Squishing the Fish in Agribusiness
Updated: Mar 29, 2020
We’re in the midst of an economic shift where businesses and consumers alike prefer access to services over the ownership of products: The Subscription Economy.
As a result, companies around the world are rethinking their business models to implement a software as a service approach that was initially pioneered by Salesforce, in order to meet new customer demands and scale in an increasingly competitive landscape.
Look no further than Apple who’s services revenue reached an all-time high of $12.5 billion (nearly 20 per cent of its business) by the end of its 2019. Another prime example is Adobe, who was the king of one time access to their reader software that transitioned their business to a cloud based software as a service over time.
The Fish Model is a burgeoning concept that brings to life the challenges of transitioning a business from a traditional business model, or selling technology as an asset (one time up front fee) to a software as a service, or recurring revenue business model. It shows the increase in upfront costs to build out a recurring revenue model, while acknowledging the decrease in revenue; a double whammy for a business. However, it shows the light at the end of the tunnel as continually increasing revenues and decreasing costs, but organizations need to go through this process initially to shift their approach. This model is commonly used in the tech industry where software as a service is common.
This concept is closely related with another one: The innovators dilemma. The Innovator’s Dilemma is the decision that businesses must make between catering to their customers’ current needs, or adopting new innovations and technologies which will answer their future needs, often this includes shifting business models.
Within ag we will be talking about this as more of a hybrid approach vs. a direct up front change to pure recurring revenue.
While you may be thinking in ag “this won’t happen", we have physical goods like herbicides and tractors”; the reality is that the transition just may not be as direct. And by that I mean, it will occur, but won’t immediately eliminate the traditional business, but leverage or supplement the traditional business, just like Apple has done. Apple is not transitioning away from being a hardware company, but they can increase their revenues, gross margins, revenue per customer and increase the switching costs between their hardware and competitors, among other things. This makes their business stronger in the long term. The inherent challenge is that the switch to these recurring revenues takes away resources and focus from core products and transitions them to this business with lots of potential, but low absolute numbers during the transition.
In the ag world this looks similar to Apple. Think about John Deere. Their increased emphasis on digital infrastructure not only gives them a new revenue stream, but increases the customer experience and switching costs. Instead of selling a piece of software one time at the sale of the equipment, they will sell a service that continually drives higher revenues and margins, which usually means a product that is continually evolving and has some cloud based component to it (eg: Soil moisture probes with annual fee or ancillary John Deere Ops Centre/JD Link).
There are some that will take this a step further and talk about “tractors as a service”, where a farmer doesn’t own the tractor, but uses an Uber-like app to use a tractor when necessary or pays a recurring fee to access a tractor on demand, like Mercedes Benz Collection membership. This has many challenges, but it shows where equipment co’s could go as an ancillary aspect to their business. In western Canada consider it from a planter perspective with canola; this approach could ease geographies into using a planter to seed canola as there may not be full on buy-in to the practice to begin with.
Seed and Chemistry
Bayer will tackle things from a seed/chemistry manufacturer similarly. This means losses and investment in Climate Fieldview that won’t see a return initially, but overtime will build up a recurring revenue model that will be synergistic to their seed and crop protection portfolio, both in terms of increased revenue, but also in terms of supporting the sales and repeat customer purchases of their physical goods or other business models (outcome based pricing). This increases the number of customers through a differentiated offering + the life time value (LTV) of these customers. These short term losses are regarded as “squish the fish”, so that in the short term there may be slight decreases in returns, but in the long run their business is set up more bullet proof and in a position for growth.
I’ve highlighted the challenges of switching from using services to support a product, to offering a service THAT IS the product in Precision Ag services to offset declining margins and increase customer loyalty. This could be taken to the next step where a farm customer has their farm digitally connected (hardware, sensors in machines, fields, bins etc and cloud based) and a retail builds an alert based membership process around this connectivity – agnostic to brand, driven by data and includes member based pricing for all of the inputs.
The challenge is in seeing a bump in costs that aren’t offset by the immediate revenue. It will be difficult for many retails to “squish the fish”. During this period, companies will experience a string of seasons where top-line revenues shrink as revenues from large, pay-up-front deals are replaced by recurring subscriptions without the big up-front payment. Retail is traditionally focused on being profitable today, not scaling a service business. This is exactly what we have seen Disney run into with their business and where the Disney+ model came from; squishing the fish or acknowledging the innovators dilemma. They gave up billions straight to their bottom line from Netflix and other streaming services by pulling their content to build their own platform out in a move to strengthen their direct customer relationship and enhance the entirety of their business (theme parks, resorts, licensing of IP, Disney brand).
The challenges throughout all of this is that the companies and businesses are optimized for business through the old formula. Migrating to a subscription-based model requires thoughtful transformation of current business practices, including time, patience, and money, to work through the transition - this means go to market model, organizational design, core metrics, compensation structures and more may be misaligned and that can create friction within the business, hindering success.
To overcome this there needs to be an assessment of the following from Bill Schmarzo, focusing on digital initiatives as a whole, but directly necessary for squishing the fish in a recurring revenue business model:
It’s About Business Models, Not Just the Business. Squishing the fish is about innovating business models.
Eliminating Barriers Associated with Time and Distance. Identify and couple digital technologies with digital assets in order to eliminate time and distance barriers in your business model (touch points, tighter feedback loops etc). How can this be done?
Creating New Digital Assets. The need to create new digital assets (data, analytics, and insights about customers, product, operations and markets) that can be used to re-engineer your business model and swallow the fish. What needs to be created that can add value to a customer and the business, continually get better, and monetize consistently?
Predictive Intelligence. Predict what’s likely to happen, prescribing actions, learning from the results and integrating those learnings faster than your competition into your business model.
Creating More Compelling, Differentiated Customer Experience. Not only about delivering a more compelling user experience, but learning from each user engagement to make your business model more relevant and differentiated.
Monetizing the Pain. Reducing friction, quantifying and eliminating the inhibitors to customer and market value creation, and re-engineering your business model to monetize those customer and market value creation inhibitors in a way that's different than before. Essentially, capturing some of the value created in a way that build out recurring revenue.
After assessing to successfully move forward there needs to be alignment and transparency across all departments about what the vision and the future looks like, consistency in messaging so that it takes off and a demonstration what the execution looks like.
Just because agriculture is a different business doesn’t mean we are immune to the same innovators dilemmas that occur in consumer businesses. It simply means we need to re-frame the challenges from an agricultural perspective, ask ourselves the hard questions (above) and work within those confines to “squish the fish”.