This story was originally published in The National Business Review by Nathan Smith.
Over the past seven years, subscription companies have seen their sales grow by more than 300%, representing an 18% compound annual growth rate (CAGR), according to a new report.
Cloud-based subscription management platform Zuora’s biennial Subscription Economy Index found that between January 1, 2012, and December 31, 2018, subscription companies across North America, Europe and Asia Pacific showed impressive growth statistics.
Subscription companies in the Asia Pacific had almost 10 times the sales growth of the ASX (Australia) index, four times the sales growth of the NZX (New Zealand) index and 2.5 times the sales growth of the Nikkei (Japan) index.
Over the past seven years, the companies featured in the study have seen their sales grow by 321%.
A full 75% of New Zealand adults have some kind of subscription service, averaging 2.9 subscriptions each. In comparison, only 55% said they had subscriptions five years ago, with an average of 2.3 services.
The report monitors two growth levers: average revenue per account (ARPA) and net accounts. In 2018, average subscriber growth was 14%, up from 11.7% in 2017. Subscriber acquisition was fueled by moderate price increases, with ARPA rising by just 8% in 2018, compared with 11.3% in 2017.
However, customer-focused subscription companies are making a comeback. As recently as 2016 the average churn rate at a business to consumer (B2C) company was well above 30%. But 2017 and 2018 showed marked improvements, leaving the B2C churn rate at 24%, below the churn rate at business to business (B2B) subscription companies, which have an average annual churn rate about 28%. What’s more, B2C growth beat B2B growth by 23% to 20% in 2018.
Overall, subscription businesses grew revenues about five times faster than S&P 500 company revenues and US retail sales (18.1% versus 3.6% CAGR for both the S&P 500 and US retail sales).
The report showed software-as-a-service (SaaS) was the fastest-growing sector in 2015 and 2016. But as of mid-2017, the internet of things (IoT) cohort grew even faster. The only sector unaffected by a slowdown in 2018 was telcos, which accelerated and ended up equal to SaaS for growth in this two-year period.
“For the first time with this index, there is data suggesting the growth of subscription revenue tracks ahead of the GDP,” Zuora founder and chief executive Tien Tzuo said.
Sticky subscriptions
Meanwhile, analyst firm Gartner predicts that “by 2023, 75% of organisations selling direct to consumers will offer subscription services.”
In its 2018 Digital Commerce State of the Union survey, Gartner found that 70% of organisations have deployed or are considering the deployment of subscription services.
New Zealand-based cloud computing company Umbrellar chief executive Michael Foley isn’t surprised by these figures at all. His company was founded in 1997 and now has 87,000 subscribers using various services with a very low churn rate.
“I think we’re already in a subscription economy, especially in the digital world. Telcos, for instance, have always been subscription businesses, it’s just that from their perspective it goes through a product.
“New Zealand’s economy overall has had a huge focus on ‘as-a-service’ platforms, which are subscriptions by another name. I don’t think the idea of ownership is dead or that the entire economy is going to a subscription-first model,” he said.
He added that in the balance between “usership” and “ownership” in terms of how people are buying and selling, there is a “swing to usership” but he expects the future will be a hybrid of subscription and non-subscription offerings.
“For subscription companies, rather than selling to customers, the focus must be on creating such a great service experience that customers choose to buy. That’s at the heart of subscriptions. The subscription service is about lifetime value rather than units sold,” Folly said.
He said listening to customers means gathering data on what they want. Gone are the days when modern companies could rely on traditional methods such as customer focus groups to gain insights.
Instead, a reciprocal relationship between customer and provider is about presenting a suite of services for a customer to choose to help guide them through the process of setting up their own business which is “what makes subscriptions so sticky,” he said.
Shift in focus
Zuora vice-president and general manager of the Asia-Pacific region Iman Ghodosi said subscriptions are putting down deep roots in the global economy.
“More and more Australasian businesses are seeing subscriptions as a strategic part of their business growth and realise it generates more dependable revenue. The billing system is vital to subscription management success, but we’re talking about a change that goes so far beyond that.
“This is a revolution in the way people in Australia and New Zealand – and around the world – are thinking about the way they buy and use the things they need for everyday life. It’s a shift from a product and company-focused economy to a service and customer-focused economy,” said Ghodosi.
Ghodosi wasn’t surprised either to see the Asia-Pacific level rise around 16% over the year in 2018.
“Subscription companies adopt a flexible IT architecture from day one, allowing them to quickly penetrate international markets, accept global payments, measure financial growth and to iterate over time,” said Ghodosi.
“In other words, they’re born free of the limitations of the product economy and the customer is at the centre of everything they do.”