By Stuart Lauchlan. This article was originally published on Diginomica
The Index comes up with a series of top-line findings, including:
- An average company in the Subscription Economy has grown its revenue by 321% since the launch of the index in January 2012, a compound annual growth rate of 18.1%.
- Subscription businesses are growing revenues about 5 times faster than S&P 500 company revenues and US retail sales.
- The Subscription Economy Index growth rate correlates with Gross Domestic Product (GDP).
- Europe’s growth rate over the past two calendar years has been 64%, ahead of 48% growth for the US over the same period.
- B2C churn has fallen – down to 24% in 2018 – and is lower than that of B2B firms with a churn rate of 28%.
- B2C growth in 2018 beat B2B growth by 23% to 20%, whereas in 2017 B2B growth exceeded B2C, 24% to 21%.
It’s now almost a year since Zuora went public. A lot has changed since then, according to CEO Tien Tzuo:
What a difference a year makes. When we first went on our roadshow 12 months ago, many investors hadn’t yet given much thought to the idea of subscriptions. Subscriptions they thought were only limit to just SaaS companies…But today everywhere you look the topic of subscription seems to be popping up all over the place.
He points to recent subscription initiatives from firms such as IKEA, Phillips – subscription toothbrushes! – and Burger King as cases in point. Picking up on the Index, he adds:
It turns out the best subscription businesses are built around dynamic customer relationships. Tying the pricing model to usage or users and driving greater and greater engagement from your subscribers, this is what leads to growth. How do we know? Well, it’s in our data, it’s in the $10 billion of quarterly transaction value as we see.
Subscription companies that employ usage based billing models actually grow 50% faster than companies without usage-based billing. Subscription companies that average just one subscriber change per subscriber per year – think of a renewal and add-on product, more users or change of plans – these companies actually grow 3x faster than companies that have seen no changes at all.
From legacy to subscription model
A good example is the use case of a multi-billion dollar Point-of-Sale terminals manufacturer, says Tzuo, a company with more than a century of operating history behind it:
In 2011, like a lot of other manufacturing companies, they were facing shrinking margins, co-modification, as well as competition from new startups. The product-based business model simply wasn’t working. But here was the silver lining – when they spoke to their customers, they realized their customers wanted something different. ‘You sell us a product,’ their customers said, ‘but you also sell us a service contract and you take care of the equipment. Why can’t we just subscribe to the whole thing?’. And so they launched essentially a hardware-driven SaaS service which grew pretty quickly. That’s when of course when they started working with us putting us in between Salesforce as CRM and Oracle as their General Ledger, starting off as an account worth probably between $200,000 and $300,000 to us.
Fast-forward 7 years, today that [subscription] business has now grown to 10% of their overall revenues, and given our business model, they are now easily a multi-million dollar ACV account. More importantly [is] what they are telling us -‘Already 10% of our revenue is on you. That’s the part that’s growing fastest and we need the other 90% of our revenues to work just like that 10%’.
There are lessons to be learned here, says Tzuo:
Here is a manufacturer that’s been around since the 1800s and subscriptions are now absolutely central to their growth strategy. And I think this story could easily apply to any company that’s yet to make the leap to a truly customer-focused business model. Just think about thousands of big manufacturers out there that are still selling products off-the-shelves to strangers. The stakes are very high for these companies – they are seeing a lot of digital disruption in the marketplace.
So when I look past on the year and I think about the story, what does this all mean? We are seeing the long-term opportunity for Zuora is absolutely enormous. We may be in the early stages, the vast majority of business models have had to eventually transition their subscriptions, some faster and more effectively than others but we believe this will happen. And for the ones who get it, they are achieving growth rates that are changing the game against their competition.
That is the pitch from Zuora, he concludes:
The important thing for us is, we’re becoming increasingly strategic to the Subscription Economy. We’re seeing more and more interesting companies enter the Subscription Economy. We are really the only choice when it comes to putting [in] the platform to drive that growth and companies are increasingly realizing why we’re so important, why ERP systems are simply not sufficient to deliver on these growth strategies…the usage-based billing models, the number of customer engagements, these are the things that all break ERP systems.
The Index makes for interesting reading and is well worth a more thorough examination than there is opportunity to delve into here.
Zuora itself grew its own subscription revenues by 35% year-on-year. For the full year, revenues were $235.2 million, up 40% year-on-year, on a loss of $77.6 million. In common with other SaaS firms of late, the stock took a bump on Wall Street on the back of lower guidance for the first quarter.
But the firm remains well-positioned as the ‘gorilla’ in the Subscription Economy market. With more and more firms rolling out subs-based initiatives, that’s a good place to be in the short and longer term, although it’s inevitable that if the space is as lucrative as the Index data suggests it is, then competitive rivals will inevitably end up on manoeuvres. As Tzuo puts it:
I hear Burger King announcing subscriptions and you say, ‘Gosh, how far can this thing go?’.
That’s a question that others will ask. But Zuora for now has a solid lead in helping organizations with legacy product-centric business models adapt to the subscription opportunity.