Are subscription businesses more resilient in a crisis?

May 18, 2020

This piece was originally published by Iman Ghodosi, Zuora’s VP and GM of APAC, in The Australian. 

 

In my working life, I can’t remember a time like the first half of 2020. Coronavirus has changed our society, which has changed our economies, and in many cases that’s led to seismic shifts for commercial enterprises across the world.

Over the last two months, Zuora has analysed businesses to get a sense of just how profound the consequences of these changes have been.

As I wrote in April, subscription companies have shown pretty extraordinary resilience.

Now, I made that claim after a single month’s worth of data, but our second round of results suggest that we weren’t looking at an aberration; businesses that employ a recurring revenue model are, on the whole, weathering this fierce economic storm remarkably well.

Our Subscription Impact Report tells us that about 47 percent of the 700 companies surveyed have not seen a significant impact to their subscriber acquisition rates. In fact, one in five companies have experienced an acceleration in their subscription growth rate.

And while it’s true that this is a global analysis, we know the results are holding true in Australia.

Carbar is an Australian vehicle subscription company (and a Zuora customer). Its CEO and co-founder, Des Hang, recently wrote in The Australian that it has “had growth in our subscription business across all three states that we operate in, with Queensland — our newest — seeing the highest growth.

“The main reason for this, we feel, is that there’s been an uptick in demand for private transport during the pandemic. Consumers also don’t want the overhead of debt or upfront registration fees and prefer to hold onto their cash during uncertain times.”

It’s a great story, and today I want to look a little bit more closely at what subscription companies are doing to retain, and in many cases gain, customers at a time when so many other businesses are understandably floundering.

More than just windfall gains

What Des Hang was referring to in his article might be called a windfall gain or profit. He believes the central reason for his company’s success during this time is the conditions brought about by the season itself.

We call it a windfall because it’s unexpected and fortunate, like a ripe apple falling from the highest branches of a tree on a windy day. (You wouldn’t have been able to reach it if it hadn’t dropped.)

Now, there’s no doubt that our analysis points to some subscription companies benefiting from the moment. As a segment, video streaming services, for example, posted a 6.6X growth figure as of April 30 compared with the previous 12-month baseline. That clearly has to do with people watching Netflix or Stan when they might otherwise have been at the footy or the gym.

But that’s not the whole story here. Luck plays a part in any market, but subscription companies are retaining customers due to far more than right-place-at-the-right-time factor.

Yes, the where and the when is important, but it’s the what and the how that may be making the biggest difference of all.

Three levers

The Subscription Impact Report found that there were three main ways in which organisations running on a subscription model have adjusted their services during this period. In other words, there were three business levers they were pulling that let them change their relationship with their customer and, ultimately, make life a bit easier for the person subscribing to their service. They’ve:

  • Paused billing – Subscription suspensions, including bill pauses, have increased by more than 4X during our survey period to date. This is a plus for companies because it keeps a customer ‘on the books’. For the subscriber, it’s only fair: they’re not charged for a service that has become (temporarily, we hope) unusable or which is suddenly much more difficult to access.
  • Delayed payment requirements – Credit memos increased by 2.5X. Subscription companies have helped customers unable to pay on time by:
    • offering credits to be used at a later time
    • providing discounts
    • adjusting payment terms
  • Changed prices – Free plan subscription uptake increased by 1.2X. Subscription companies have updated pricing, launched trials or introduced new bundles in the past few weeks to help customers adapt to COVID-19.

As Des Hang said in his Australian op-ed, the panic buying we saw in the early days of the crisis is now being replaced by a reluctance to spend. Australians are saving.

For traditional product businesses – those that rely on a customer choosing to purchase an item off a shelf (real or virtual) – this reluctance is a problem. How do you connect with a customer who’s decided they can’t afford your product anymore? Hope they’re on your mailing list?

Subscription businesses have a significant advantage here. Not only do they have a direct connection with their customers, they also have the means and the desire to change their commercial relationship instantly. This doesn’t guarantee long-term retention or continued revenue, but as our report shows, it helps to make sure that subscribers under financial pressure or gaining little benefit from a service, disappear forever.

That’s not good luck. That’s good management.

 

For more insight on how your company can double down on customers during this challenging time, visit https://www.zuora.com/covid-19/.