Subscription Economy is Growing Nine Times Faster Than The S&P 500
Zuora’s Inaugural Subscription Economy Index Defines the Health of a Burgeoning Global Economy
Foster City, Calif. – November 15, 2016 – Zuora, Inc., the world’s leading provider of subscription billing, commerce, and finance solutions, today announced the Subscription Economy® Index™ (SEI) designed to measure the collective health of subscription businesses and track the impact of these businesses on the overall economy. The SEI reveals that subscription businesses grew revenues nine times faster than S&P 500 company revenues and four times faster than U.S retail sales over 15 consecutive quarters (January 1, 2012 to September 30, 2016).
“For nearly a decade, we’ve watched the rise of a worldwide Subscription Economy as customer preferences have shifted from product ownership to subscription experiences,” said Tien Tzuo, CEO of Zuora®. “Now, for the first time with the Subscription Economy Index, there is data proving that the companies adopting subscription business models are growing their revenue significantly faster than with traditional business models.”
In recent years, several reports have documented glimpses of a global subscription movement. In 2013 The Economist found that 80 percent of customers demanding new consumption models and moving away from traditional ownership. In 2015, Credit Suisse reported that people in the U.S. spent $420 billion on subscriptions, up from $215 billion in 2000. And in 2016, YouGov found that 40 million adults in Britain, 78 percent of the adult population, were subscribing to at least one product or service.
Leading analyst firms are also dedicating resources to researching this emerging trend. For example, Gartner stated that “by 2020, more than 80 percent of software vendors will change their business model from traditional license to subscription, regardless of whether the software resides on-premises or in the cloud.” Furthermore, MGI Research expects the total addressable market for Subscription Economy technology providers will reach $102 billion by 2020.
While this shift in consumer preferences is accelerating the growth of cloud-born companies like Salesforce and Netflix, it is also opening new revenue opportunities for leading product and service providers. IBM, Microsoft and Apple have all recently announced earnings detailing the significant growth of their subscription service offerings. Microsoft, for example, announced its fastest growing segments were cloud-based Azure at 116 percent YoY and Office 365 commercial at 51 percent YoY, while its personal computing revenue declined 2 percent. Apple iPhone sales declined 13 percent YoY while its services like iCloud pulled in $6.3 billion in revenue for the quarter, up 24 percent from a year ago.
Xplornet Communications Inc., Canada’s leading rural broadband provider, sees its subscription business model as the foundation of sustained, long-term revenue growth. “Our business model enables us to develop relationships with customers that last far beyond a one-time sale,” said Cathy MacDonald, EVP Operations and Information Technology at Xplornet. “These relationships help us find new ways to delight our customers, and continue to grow quickly in today’s demanding subscription economy.”
While several innovative companies around the world began participating in the Subscription Economy trend early on, and have benefitted from being first movers, there has never been hard evidence of the impact on the overall economy. The SEI offers proof that the Subscription Economy is growing significantly faster than the overall economy and details its long-term magnitude and viability.
“Zuora is uniquely qualified to issue the Subscription Economy Index because it is the only company with a base of customers that is both broad enough and deep enough to reflect significant subscription-revenue growth trends,” said Carl Gold, Zuora’s chief data scientist. “The SEI was created using Zuora’s deep understanding of the subscription economy combined with the system activity we have observed across multiple years, billions of dollars in revenue, and millions of financial transactions. Every company in the world, large or small should be considering developing a subscription based business model in order to grow faster and deepen their customer relationships.”
Summary of Subscription Economy Index Findings
Subscription Economy is the New Source of Growth for Global Economy
The SEI reveals that subscription businesses grew revenues nine times faster than S&P 500 company revenues (15.1% versus 1.7%) and four times faster than U.S retail sales (15.1% versus 3.6%) from January 1, 2012 to September 30, 2016. [Figure 1]
- The slowest period of growth for the SEI, in late 2012 and early 2013, aligns with a similarly challenging time for the American economy during the gradual but tepid recovery from the 2008 recession.
- The combined annual revenue of companies in the SEI is more than $9 billion, a figure that has increased 20 times over the past five years, and there are 10 times the number of companies included in the SEI since 2012.
- The two primary levers of growth in the Subscription Economy are Average Revenue Per Account (ARPA) and net account growth. [Figure 2]
Business Model Trends
Average annual revenue growth rates of B2B vs. B2C [Figure 3]
- B2B grew fastest: 22% per year for 2015 and 2016; in that time B2C grew 16%.
- B2C churns more annually (31%), than B2B (24%).
Average annual revenue growth rates by industry [Figure 4]
- SaaS growth: 25%
- Media growth: 15%
- Telecommunications growth: 15%
- Corporate Services growth: 13%
Company Size Trends
Average annual revenue growth rates by revenue bands <$1M, $1M-$20M, $20M-100M, and $100M+ [Figure 5]
- The sub-index made up of the largest companies ($100M+ in revenue) has been the highest performing with 28% per year growth.
- < $1M growth: 17%
- $1M-$20M growth: 13%
- $20M-$100M growth: 17%
- $100M+ growth: 28%
Average annual churn rates in the SEI are generally between 20 and 30 percent. Among the business models, churn is highest for B2C and lowest for B2B. For the industries and verticals, churn is highest in Media and lowest in SaaS. [Figure 6]
- B2B churn: 24%
- B2C churn: 31%
- Corporate Services churn: 26%
- Telecommunications churn: 24%
- SaaS churn: 22%
- Media churn: 28%
Companies that enter the subscription economy are not guaranteed success, but if they know what contributes to failure, churn or stagnant growth, they are more likely to achieve the same or faster growth rates covered in this study.
Today, Zuora Inc. also announced the general availability of Zuora® Insights™, the first analytics solution that unifies financial, behavioral, and demographic data to help maximize revenue growth and reduce churn for subscription businesses.
Subscription Economy Index Methodology
The Subscription Economy Index (SEI) tracks the organic growth of subscription businesses by reflecting aggregated, anonymized, system-generated activity on the Zuora subscription management service between January 1, 2012 and September 30, 2016. To measure average organic recurring revenue growth, Zuora used a weighted average of system activity of over 350 constituents who had been live on the Zuora platform for at least two years. Sub-indices of the SEI follow the same exclusions and must include a minimum of 25 constituents.
“The Subscription Economy: A Business Transformation” by Tien Tzuo, CEO of Zuora
SlideShare: “Drivers of Success in the Subscription Economy”
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About Zuora, Inc.
Zuora’s Relationship Business Management (RBM)™ solution helps enable businesses in any industry to launch or shift products to subscription, implement new pay-as-you-go pricing and packaging models, gain new insights into subscriber behavior, open new revenue streams, and disrupt market segments to gain competitive advantage. Headquartered in Silicon Valley, Zuora also operates offices in Atlanta, Boston, Denver, San Francisco, London, Paris, Beijing, Sydney and Tokyo. Zuora clients come from a wide range of industries, including media, travel services, consumer packaged goods, cloud services, and telecommunications. Clients include Financial Times, Schneider Electric, Box, Honeywell, NCR, RTL, The Guardian, YP.com, BlueJeans, Shutterfly, TripAdvisor and Vivint.
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