The last 10 years of the Subscription Economy have shown remarkable adoption and growth as industry after industry makes the shift from products to services. The subscription model market has increased from $57 million in sales in 2011 to $2.6 billion in 2016…but where do we go from here?
Businesses say “things are getting harder.” Customer acquisition costs are rising. Churn is increasing. While getting the first waves of new customers was easy, businesses have plateaued.
Backed by data from the Subscription Economy Index, Zuora CEO Tien Tzuo and Zuora Chief Data Scientist Carl Gold have provided four predictions for how businesses can sustain growth into the next 10 years of the Subscription Economy, and beyond.
PREDICTION #1: SUCCESSFUL BUSINESSES WILL FOCUS ON SATISFYING THE WHIMS OF THE DIVINELY DISCONTENT CUSTOMER
The birth of the Subscription Economy has created a different breed of customers, which Jeff Bezos, CEO of Amazon, named the “divinely discontent customer.” These divinely discontent customers expect businesses not just to meet, but to anticipate, their needs. With the data they share, they expect transparency and full control.
For a subscription business, this requires subscription changes. Just a few years ago, only 30% of subscriptions got modified after the fact; now it’s closer to 60%.
What’s more, we’ve discovered that companies that have lots of subscription changes perform better. In fact, when customers make just one change for every 10 subscriptions, company growth doubles and churn decreases by 14%. Furthermore, we found that when customers average one change for every subscription, the company growth rate triples and they see 25% less churn.
In other words, if you have an existing customer base, and can respond to their changing needs—from adding more services to removing a service, upgrading editions, changing billing cycles, and more—you can grow faster.
Takeaway: Businesses need to embrace the needs of customers and enable them to modify subscriptions.
PREDICTION #2: COMPANIES NEED TO INCORPORATE MORE USAGE-BASED PRICING
Who wants to pay for stuff you don’t use? Businesses need to offer usage-based pricing to increase perceived value and customer satisfaction.
As a recent Deloitte Insights report details, you can see the drive for usage-based pricing play out across the board. You can see it in a SaaS model like Salesforce which led the way for software in terms of pay-per-use and pay-per-feature—all the way to a direct to consumer business, like Rent the Runway, which increases utilization of “products” through usage-based pricing (i.e. pay per wear).
According to our data, companies that deployed a usage-based model had an 8% increase in their growth rate in the first year. But, interestingly, while data shows that companies that don’t offer usage-based pricing grow slower than the average, it also warns against relying too much on usage pricing: The fastest growing companies offer usage-based billing, but it accounts for less than 50% of revenue.
Takeaway: Usage-based pricing isn’t a “nice-to-have;” it’s a “must-have”—but you need to find the right usage-based pricing for your revenue mix.
PREDICTION #3: THE FINANCE TEAM WILL BE COMPLETELY RESHAPED
Recently we conducted a survey of ten thousand Zuora users, most of whom were finance. Interestingly, more than 20% of respondents saw themselves in a “customer service” role.
This is because finance roles are changing, from the deal desk to revenue recognition. Here are just a few examples:
–Deal Desk. From optimizing profit margin to contemplating customer relationships, the deal desk used to be about configuring one-time product deals, but now it’s about nurturing long-term relationships.
— Orders. Orders used to be manually entering new orders; now it’s managing large volumes of change orders every single day.
— Billing. Instead of drafting one-off invoices and entering transactions in the back office, billing now manages complex recurring invoices, monitors customer usage—and spots upsell opportunities.
— Collections. Collections used to be the AR police. Now, instead of sending one-off collections emails, they’re proactively monitoring collections as the first line of defense against churn.
— Revenue. Revenue accountants no longer simply process and reconcile revenue at the end of the chain. Instead, they actively drive revenue policies.
— FP&A. For years, FP&A have been forecasting based on historical data such as GAAP metrics. But now they’re considering forward-looking subscription metrics, like ARR and churn, that drive the business model forward.
Takeaway: New business models create new organizational roles. Businesses need to keep up with and embrace the opportunities this brings.
PREDICTION #4: IT SYSTEMS WILL MOVE TO A THREE-CLOUD ARCHITECTURE
Today, enterprise software is dominated by two clouds: ERP and CRM. Neither is sufficient for the Subscription Economy.
ERPs can manage the general ledger and CRMs can manage leads, opportunities, and sales workflows. But in the center, today’s businesses need an agile hub revolving around subscribers that provides for dynamic pricing and rating; event-driven order, billing, and revenue rules, time-based metrics; CRM and ERP integration; and a subscriber identity record to hold and track all subscriber information.
Just look at a company like the Financial Times whose CTO John O’Donovan recently boasted that they have more subscribers now than they’ve ever had in their 126+ year history, with digital accounts accounting for more than 70% of their circulation. Over Brexit weekend, they drove a 600% increase in digital subscriptions by leveraging subscription analytics to test price points and offers in real time. No CRM or ERP can do that!
Takeaway: Modern businesses need new technology to support subscription models: a third cloud that sits between ERP and CRM and makes both “subscription aware.”
Read more about the state of the Subscription Economy in our latest Subscription Economy Index update.