Insights, developments, and market scenario
Subscription – or, more specifically, the importance and relevance of the subscription economy – has continued to gain momentum and goes far beyond the use of new billing models. It’s at the heart of the digital transformation that is turning product manufacturers and vendors into providers of services and end-to-end solutions.
Leading business journals are therefore increasingly addressing this topic and recognizing that the printing press sector is at the forefront of developments. The Annual Accounts Press Conference of Heidelberger Druckmaschinen AG provided the ideal opportunity to continue the conversation about the current status and future of subscription in the print sector that ValueDialog started around a year ago with member of the Management Board and Chief Digital Officer Dr. Ulrich Hermann.
His conclusion? It’s going from strength to strength. And it’s evident that the subscription economy is adding a whole new dimension to the business activities of both Heidelberg and the company’s customers.
Interview: Andreas Weber, Head of Value | German Version
What’s occupying your time at the moment?
Dr. Ulrich Hermann: The level of interest in subscription solutions continues to be extremely encouraging. A great deal is happening in industry in particular. The basis for this is the growing ability of product manufacturers to use IOT – the Internet of Things – to place their business with customers on a new footing. One way of putting it is to say customers are buying products from the manufacturer to solve their problem, a problem I call the availability dilemma of usage.
What does that mean?
Dr. Ulrich Hermann: Products are “purchased” to have them available for usage that is often unplanned and hard to predict. For example, people used to buy encyclopedias, put them on a shelf and look up something three or four times a year. The option of more regular usage and the problem that led them to look up something justified investing over 1,000 euro in a set of encyclopedias! When the emergence of Wikipedia removed this availability dilemma, that is to say the basic situation that led to the encyclopedias being purchased in the first place, the encyclopedia suppliers’ business base vanished, as did the customers’ need to own knowledge.
What were the consequences of this?
Dr. Ulrich Hermann: It was a wake-up call for many in the media industry, and we can see everything that’s happened there. Just look at how many things are standing around unused – from stationary traffic to overfilled refrigerators in homes. It’s all too clear what’s going on when not only content but also products are going online in the era of the Internet of Things. At any rate, product manufacturers must adopt a setup that enables them to grow through increasing usage of their products and not solely through even more product sales.
So the Internet or, more accurately, the digital economy of things is diffusing the availability dilemma?
Dr. Ulrich Hermann: Exactly. The Internet connection will enable manufacturers to “understand” the usage of their products, use this information to make product development more effective, and adopt a usage-based billing system. This is more beneficial for users. At the end of the day, it leads to better utilization of product capacity and it’s therefore a tailored investment, because usage-based payment means customers avoid having to pay for time and functions that are surplus to requirements. Furthermore, the risk of non-usage passes partially or entirely to the manufacturer – as with Rolls Royce’s Power by the Hour system – or to other co-users, as in the case of car sharing.
What’s different during the purchase process?
Dr. Ulrich Hermann: Pay-per-use billing eliminates the actual reason for purchasing a product, that is to say the availability dilemma. Customers only pay for actual usage, not for the “option” of using the product. Sooner or later, a manufacturer that approaches customers with usage-based business models to stand out from the crowd prevails over competitors that base their business on customers simply buying the product to manage product availability themselves – as long as this manufacturer ensures customers benefit from the same level of availability as with the purchase option and also reduces the amount of unused product resources.
What are the other influencing factors?
Dr. Ulrich Hermann: Industry is currently working on artificial intelligence capabilities that enable products to communicate independently with one another. Cars will drive autonomously and pick up passengers to order. This will completely eliminate the availability dilemma and there will be no more stationary traffic. Automakers need to carefully consider exactly what this means for them. Refrigerators, meanwhile, will order food independently based on the consumption habits of the people using them. In everyday terms, this means supermarkets – which currently act as logistics centers – will be transformed into markets where new foods are sampled and make it onto refrigerator order lists. The cashier will be a food specialist standing behind a tasting counter rather than at the checkout belt. In my opinion, that’s a more agreeable prospect for us humans.
But doesn’t that also mean the virtual changes driven by the Internet are now also reaching the material world?
Dr. Ulrich Hermann: It does indeed. For the first time, the Internet is changing the material world. Stationary traffic, traffic lights, and cell phones will disappear and the world of work will be transformed – not only in supermarkets.
What impact will this have on the printing sector in this new digital world?
Dr. Ulrich Hermann: First and foremost, it will mean a rethink. The print market is absolutely huge and the overall value added has remained steady for a long time, despite shifts in individual submarkets. Our customers therefore need to gear themselves toward customer segments that generate added value with print. If the advertising industry abandons printed magazines, anyone sticking with this segment will get into difficulties. Entrepreneurs in the printing industry have been confronted with a substantial change, because the media industry has undergone a massive transformation in recent years. Other sectors such as the automotive supply industry are now experiencing the same thing in the era of the Internet of Things.
Illustration: Heidelberger Druckmaschinen AG, Annual Report 2018/2019
What advice would you give print shop entrepreneurs?
Dr. Ulrich Hermann: The trick is to quickly identify where the demand for print arises, and to win customers and build up expertise in these areas. Anyone who focuses solely on the ability to produce will not survive an upheaval like the one the print media industry experienced. The ability to generate business with evolving or completely new customers is the core competence of the future and above all the digital future, which will see markets undergo a disruptive transformation in some cases rather than simply changing.
What support is available to deal with this transformation?
Dr. Ulrich Hermann: To free up our customers – printing companies – so they can develop transforming customer segments to generate business, we have created a subscription model called Heidelberg Subscription that offers an end-to-end production system. This normally covers the press, associated consumables, software, and all servicing and consulting requirements. The printing company then pays on the basis of productivity that is already competitive – for usage, i.e. per printed sheet.
What’s the impact of subscription as a driving force behind the transformation?
Dr. Ulrich Hermann: It turns us from a vendor of equipment and products required for operations into a provider of productivity. We’re not selling individual components, but rather the result of an ideal configuration that we call the Smart Print Shop. Should productivity fall below the average for the comparative group, it means Heidelberg can’t do business with the customer either. So Heidelberg and its customer are in the same boat. Consequently, the printing company increasingly focuses all its resources and investments on unlocking and developing the market. A print business that is enjoying successful growth is exactly what we’re looking for!
What challenges remain?
Dr. Ulrich Hermann: One of the biggest challenges is selling the market exactly what we’ve been talking about – not products, but the results they achieve. That’s why we’re also transforming our sales operations. We’ll be using digital technologies to make them more effective when it comes to selling solutions, approaching customers in the right way throughout their “journey” – that is to say from the initial contact to the very end – and overseeing the productive operations phase that has become so important to us.
Thank you very much for this interview.
About Dr. Ulrich Hermann
Dr. Ulrich Hermann, member of the Management Board and Chief Digital Officer at Heidelberger Druckmaschinen AG, is a recognized expert on digitization and is in charge of the company’s ongoing digital transformation. As a member of the Heidelberg Management Board, Hermann is responsible for all business relating to life cycle solutions, services, software, and sales, and also for the Heidelberg Digital Unit – the company’s central marketing organization and innovation lab. Heidelberg is already generating total sales exceeding one billion euro in this area and is enjoying sustained profitable growth.
Following a degree in mechanical engineering, Hermann obtained a doctorate in business management in St. Gallen in 1996 and was recently appointed honorary professor at Allensbach Konstanz University. He started out on his professional career in 1997 with a number of managerial positions at Bertelsmann AG.