Top 3 Lessons from Zuora’s new update to the Subscription Economy Index which I created:
1. Subscription companies are Killing It.
Subscription sales expanded at a record 24% for the year ending in March. In comparison, traditional economy sales growing in the low single digits.
2. But the laws of physics still apply.
In Q2 the largest subscription companies we tracked ramped up subscriber acquisition only to see Revenue Per Account fall flat, leading to a 50% fall in the aggregate sales growth rate, from 24% to 12% annual rate. We are still waiting to see how this developing trend plays out.
3. Subscription Economy leaders must not waste their shots
With so much uncertainty in the business environment, leaders at subscription companies must make diversified and educated bets. Recurring business models have many advantages over traditional business models but also unique pitfalls all their own.
At Zuora we are doing what we can to empower subscription economy leaders with the lessons we have learned through initiatives like the Subscribed Institute, Zuora’s new think tank, and my own new project, this website: grokchurn.com, dedicated to sharing best practices around the data science of subscriber churn.
BLOG POST FOR ZUORA.COM:
TITLE: The Subscription Economy Index Update: Fall 2018
We’ve just released the latest update to the Subscription Economy Index (SEI)!
What is the Subscription Economy Index (SEI)?
The SEI, conducted by Zuora’s Chief Data Scientist, Carl Gold, is based on anonymized, aggregated, system-generated activity on the Zuora service, a comprehensive platform for subscription-based businesses. This index reflects the growth metrics of hundreds of companies around the world, and spans a number of industries including SaaS, media, telecommunications, and corporate services—and, new this update, IoT.
The explosion of recurring revenue-based business models
The breadth and depth of the data analyzed in this study speak to the rapid ascent of the Subscription Economy. Gartner predicts that by 2020, more than 80% of software providers will have shifted to subscription-based business models. In addition, IDC predicts that by 2020, 50% of the world’s largest enterprises will see the majority of their business depend on their ability to create digitally enhanced products, services, and experiences. This is a broad, secular shift.
Recurring revenue-based business models are not new, but they have exploded in recent years owing to cloud-enabled, pay-as-you-go services. As globalization has placed increasing margin strains on manufacturing and product sales, subscription-based businesses have benefited from stable and predictable revenue projections, data-driven insights from direct consumer relationships, and large economies of scale owing to relatively small fixed costs.
Top-level findings of this latest SEI update
- Subscription businesses grew revenues about 5 times faster than S&P 500 company revenues and U.S. retail sales (18.1% versus 3.3% and 4.1% respectively) from January 1, 2012 to June 30, 2018.
- European growth surpasses North America: The EMEA sub-index of the SEI had at least six times the sales growth as the companies represented by the FTSE (London), CAC (Paris) and DAX (Berlin) stock indices.
- IoT is now covered by the SEI, and is growing fast. IoT beat the SEI average, growing at an annual rate of 25% over the 12 months ending with Q2 2018, while the main index grew 21% in the same time period.
The future of growth is subscription models
The message from this study is clear: When companies pursue subscription models, they find growth. While those growth rates may fluctuate, and are susceptible to broader market trends, recurring revenue models offer sustained and predictable returns that largely avoid the volatility of traditional “boom or bust” product cycles.
Tip from the creator of the SEI, Zuora Chief Data Scientist Carl Gold: Subscription Economy leaders must not waste their shots. Gold says, “With so much uncertainty in the business environment, leaders at subscription companies must make diversified and educated bets. Recurring business models have many advantages over traditional business models but also unique pitfalls all their own.
For more insight into ARPA vs Net Account Growth; revenue growth by company type; churn rates by business model, industry, company size, and region; and growth by region, download the latest Subscription Economy Index.