Supply on demand adapting to change in consumption and delivery models

It delves into the shifting attitudes among business executives towards new consumption and delivery models, the drivers of change, and how companies are adapting to accommodate the tren

Sponsored by

Adapting to change

in consumption and delivery models

About the report 2

About the report

Supply on demand: Adapting to change in consumption and delivery models is an Economist

Intelligence Unit (EIU) report sponsored by Zuora

It delves into the shifting attitudes among business executives towards new consumption and delivery models, the drivers of change, and how companies are adapting to accommodate the trend

To shed light on this topic, the EIU surveyed 293 business executives in July-August 2013 Nearly two-fifths of the survey sample (39%) are based in the US, 31% in the UK and 30% in Australia They hail from 18 sectors, with financial services, professional services, technology, and healthcare, pharmaceuticals and biotechnology especially prominent in the sample The respondents are relatively senior—61% hold C-suite positions—and they work in organisations of different sizes, with 54% posting annual revenue of US$500m or more

To complement the survey findings, the EIU also conducted in-depth interviews with senior executives and industry experts We would like to thank all survey respondents, as well as the following executives (listed alphabetically) for their time and insights:

l Thomas Amos, co-founder, Sidekicker

l Giles Andrews, CEO, Zopa

l James Beshara, founder, Crowdtilt

l John Compton, manager, Streetclub by B&Q (Kingfisher)

l Chris Fletcher, research director, Gartner

l Saar Gillai, senior VP and general manager, HP Converged Cloud

l Ed Lee, mayor, San Francisco

l Ann Mack, director of Trendspotting, JWT Worldwide

l Paul Marsden, consumer psychologist

l John Mewett, marketing director, Screwfix (Kingfisher)

l Mark Norman, CEO, Zipcar (Avis)

l Aleyn Smith-Gillespie, associate director, Carbon Trust Advisory Services

The report was written by Sarah Fister Gale and edited by Zoe Tabary of the Economist Intelligence Unit

Under the impact of advances in technology, economic pressures and shifting cultural norms, consumers are looking for cheaper goods and more convenient ways of accessing them New models of personal ownership are gaining attention in many industries based on the idea that people are increasingly interested in consuming and paying for temporary or limited access to goods and services, rather than purchasing them outright

Judging by this Economist Intelligence Unit survey, businesses are responding by changing how they price and deliver goods and services, with subscription-based models in which companies offer ongoing access to a product or service for a periodic fee; rental models that give consumers temporary use of a product or service; and sharing models that allow groups of people to jointly share ownership of a product or service among the preferred options

Advances in technology are enabling this trend, both by giving consumers greater insight into where and how they can access products and services, and by allowing businesses to rapidly ramp up new sales models at relatively low costs

Businesses believe that these new models will enable new revenue opportunities, better differentiation from competitors, and access to new customer segments They will also create new

opportunities for businesses to engage with customers on a more regular basis and foster stronger relationships

For consumers, reduced transaction costs and more convenient use of goods and services should be the biggest benefits But adapting to these new consumption and delivery trends will not be easy, and they will not impact every product or business

in the same way Financial constraints, technological complexity, shifting regulations and the need for new marketing strategies and extensive change management are just a few of the challenges that companies must address to succeed

Executive summary

followed by the enabling of sharing models (27%)

The revenue impact is still relatively small, but is expected to grow steadily More than one-half of

the companies surveyed report that these new delivery models represent 10% or less of their annual revenue, and 12% say that they represent more than 50% of revenue However, 84% of respondents anticipate that the share of revenue will change “somewhat” or “significantly” over the next two years

Technology is proving a powerful enabler of new consumption and delivery models “Any area

where you’ve got fairly expensive goods that customers don’t feel like they have to own, and enabling technology that allows them to easily use them, will be open to transitions in business models,” says Aleyn Smith-Gillespie, associate director at Carbon Trust Advisory Services

Consumers benefit from cheaper, more convenient products, while businesses generate new revenue streams “Consumers are getting

accustomed to pay-as-you-go models, and they like that flexibility They can instantly get all the capabilities without paying up-front for the cap-ex,

and they have better control over their spend,” points out Saar Gillai, senior VP and general manager at HP For businesses, the leading benefits are access to new revenue opportunities (37%), differentiation from competitors (27%), and accessing new customer segments (27%)

Cost, technical complexity and regulation may hamper the implementation of new consumption and delivery models Internal co-ordination

(selected by 33% of respondents), technical complexities (30%) and compliance regarding data privacy and protection (27%) are viewed as the key difficulties in implementing these new delivery models Regulatory hurdles can also be a stumbling block for lean start-ups, according to experts Each company faces a different set of

circumstances, but there are some common elements all should think about, say executives interviewed in this report Backing new delivery models with a strong business case, developing a seamless user experience, working with regulators and monitoring corporate reputation are some of the specific areas which new delivery models need

to encompass

Consumers’ desire to own high-value goods, such

as cars and apartments, is being trumped by their interest in finding cheaper, more convenient options to use them In an increasingly cost-conscious world, the benefits of temporary just-in-time access to products and services—

without the cost and hassle of ownership—are becoming more appealing

At the same time, the explosion of social media and mobile devices, as well as the growth of cloud computing, are dramatically increasing the speed with which information is reaching consumers and facilitating their access to goods and services

“It’s a chicken and egg scenario,” says Chris Fletcher, the research director of enterprise applications at Gartner, a US-based IT research

and advisory company “Consumers are demanding new types of services, and technology innovations are enabling those services.”

Executives today are keenly aware of this transition Fully 83% of survey respondents agree that consumers in general are changing how they prefer to obtain access to goods and services, and 80% are seeing these changes in their own customers

Subscribe, rent, share

For individuals, subscriptions and rental options are seen as the most appealing consumption models to emerge from this trend Asked about their preferences as consumers, 38% of executives say they increasingly prefer to access goods and services via subscription rather than purchase them

Consumers want convenience and value, and they want it now

1

Q

Note: Figures do not add to 100% as respondents were able to select more than one option Source: Economist Intelligence Unit.

What do you see as the main benefits to consumers from new consumption models?

(% respondents)

Reduced transaction costs More convenient use of goods and services Easier to upgrade or downgrade products and services Reduced amount of waste from underused assets More convenient payment for goods and services Greater personalisation of products and services Ability of consumers to act as product and service providers themselves

Ability to connect with a like-minded community of users

Other Don’t know

36% 34% 33% 27%

outright, and 26% prefer to rent The models they prefer shift somewhat based on their location US executives are the most interested in subscription options (42%), compared with just 31% of their UK counterparts; and twice as many UK as Australian respondents prefer to share ownership of goods and services

These changing preferences are not surprising, says Aleyn Smith-Gillespie, associate director at Carbon Trust Advisory Services, a consultancy offering expertise on sustainable business strategy and models “If you can add value to the customer,

if you can reduce their cost and make things more convenient for them, then these models can work.”

He anticipates that similar trends are likely to occur with appliances, equipment and high-value goods “In these models, customers don’t just reduce their costs, they get an additional level of expertise and access to evolving technology without the capital investment,” he says This idea

is reinforced by the fact that reduced transaction costs are viewed as the number one benefit of this trend for consumers

The ease with which consumers can upgrade or downgrade services and reduce waste also ranks highly on the list of benefits “We are in an

‘as-a-service’ economy, where customers expect options,” agrees Saar Gillai, senior vice president and general manager at Hewlett Packard

Converged Cloud, an IT multinational company

Having open lines of communication with customers enables businesses to proactively provide those options, he says “We can see what the customer is trying to do, and tailor a solution that’s flexible enough to meet their needs.”

Convenience also makes the list of top benefits—

and it’s one of the most critical components for success, says Paul Marsden, a consumer psychologist “The consumer doesn’t want to do anything extra, so the business model has to be effortless,” he says “Or the value they derive has

to be so great that it can overcome their laziness.” Interestingly, the two benefits most often touted

by peer-to-peer sharing companies—the ability to connect with like-minded users and the

opportunity for consumers to act as product and service providers themselves—receive the lowest scores in the survey This suggests that the business trend is about value and convenience rather than community-building or altruism [It should be noted, though, that the interviewees in this survey were business executives rather than broad consumers.]

Respondents’ personal preferences also bleed over into how they do business, with 37% saying that their business units increasingly prefer to rent goods rather than purchase them, while 35% prefer

to access goods via subscription and 16% prefer to share ownership UK businesses are more

interested in renting (42%), while US businesses lean towards subscription (44%)

Ultimately, companies will need to adapt their business models to account for regional differences

in infrastructure, cost structures and customer behaviour, says Mr Smith-Gillespie “For a global company, this will probably be starkest between developed and developing economies, and can be both an opportunity as well as a challenge For example, in some regions business models requiring live tracking of vehicles and products may find local infrastructure and mobile services to

be lacking—although this is improving On the other hand, urban density and premiums on space can be a driver of sharing models.”

❛❛

If you can add

value to the

customer, if you

can reduce their

cost and make

things more

convenient for

them, then these

models can work.

❜❜

Aleyn Smith-Gillespie,

associate director at Carbon

Trust Advisory Services

The demand for temporary access to goods and services has the potential to upend long-established business models that are built on a financial foundation of receiving full payment in exchange for outright ownership of goods For companies to alter this model requires them to radically change the way in which they operate

They seem to be figuring it out, though A majority

of companies in the survey have already changed

or are in the process of changing how they price and deliver their goods and services That number jumps to 67% in Australia, compared with 42% in the US and 48% in the UK Adapting pricing and delivery models is a necessary part of the transition from one-off sales to a subscription, rental or sharing-based offering, according to Mr Gillai: “This is a pay-as-you-go economy To succeed, companies need to create payment and

delivery infrastructures which support that environment.”

The most popular addition is the introduction of subscription models (40%), followed by the integration of shared goods and services (27%) In Australia, 46% of respondents are incorporating subscription models, compared with 40% in the UK and 34% in the US Smaller companies are also more likely to embrace subscription options (45%), while larger companies are almost as likely to enable sharing (31%) as subscription (33%)

In the past few years start-ups and established businesses alike have begun offering rental, sharing and subscription options for everything from cars, textbooks and entertainment to part-time workers and heavy equipment The trend even extends into the financial services industry,

where companies are creating virtual environments

in which consumers can source, lend and borrow money electronically without the time and costs associated with traditional banks

Mr Smith-Gillespie points to Digital Lumens, a US lighting company that has shifted from selling equipment to delivering lighting-as-a-service under

a “managed asset” model: “Customers pay for the outcome, not the product.” It is still early days for many of these fledgling businesses, but there is a lot of optimism about their future success

Small revenue, big growth expectations

More than half (53%) of respondents say these new delivery models represent 10% or less of their annual revenue, and only 12% say they represent more than half of their revenue The financial impact is somewhat higher in UK and US companies than in Australian companies, with respectively 16% and 14% saying they represent more than half

of their revenue, against 6% of Australian companies

But the revenue impact from these models is on an upward trend Fully 84% of respondents anticipate the share of revenue they represent to change somewhat or significantly over the next two years

Smaller companies are more likely to anticipate a significant increase (34%), compared with 21% of larger companies

Mr Smith-Gillespie is not surprised by their optimism “Goods and assets that have a relatively high cost but low utilisation will be open to a shift away from ownership towards a leasing, rental, or subscription-based business model, particularly when combined with a service package that guarantees convenience and access,” he says He also believes that these new delivery models can provide greater financial stability for the vendor by turning a single sale into a long-term revenue stream But that can require upfront financing by the business to cover the initial cost to deliver the product or service system, as well as cash flow to cover maintenance, insurance and any other ancillary business costs

It won’t work for everyone, however In sectors that offer lower cost, disposable or frequently used goods, the model won’t be cost effective, maintains Gartner’s Mr Fletcher: “It’s hard to argue that you would generate enough revenue from renting a ladder or a lawn mower And if it’s not going to be profitable, it doesn’t make sense.”

In those cases, business owners can look for added-value opportunities, suggests John Mewett, the marketing director of the Screwfix Community Forum, a trade forum for contractors hosted by Kingfisher, a European home-improvement retailer Although Kingfisher’s products do not lend themselves to a rental or subscription model, the company has invested in building a sharing environment

QChart 3How, if at all, do you expect the revenue your company gains from new delivery models of goods and services to change over the next two years?

(% respondents) Increase significantly Somewhat increase Stay the same Somewhat decrease Decrease significantly Don’t know

Source: Economist Intelligence Unit.

28%

56% 13%

1%

0%

2%

The Screwfix Forum brings together professionals and DIY enthusiasts to exchange tips about home improvement projects, socialise and even share tools or business opportunities “These services aren’t monetised and don’t generate revenue directly, but they do build brand loyalty and can indirectly generate sales in stores,” says John Compton, the manager of Streetclub.co.uk, a sharing website for neighbours by Kingfisher-owned B&Q, another DIY firm

Unlocking business benefits

According to the survey, the leading business benefit of these new delivery models is access to new revenue opportunities (37%) Differentiation from competitors (27%), accessing new customer segments (27%) and increasing customer loyalty (25%) also figure prominently

These new models also allow businesses to form closer relationships with the customers they serve,

Mr Smith-Gillespie points out As the owner of the goods, be they cars, equipment or virtual servers, the vendor takes on the role of a trusted and expert supplier, providing maintenance and services to support the product and the customer “This value proposition opens up opportunities for long-term customer relationships with multiple touch-points, thus enabling providers to broaden and deepen their revenue streams,” he says

Even in sectors such as hard goods, where the fundamental product is still a one-off sale, companies are creating add-on services that are bundled with the core product General Motors’ subsidiary Onstar, for example, is a subscription-based roadside assistance service that car owners can pay for through a monthly fee

For other organisations, these new models are seen

as an opportunity to alleviate the impact of rising manufacturing costs Businesses that devise ways for customers to reuse existing products can derive more long-term value from the assets they pay to create, while simultaneously allowing customers to reduce their own cost of ownership and

environmental footprint “Resource efficiency is a core part of the proposition,” says Mr Smith-Gillespie “It is a real value add that a provider can give to a customer, and that customers are seeking.”

To fully benefit from new delivery models, organisations need to work proactively with manufacturers, vendors and material suppliers to design products that best accommodate

consumers’ demands If companies can deliver reliability as part of the value proposition, they can secure customer loyalty while lowering their own maintenance and support costs

QChart 4What are the key business benefits you would associate with implementing new delivery models?

(% respondents) Opening up new revenue opportunities Differentiation from competitors Accessing new customer segments Increasing customer loyalty Reducing waste from underused assets

Strengthening our brand Accessing new product markets Improving our environmental footprint

Other Don’t know

Source: Economist Intelligence Unit.

37 % 27%

Harnessing small players

In the meantime, the market to accommodate consumers’ demand for subscription, rental and sharing options is still fairly wide open Thanks to the proliferation of cheap, reliable, virtual technology, anyone with some spare cash and an idea can start a company, which means that lean start-ups have a chance to step into well-established marketplaces and lure dissatisfied customers with more agile delivery models

Smaller firms tend to be more alert to shifting market trends and are more able to adapt than their larger counterparts The survey highlights this idea, with more than one-half of executives at large firms saying their company underestimates the impact of changes in the way consumers want

to access goods and services, compared with just one-third of executives at small companies

However, big companies have the advantage of deep pockets While it may take them longer to adapt their culture and processes to the new trends, they have the option to acquire smaller companies that have demonstrated success as a way to gain immediately access and expertise in this area, says Ann Mack, the director of Trendspotting at JWT Worldwide, a marketing communications firm

“Instead of fighting the encroaching competition, partner with them,” she advises

This approach has been practiced for years in the software-as-a-service sector, where global enterprise software firms, including Oracle, IBM and SAP, have acquired dozens of cloud-driven start-ups to round out their service offerings

It is also moving into the car rental business, where

in the past year Avis Budget Group has purchased Zipcar, a US membership-based car-sharing company, and Enterprise Holdings has acquired Zimride, a ride-sharing and car-pooling company

“These acquisitions have enabled the acquired small firms to rapidly expand their reach In the case of Zipcar, it means continuing its quest to build a global fleet”, says Mark Norman, the company’s CEO, albeit under the aegis of a larger owner “It is logical that these acquisitions will continue in other sectors as companies demonstrate that they can produce sustainable business models with proven profitability”, according to the mayor of San Francisco, Ed Lee, who is credited with coining the term “sharing economy” to identify entrepreneurs using the Internet to connect services and products with buyers “It makes sense that [these companies] will become attractive for purchase or imitation by already established businesses in the

What is cheap, reliable and everywhere?

3

The Internet, mobile technology, secure online transactions, social media and the ubiquity of cloud computing are among the many technological advances that are making it possible for companies to provide these kinds of delivery models for any number of products and services, remotely and electronically, to a broader community of customers

“You can connect with people in a way you couldn’t previously, and it’s changing the mindset of businesses and consumers,” says Thomas Amos, the co-founder of Sidekicker, an Australian firm that links companies with people seeking temporary work assignments

The survey shows that advances in technology, including cloud computing, are top of the list of

perceived drivers of change in this area Economic factors and demand for greater convenience—both issues that can be addressed thanks to

technological advances—complete the list of the top three drivers

Not surprisingly, technology-driven products and services that can be accessed and purchased electronically—including software, news media, consumer electronics, and music and

entertainment—are expected to see the biggest shifts in consumption and delivery patterns over the next three years More durable items, including cars, homes, appliances and fashion, are seen as least likely to experience big shifts in the near term Location, for example, can be a challenge in providing durable goods, particularly for small

Q

Note: Percentages were rounded up and may not add up to 100% Source: Economist Intelligence Unit.

Of the following, which would you say is the single most important driver of changes in the way consumers obtain access to goods and services?

(% respondents)

Technology advances (eg cloud computing) Economic factors (eg, cost pressures, demand for greater value for money) Demand for greater convenience Policy or regulatory changes

Environmental concerns

Other

Chart 5

37% 27%