Published on the 21/10/2020 | Written by Jonathan Cotton
2020 is the year of the accelerated trend…
From health tech to remote working, smart manufacturing to supply chain digitisation, amongst the devastation of Covid-19, new ways of living and working have been coming into their own.
As markets almost universally contract, one area seems to have remained strong – and even thrived – through the uncertainty of 2020: Subscription-based services.
It’s been a quiet revolution, but significant nonetheless.
“Just 8.5 percent of companies are sticking with the traditional model.”
Just as Netflix has changed the way we consume TV and movie media (and chill), the recurring revenue model is changing our relationship to a lot of things.
“The first products to achieve true scale in the subscription economy were digital,” says digi-tech researcher Juniper in its recent Subscription Economy, an analysis of the growth potential and wider impact of the model. “Successes such as Netflix and Spotify popularised the concept beyond traditional subscriptions to periodical publications in the public eye.”
The Netflixification of everything? Let’s not call it that, but whatever you do call it, it’s a model that can apply to a lot of different commercial categories. Generally speaking, services and goods that use the subscription model generally fall into one of three classifications: Replenishment services (razors, FMCG, undies), access services (digital subscriptions such as software or digital streaming) and curation services (pop culture packs, wine etc).
September’s 2020 edition of the Subscription Economy Index (produced by subscription software company Zuora), finds that subscription companies are outperforming their product-based brethren.
“Everywhere we look we see new ways the subscription economy is expanding into new spheres and putting down deeper roots as a core part of the global economy,” says Carl Gold, chief data scientist at Zuora.
“We see the subscription economy flourishing far beyond its birthplace in new regions like Europe and Asia. And in the US we are finding the subscription economy is now the leading edge of the national economy, leading in growth rates and leading the way in and out of economic cycles.
“All these data points suggest the subscription economy is getting bigger and more important than anyone expected.”
According to the research, SaaS companies with multiple markets in particular have been enjoying revenue spikes thanks to the subscription model, even while the economy in general shrinks.
“Even as SaaS sales to small businesses slowed due to Covid-19 closures, SaaS companies that serve multiple customer types – consumers, small and medium-sized businesses, and enterprises – reached record account growth.”
These ‘B2Every’ companies saw a huge surge in account growth as Covid-19 requirements drove most companies to quickly adapt and leverage remote workforce solutions.
“Overall, new customer acquisition in B2Every SaaS was nearly 2.4 times that of 2019’s rate.
“This trend is likely to continue.”
In 2020, infinite scalability and hyper-resilience is nothing to sneeze at.
“Evolving customer behaviors and dynamic market conditions mean subscription models are increasingly key to tech companies’ ability to increase revenue streams, build long-term customer relationships and ensure smooth, frictionless delivery of products and services,” say researchers at Ernst & Young.
EY’s research shows a tech industry eager to make the shift, with 12 percent of respondent companies having already shifted to subscriptions, over 50 percent in progress, and almost 30 percent considering it.
“This leaves just 8.5 percent of companies sticking with the traditional model,” says the research.
These are early days of course, and the potential is huge. Gartner predicts that by 2023, 75 percent of organisations that sell direct to consumers will offer subscription services. Juniper says that it expects the market for consumer subscriptions for physical goods to grow from an expected US$64 billion in 2020 to more than US$263 billion in 2025.
“There are few industries that are not amenable to a subscription model, making subscriptions a possibility for many different types of goods.
“Juniper Research expects a global average of two physical goods box subscriptions per subscriber by the end of 2025, in the same way that multiple digital video subscriptions are common.”
For firms planning on developing subscription services however, it’s important to develop the right mindset.
“It’s important to shift growth strategies from ‘landing new customers with hit products’ to ‘expanding relationships with existing customers’,” advises Amy Konary, VP of customer business innovation at Zoura.
“Given the current market conditions, it will be easier to sell to a customer base that is already seeing value from your services than convincing new prospects to invest in a new service. And it’s always less costly to keep an existing customer rather than find a brand new one.”
Similarly, the price to acquire new customers, with a focus on long term relationships, says Konary.
“Pricing and packaging play a key role in subscription success. Given the current market conditions, it’s best that businesses price to increase subscriber acquisition with a long-term monetisation strategy. Typically, this would take the form of entry-level or free tiers that drive adoption and experimentation with logical upsell motions clearly defined.”