Subscription-Based Service Contracts In Industrial Manufacturing

Avarind Renganathan, Service Growth Leader for Honeywell, with over a decade of experience in fluid control industrial products.

The landscape of industrial manufacturing is undergoing a transformation with the adoption of subscription-based service contracts. These contracts offer a model where customers pay recurring fees for access to services, maintenance and performance guarantees. While this approach provides improved value and operational efficiencies, it also brings challenges that impact both providers and clients. Here, I delve into what businesses and customers love and hate about these subscription services, especially within the advanced industrial manufacturing sector.

What Businesses Love

Subscription models create consistent cash flows, helping manufacturers better manage financial planning and investments. This stability reduces reliance on irregular sales and builds a sustainable growth framework. Long-term contracts encourage stronger relationships, fostering customer loyalty. By offering ongoing service and support, manufacturers become indispensable partners rather than one-time suppliers.

Engineered connected equipment and IoT-enabled devices generate valuable operational data. Businesses can analyze usage patterns, predict failures and optimize performance, creating opportunities for upselling premium services. Subscription services allow businesses to expand offerings by bundling additional features like remote monitoring, software upgrades and training programs. This flexibility meets evolving customer needs without requiring significant infrastructure changes. Offering subscription-based contracts positions businesses as innovative and customer-focused, giving them an edge over competitors with traditional sales models.

What Businesses Hate

Manufacturers often rely on intermediaries such as distributors and resellers to reach end users, adding layers of complexity to the process. These intermediaries may lack the technical expertise to effectively communicate subscription benefits or may resist the model due to concerns over margins and commissions. Additionally, manufacturers may struggle to establish direct relationships with end users, making it challenging to tailor contracts to specific needs and ensure smooth service delivery. This issue is particularly evident in sectors where technical knowledge and regulatory compliance requirements are critical.

If customers perceive insufficient value, they may cancel subscriptions, leading to lost revenue and increased churn rates. Managing subscriptions involves tracking service delivery, monitoring equipment performance and maintaining uptime commitments. Failure in any area can damage customer relationships. Some industries are slow to adopt subscription models, especially where capital equipment purchases have traditionally been seen as assets rather than ongoing expenses.

Implementing IoT systems, data analytics and remote monitoring infrastructure requires significant investment. Businesses must also train staff and develop new processes to manage subscriptions effectively. Subscription revenue often necessitates complex accounting practices, potentially delaying income recognition and complicating financial reporting.

What Customers Love

Subscriptions eliminate unexpected repair and maintenance costs, allowing customers to budget more effectively. In industrial sectors where safety is a key priority, subscriptions offer peace of mind for customers and provide a low cost of entry to ensure timely upkeep and maintenance. Customers can leverage the latest technology without significant capital investments. Regular updates and enhancements keep equipment optimized and competitive. Proactive monitoring and preventive maintenance ensure higher uptime and productivity, minimizing operational disruptions. For industries dealing with hazardous materials, this proactive approach provides an added layer of safety and compliance.

Bundled services reduce the need to coordinate multiple vendors, streamlining maintenance and support. Subscription models grow with customer needs, offering flexibility to add services or features as operations expand.

What Customers Hate

Many customers are wary of being locked into lengthy contracts that may not align with their evolving needs or financial situations. Assessing the return on investment for subscription services can be challenging, especially if performance metrics and deliverables are not clearly defined.

Customers may feel trapped if the service provider fails to deliver promised support or upgrades, leaving them vulnerable to operational risks. Subscription packages may lack flexibility, forcing customers to pay for features they don’t need while missing out on bespoke solutions. Additional charges for upgrades, premium support or exceeding usage limits can erode the cost advantages initially promised.

Balancing The Scales

For businesses and customers to fully benefit from subscription-based contracts, it’s crucial to address these pain points:

• Transparency: Clear contracts that outline deliverables, performance guarantees and cost structures build trust.

• Flexibility: Offering modular plans enables customers to scale services up or down as required.

• Technology Integration: Robust IoT and analytics systems help businesses deliver value-driven insights, enhancing customer satisfaction.

• Customer Support: Reliable and responsive service teams create a safety net for customers, fostering long-term partnerships.

Conclusion

Subscription services in industrial manufacturing are reshaping the dynamics of service delivery. Businesses appreciate the predictable revenue and deeper customer relationships, while customers value access to technology and cost predictability. However, both sides face challenges that must be addressed through transparency, flexibility and continuous innovation. As the industry matures, companies that adapt to these expectations will be more likely to emerge as leaders in this evolving marketplace.

Forbes Business Development Council is an invitation-only community for sales and biz dev executives. Do I qualify?