This article was originally published in Multichannel Merchant by Zuora’s Chief Data Scientist, Carl Gold.
One thing is clear heading into 2020: we’re living in a subscription service economy, and that economy is only going to expand. We’ve all seen the headlines this year from Nike and Bloomingdales to Coca-Cola, Mercato and GNC. Organizations across all industries are increasingly turning to subscriptions to set their businesses up for future growth and success.
Why? Because consumer preferences are shifting globally. In fact, recent research from Zuora found that 71% of adults across 12 countries have subscription services and 74% believe that in the future, people will subscribe to even more services and own less physical goods.
Driven by this new consumer imperative favoring access to services over the ownership of physical products, vast sectors of the global economy are transforming themselves with subscription service models. Goods spanning from food, clothing and transportation to gaming, music and technology are being reimagined as utilities for consumers to leverage where and when, they are needed, much like water, gas, or electricity is consumed.
The good news? Companies that transform into service providers via subscriptions are experiencing rapid growth, and will continue to do so as they iterate their offerings in years to come.
In my role as a Chief Data Scientist, I have the incredible opportunity to analyze rich sets of data into actionable insights for organizations looking to scale in this new economy. The end result is a biannual Subscription Economy Index, or SEI, designed to measure the health and growth of subscription businesses in various industries. In the latest SEI, we found that subscription businesses, on average, are growing revenues 5X faster than S&P 500 revenues (18.2% vs. 3.6%) and U.S. retail sales (18.2% versus 3.7%). With the incredible opportunity to scale, it’s no wonder all of these companies are turning to subscriptions.
But subscription businesses are inherently complex and come with challenges. As a result, in 2020, as organizations continue to focus their energy on launching new subscription services and enhancing existing offerings, I believe we will see businesses hyper focused on strengthening subscriber relationships, mitigating churn and leveraging data to iterate on offerings in order to remain competitive.
Without further ado, here are my 4 predictions for subscription businesses in 2020:
The “Active User” Will Be a Company’s Crown Jewel
The cost to acquire an active user is steep. Blue Apron has paid over $400 for every new user, and last year Netflix was buying new viewers for around $100 each. Companies that have access to rich customer data – and the ability to put it to use by iterating existing offerings – will have greater opportunities to engage active users, upsell and ultimately scale their subscription business. After all, subscription businesses live and die by usage. As a result, customers will be top of mind in 2020 and beyond.
Companies Will Begin to Diversify Their Offerings
Just as Apple experimented with news and TV services in 2019, in 2020 companies will begin to launch and experiment with different promotions and services to increase subscribers, build loyalty and drive sales. However, it’s imperative that companies don’t overdo it. Too many active products are associated with lower growth. A good rule of thumb for any subscription business is to have no more than one active product per $1 million in revenue.
Industry Consolidation is Inevitable
Google just bought FitBit for $2.1 billion and, as a result, will accumulate 28 million active users. In 2020, we will surely see more consolidation of subscription service offerings as companies begin to diversify and learn from telling consumer data. After all, data is critical to help reduce customer churn. In fact, data-driven programs result in approximately ~25% relative reduction in churn rate on average. That’s too significant of a percentage to ignore, especially given the number of new competitive entrants in various industries.
Subscription Services Will Grow in Any Economy
Any potential slowdown in business or consumer spending in 2020 will only increase the competition among subscription-based businesses and drive non-subscription companies to transform to meet new consumer demands for services. Retaining and growing active subscribers is core to succeeding in any economic climate, and, in the case of a downturn, will add a layer of urgency to mitigating and reducing churn.
At the end of the day, subscription businesses that leverage data to experiment and enhance their offerings – whether they’re traditional retailers, ecommerce giants, technology providers or manufacturers – will gain greater understand of their customers and be better positioned to mitigate churn and scale. And it is these businesses that will ultimately win out in the subscription service economy.
I’m excited to see what lies ahead for subscription businesses in 2020. The new year will surely bring unrivaled growth for those who commit to becoming truly customer-centric organizations, placing customer preference for convenience, simplicity and flexibility at the core of their businesses.