The subscription economy is here. Last month Zuora – the world’s leading provider of subscription billing, commerce and finance solutions – held its annual Subscribed conference in Sydney and Melbourne. The event was opened by Zuora’s CEO and founder Tien Tzuo – a leading evangelist for how businesses can benefit from the subscription model and what operational changes are needed to be successful.
There were five key takeaways from the conference:
1. The subscription economy is now mainstream
The subscription model is being used by many more suppliers across a wide range of industry sectors. Zuora’s own research shows that the revenues of subscription-based companies in the US are growing nine times faster than those of the S&P 500.
Nearly US$300 billion now runs through Zuora systems annually. Leading examples are Netflix, which now has more than 100 million subscribers worldwide, including 6 million in Australia; Spotify with over 50 million, and Apple Music, with 30 million subscribers.
The Software-as-a-Service (SaaS) model is now the norm for software sales and media consumption, and the subscription model has been extended to everything from train tickets to fresh food sales. Even heavy machinery supplier Caterpillar is experimenting with a ‘tons of earth moved’ subscription model.
2. ERP might not be dead – but it’s yesterday’s technology
Enterprise Resource Planning (ERP) software was the boom trend of the 1990s. But the market has rationalised around just a few vendors as sales have slowed. ERP software is optimised for old-style business models and is unsuited to the subscription economy. The growth now is in more flexible software that enables customers to ‘try, buy, upgrade, downgrade, cancel, and re-join’.
As more and more companies are moving from selling products to selling services, software needs to manage the transition from products to services and beyond — to insights, experiences, and outcomes.
3. The metrics for business success are changing
Many old-style financial metrics are unsuited to the subscription economy. New metrics like ARPU (Average Revenue per User) and churn rate have become widely known from their use in the telecommunications industry, and now measures such as ARR (Annual Recurring Revenue), CAC (Customer Acquisition Cost) and LTV (Lifetime Value) are becoming increasingly relevant.
These new metrics describe the changes in the nature of business brought about by the subscription economy. In the old world, suppliers kept limited information about their customers, but in the new customer-centric world of the subscription economy much more information is kept and acted upon, enabling a much more personalised service.
4. The compliance wave is about to hit
New subscription based metrics are not theory – they are having a real impact on accounting practices. In Australia the new AASB 15 standard comes into force on 1 January 2018. Driven by the rise in subscription revenues, it requires all companies to recognise revenues in a consistent way.
At the Subscribed conference, Katelyn Bonato from Deloitte gave a detailed overview of what the changes mean to the subscription economy in Australia. “Companies will need to recognise expected revenue from promised goods and services to customers. This has consequences beyond the finance department, and has the potential to affect how many organisations report their financial data.”
5. It’s not just consumer freedom – it’s also about business freedom
One of the key aspects of the subscription economy is the greater freedom it gives to consumers. They can pay for products and services as they use them, rather than investing all the money up front.
Zuora CEO Tien Tzuo explained that the subscription model also means greater flexibility for business. “Subscribers expect freedom, the business needs freedom too. As we move to consumption based pricing and usage based pricing, suppliers can also offer greater range of products and more scalable subscriber experience.”
“The subscriber world is dynamic and needs much more than order-to-cash linear transactional software. Both the subscriber experience is much more complex, and an order based processing system cannot handle this.”
“Companies need to move to a new business model. It is no surprise that three quarters of Fortune 500 companies say that their technology is holding them back. To deliver subscriber freedom you need business freedom.”
Join us at an upcoming Subscribed conference near you!