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IRUK Top500 The Customer Report: 2018

IRUK Top500 The Customer Report: 2018

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The Netflix model: How Philips and Husqvarna are embracing the subscription economy

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Philips is moving from an ownership model to an access model.
Philips is moving from an ownership model to an access model.

Moving towards an access model rather than an ownership model could be a way for retailers and brands to reduce the cost of acquiring new customers, if recent experiments with a Netflix-style business model by major European brands are anything to go by.

 

Speaking at the Zuora Subscribed conference this week, Marinus van Diggelen, director of digital product marketing and new business models at Philips Personal Care, said that the 127-year-old brand’s healthcare and beauty arm is exploring a range of new business models built around recurring payments as opposed to the traditional “single value exchange”.

 

Subscription boxes for beauty and food products are now offered by the likes of, for example, Birchbox and Graze. But most such models are still largely limited to the exchange of payment for a product, just on a recurring basis.

 

Philips wants to take this model further. van Diggelen highlights the “try before you buy” model as a particularly relevant one for Philips. Rather than having to spend a large lump sum on a product like an electric razor, customers pay off the cost of the device in instalments over the course of over a year.

 

If they want to buy the product outright or cancel before the end of the repayment period they can. This does lead to some churn early on, says van Diggelen. However, while the customers that churn within the first two months are not profitable for Philips, churn falls significantly after three or four months.

 

van Diggelen says that the ongoing relationship with the customer introduces opportunities to cross sell – which he claims is more lucrative than acquiring new customers considering the cost of acquisition is rising. He says that the cost of acquiring customers through an access model is 30 percent lower than in a traditional model.

 

Other potential models include adding a service subscription alongside the purchase of a product, as well as providing customers with the opportunity to swap products on a seasonal basis.

 

However, he said the shift to this type of model “doesn’t come for free”. Philips’ traditional model is centred on products, with everything optimised towards manufacturing and selling products.

 

This meant changes to the IT setup and the introduction of new finance systems that were capable of handling recurring payments.

 

It also meant building a “scrum team” bringing together multiple disciplines with technologists, which van Diggelen said boosts market reaction speed and creativity.

 

But in this model, he says, is the opportunity to “increase the pie” by offering products to people who wouldn’t normally be able to access them.

 

He also cites benefits from a sustainability perspective, with products being refurbished and sent back out. The incentive now for Philips is to build products that last a long time instead of “fighting a downward spiral game”.

 

Also experimenting with the subscription model – although not as far along the journey as Philips – is Swedish power products manufacturer Husqvarna. The fact they are slightly behind might be excusable considering the company was founded in the 17th century as a manufacturer of muskets for the Swedish king.

 

Margaretha Finnstedt, global director of PR and Brand, told the Zuora conference audience about the new “battery box” that the company rolled out in May. Installed in Stockholm, the pilot project allowed homeowners to access tools such as chainsaws, hedge trimmers and blowers on a pay-per-use model. Accessed through an app, the service targets urban customers with relatively small gardens who will only have occasional need for such tools.

 

Finnstedt explains the trade-off to InternetRetailing: since Husqvarna offers premium products, the belief is that the customers that will use the access model would generally have opted for a cheaper model anyway. This means that the key product stream of professional users is preserved.

 

While, feedback from customers found that 99 percent of users would recommend the service to others. Finnstedt said the pilot had been held back by the speed at which it came to market – six months from the decision to the launch.

 

The drawbacks of the project included limited ways to pay, inflexibility over bookings and the lack of a direct chat function between the customer and Husqvarna.

 

The next pilot is expected to resolve some of the key limitations of the pilot – for example, integrating the opportunity for customers to buy the tool on the back of using it.

 

Tien Tzuo, CEO of conference host Zuora, claims in his book “Subscribed” that “the subscription model is transforming every sector of the modern economy”. Whether it will transform every retailer and whether retailers can find the models to make it work are separate questions – but the examples of Philips and Husqvarna indicate that there is definitely a market there.

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