownership on its Head

Products are turning into services. Devices we buy can send information about usage back to the maker and give them ideas on how their customers actually use it and what manufacturers need to do to make it more personal and sticky.

The leading question among device manufacturers is, “How can we enter a digital services offering and get a cut of that sweet subscription business?”

First, let’s recap what we learned about the industry's evolution in earlier editions of this newsletter and then examine where it’s going and what customers think about it.

Recap - Hardware as a Service (HaaS) is rising

A company's goal is to form an ongoing relationship with its customers. With that, it knows it can create ongoing revenue streams. For hardware companies, this meant coming up with new features to add to the next generation of their products or innovate and create entirely new product lines.

Apple is not just making consumers admire their product design. It just as well makes businesses admire how sticky they made their ecosystem. Integrating iPhones and iPads into a list of software services around them. (iCloud, Music, Fitness+, TV)

Apple is a world champion in building an ecosystem that locks the customer in and makes it very hard for them to leave. This is how they innovate these days. Everyone is looking for how the iPhone gets better, but a lot of the magic happens on the platform level. “Why Apple’s Innovation Feels Different Now.”

Outside of the software ecosystem., AppleCare+ is another testament to Apple's understanding of the value of an ongoing customer relationship. Customers pay for ongoing protection and repairs because they want to pay that price for convenience.

In a recent edition, we talked about another specific example: Eight Sleep: Selling mattresses with an ongoing sleep-tracking and analysis feature.

We had a follow-up on “How Data is Redefining Consumer Hardware Business Models.”

TL;DR for all of the above on why companies love HaaS:

• Stable cash flow: A business can establish a stable revenue on top of occasional product sales.

• Data and insights: More consumers, more data → More insights drawn out of these to hyper-personalize the service.

• Loyal, sticky customers: Ecosystems make it tempting and easy for customers to expand in your ecosystem and make it painful to leave.

Businesses love this model. SaaS was step one. HaaS is step two. XaaS - Everything as a Service is step three.

When everything becomes a digital service, what implications does that have for consumers, and how will they react?

XaaS - Everything as a Service vs Subscription Fatigue

Great business case, alright, but who asked the consumers what they think?

It’s not just a mattress; it’s a sleep whisperer. It’s not just a toothbrush; it’s your AI dentist standing next to you while brushing your teeth, telling you why you need to floss more….

Personalization is awesome - everything is tailored just for you.

But is it all worth it for the customer? Subscription Fatigue is real. There is a limit to how many we can manage. The benefit of every new subscription we start is clear, but are some of the products worth the monthly payments?

From a Product perspective, these services solve pain points and add value, but they introduce new ones:

1. Never-Ending Payments

Monthly payments feel like a financial burden. What product do we truly own anymore? If I don’t pay my Whoop band subscription, it’s useless—maybe only a style element—an artifact of a canceled subscription.

2. Churn and Subscription Fatigue

Customers have to keep up with which streaming service currently offers a show or movie they want to see. All entertainment is scattered across different platforms that are not part of a bundle. Consumers are overwhelmed and constantly checking all existing subscriptions to ensure they don’t forget to cancel them after they are “done” with the service—for a while.

On the other hand, businesses need to mitigate for the churn. If they can’t consistently crank out compelling value, it’s easy for consumers to walk away.

3. Big Data Overload Causes Privacy Concerns

Any XaaS product needs data—lots of it—to be successful and drive personalized value. Consumers should worry about how their data is stored and protected. If it gives so many insights about all of us, it must be precious for others.

Non-tech companies expanding into this data-heavy tech segment must build the right expertise in-house to keep it safe.

Are the right security measures in place to protect it?

4. Managing complex systems and outages

The HaaS stack consists of hardware and software. Both must be in sync across firmware, cloud, and front-end applications. What if one of these systems fails?

How quickly can issues be identified? How proactive is customer support in handling premium subscription customers’ issues?

If customers pay monthly fees, are there service level agreements that guarantee uptime and money back if the service is down?

5. Loss of True Ownership Experience

The PC gaming platform Steam recently updated its shopping carts, informing customers that when checking out a game in their shopping cart, they own a license but don’t own a copy of the game. No more unrestricted ownership of software.

This prevents a backlash when an online game shuts down its servers and a game becomes unplayable. This happened recently when the publisher of “The Crew” delisted and shut down the servers for the game. Do you see the parallel?

What if I buy a fitness tracker that runs data analysis models in the cloud, but the company decides to shut those services down? The device becomes a dumb watch or, in Whoops’ case, just a wristband.

Companies will need to be upfront about functionality with and without a subscription. The HaaS model can reduce the sense of ownership and control and might make the products temporary.

6. Hidden Fees and Unexpected Costs

Connecting with the point above, if customers encounter additional costs in subscriptions, it leads to distrust. Flat monthly rates and complete transparency before purchase are needed.

Some customers would rather have an all-inclusive, piece-of-mind fee that covers everything, including service and support.

All of the above need to be addressed to help customers transition to this new model of temporary ownership.

The Future of XaaS - What are the Opportunities?

We currently see a wide range of services adopting this HaaS and XaaS model. We know it's a pain for customers to manage the services, separate subscriptions, constantly update all their devices with the latest firmware, and connect them all separately to their Wi-Fi. Imagine changing your Wi-Fi password… everything will break down.

So, I can see a convergence in full XaaS bundles.

A few musings of what could be:

Smart homes are offered as a service. Instead of buying your oven, fridge, thermostat, and security cameras individually, setting them all up, updating firmware, and downloading five apps, they should come in a managed bundle. Everything connects to a centrally managed application as the user interface.

Health-as-a-service: Instead of a watch, ring, scale, or mattress, everything comes together to create a full digital image of your condition, fitness, and health recommendations.

Business-models-as-a-service - Imagine you see an opportunity in the market and want to launch a business; everything needed is connected to help you run that business. A point of sale solution, your e-commerce, product delivery tracking, products in service. It provides the exact software suite to manage it all and the right experts to support on-call if needed. And based on your data, they already know why you are calling them.

Do you love the rise of XaaS? Are you seeing some interesting opportunities come up? I would love to hear your thoughts.

Have a great rest of the week,