Future-Proof Business with the Subscription Business Model

If you’ve been following business news of late, you’d be right to believe that subscription companies are either taking a hard hit or growing exponentially. Headlines range from layoff announcements by the likes of ClassPass, StitchFix, Uber, and several news publications, to rising stocks of companies like Netflix (15.8 million subscribers added by April) and video conferencing service Zoom (Q1 revenue grew 169% year-over-year).

Future-Proof Business with the Subscription Business Model
Future-Proof Business with the Subscription Business Model. Photo by Brandable Box

The fact is that most subscription companies fall somewhere in between and are seeing steady growth even in the aftermath of COVID-19. The subscription business model is proving to be very resilient in extremely uncertain market environments that demand a great deal of flexibility from vendors and value predictable and steady revenue streams.

As a result, more and more non-subscription companies are now considering adopting recurring revenue-based business models to ensure that their business remains relevant and is ready for the post-pandemic future. And it might be the perfect time to make the switch.

This article will help you understand what makes subscription businesses so resilient, how crises often provide opportunities and the four strategic growth levers that businesses should consider to succeed with subscription business models.

Table of contents

A Resilient Business Model
Crisis Bring Opportunity
Four Strategic Growth Avenues
Double Down On What Works
Hunt For New Prospects
Expand Offerings
Explore New Horizons
Conclusion

A Resilient Business Model

According to Zuora’s recent Subscription Impact Report: COVID-19 (May 2020), 50% of companies are still growing but have not seen a significant impact on their subscriber acquisition rates. 18% of companies are seeing their subscription growth rate accelerate, 17% of companies are seeing slowing growth, but are still growing, and the remaining 14% of companies are contracting.

50% of companies have not seen a significant impact to their subscriber acquisition rates, 18% of companies are seeing their subscription growth rate accelerate, 17% of companies are seeing slowing growth, but are still growing, and the remaining 14% of companies are contracting. Source: Subscription Impact Report: May Edition, Zuora, 2020
50% of companies have not seen a significant impact on their subscriber acquisition rates, 18% of companies are seeing their subscription growth rate accelerate, 17% of companies are seeing slowing growth, but are still growing, and the remaining 14% of companies are contracting. Source: Subscription Impact Report: May Edition, Zuora, 2020

The pre-COVID numbers for the Subscription Economy are even more positive. According to Zuora’s Subscription Economy Index, over the past seven years, subscription companies across North America, Europe, and Asia-Pacific have seen their sales grow by more than 300%, representing an 18 percent compound annual growth rate (CAGR). Subscription businesses grew revenues about five times faster than S&P 500 company revenues (18.2% versus 3.6%) and U.S. retail sales (18.2% versus 3.7%) from 1 January 2012 to 30 June 2019.

The Subscription Economy Index Level Versus S&P 500 and Retail Sales Growth. Subscription business sales have grown substantially faster than two key public benchmarks—S&P 500 Sales and U.S. retail sales. Overall, the SEI data reveals that subscription businesses grew revenues about five times faster than S&P 500 company revenues (18.2% versus 3.6%) and U.S. retail sales (18.2% versus 3.7%) from January 1, 2012 to June 30, 2019. Source: Subscription Economy Index, Zuora, 2019
The Subscription Economy Index Level Versus S&P 500 and Retail Sales Growth. Subscription business sales have grown substantially faster than two key public benchmarks—S&P 500 Sales and U.S. retail sales. Overall, the SEI data reveals that subscription businesses grew revenues about five times faster than S&P 500 company revenues (18.2% versus 3.6%) and U.S. retail sales (18.2% versus 3.7%) from January 1, 2012, to June 30, 2019. Source: Subscription Economy Index, Zuora, 2019

There’s no doubt that the Subscription Economy is here to stay. At its core, the Subscription Economy is about designing your organization and business model around your customers, not products. It’s about building ongoing relationships with customers, unlike the one-time transactions of product-based business models.

Conceptually, subscription businesses outperform those based on transactional sales for good reasons. In a Product Economy, the revenue counter is set back to zero every single sales quarter. Revenues and profits depend on “how many boxes we push,” and companies tend to constantly chase after new customers. When customers stop buying, sales immediately, and steeply decline.

Subscriptions, on the contrary, are by definition way more resilient. They focus on building and growing a loyal customer base. The long-term customer relationships offer subscription businesses stability and revenue predictability since It’s much easier to renew existing customers than chase new revenue, especially during or after a global pandemic. And even if a business doesn’t sell more to existing customers, it can still keep them on board, and nurture the relationship for the next opportunity.

According to Dr. Carl Gold, Zuora’s Chief Data Scientist, data shows that for subscription businesses, the average percentage of revenue from existing customers has been increasing over the last few years, with an average of 70% of revenue coming from upsells, cross-sells, and renewals.

Crisis Bring Opportunity

If you’re currently a subscription business, the crisis will most likely open up new avenues of growth. On the other hand, if you currently do not offer a subscription service and have been debating if you should do it, now is the time to go for it.

Here’s why the current crisis is an opportunity for subscription growth:

First, consumer preferences toward ownership have been changing for good. According to a global Harris Poll (conducted on behalf of Zuora), consumers no longer favor ownership: 57% of adults wish they could own less “stuff” and 70% of adults agree that subscribing to products and services frees people from the burden of ownership (e.g., maintenance, clutter, declining value).

Today’s customers want to decide when, where, and how they access and use products and services; they are reluctant towards committing to significant upfront costs; they fear obsolescence and want the latest and best service at all times; they value flexibility in terms of payments and offerings, and they want personalization and offers that cater to their individual needs and usage situations. In short, more than ever, customers greatly value subscription models.

Second, crises accelerate ongoing trends and trigger new ones. They make customers reconsider what really matters and dramatically shift preferences. We believe that customer preferences towards subscriptions will further deepen due to the current pandemic.

Look at how the last recession in 2008 played out for the software industry. Experts believe that the last financial crisis was the inflection point for the software industry’s shift from a traditional licensing model to a cloud-based subscription model. Launched in 1999, Salesforce.com had pioneered flexible and customer-centric subscription offerings, which really took off after the recession hit as business buyers chose lower, ongoing costs over large upfront investments.

It’s understandable that in times of uncertainty, customers want to preserve cash. As a result, business buyers increasingly value variable costs over fixed costs and replace capital investments with operational expenses. Not only did Salesforce.com’s business model prove to be resilient during the 2008 recession, but it has also been one of the primary drivers for the company’s uninterrupted growth for more than 20 years.

The last financial crisis also saw the emergence of successful SaaS companies like Zuora (2007), Twilio (2008), Nutanix (2009), ride-sharing platforms such as Uber (2009) or Blablacar (2006), retail startups like Warby Parker (2010), meal delivery service like HelloFresh (2011) or hospitality disruptor Airbnb (2008).

The success of all these companies was fueled by two key drivers: widespread adoption of new digital capabilities and the need to provide access to flexible consumption models that reduce upfront investments and risk. We believe that the current crisis will most likely lead to a similar increase in demand for more flexible consumption models from customers. And this flexibility is exactly what the Subscription Economy is about.

Given that the time is ripe for subscription business models, non-subscription businesses should seriously consider adopting the model. The fact that customers are more open than ever before to new offerings, new buying patterns, and new modes of service delivery also means that businesses can experiment with a relatively lower risk of failure. Subscription business models can help companies craft their Blue Ocean strategy² to open up a new market space and create demand.

So, how should subscription and non-subscription businesses go about this? We’ve outlined a framework to help companies identify the direction in which they can grow and determine how to get there based on where they are today. Depending on where your business is on its subscription journey, consider the four strategies outlined in the matrix on the following page.

Four Strategic Growth Avenues

Igor Ansoff’s seminal work—the Ansoff Matrix—has for years helped executives devise strategies for future growth. We transposed this simple yet powerful framework of product-market combinations to the Subscription Economy and arrived at the following four strategic growth avenues.

The matrix illustrates the options available to businesses to drive subscription growth. It illustrates four subscription-driven growth avenues depending on offerings and markets.
The matrix illustrates the options available to businesses to drive subscription growth. It illustrates four subscription-driven growth avenues depending on offerings and markets.

The matrix looks at two fundamental dimensions: i) Offerings i.e., existing subscription offerings or new launches, and ii) Markets, i.e., growing existing customer base or seeking to acquire new customers. Combining the two dimensions leads to four strategic levers for achieving subscription business growth. It’s important to note that the strategies are not mutually exclusive and a company could be employing all of them at the same time for different offerings and markets, especially in times of economic crises.

Double Down On What Works

As noted above, most subscription businesses have proven to be resilient. However, the fact that they’re still growing should not make these businesses complacent. Now is the time to double down on everything that has made you successful and helped you build a stable business.

Customer retention should be your prime focus at this time. Do everything you can to continue innovating, creating value, and making sure that your customers receive that value every single day. Activating this first strategic lever also means doubling down on efforts to increase revenue from current customers and grow overall market share.

Examples of strategic initiatives include:

  • Accelerate Customer Marketing: This is primarily about increasing marketing efforts towards existing customers and includes shifting marketing budgets and campaigns to target customers.
  • Upsells and Cross-sells: Customer engagement is an important factor in turning ‘light users’ into ‘heavy users’ of the service. This, in turn, translates to upsells and cross-sells, resulting in topline revenue and bottom-line profit growth.
  • Subscription Changes: Allowing customers to make changes to their current subscriptions can be key to growth. Research from the Subscribed Institute shows that enabling subscription changes drives overall revenue growth. In companies where 1 in 10 subscriptions has a change after the initial sign-up, the growth rate more than doubles to 20% YoY revenue growth.
  • Subscription Suspensions: Allowing customers to pause or suspend their subscriptions can help reduce churn and drive growth in the long-term. Research from the Subscribed Institute shows that offering customers the option to suspend subscriptions can help businesses save one out of every six churning customers.
  • Acquisition: If acquisitions have helped boost your growth in the past, consider acquiring competitors and companies that complement your services to increase market dominance.

Finally, continue working on your pipeline of prospects to bring in new customers. Continue to invest in your sales and marketing efforts so you can successfully reach your target customer segments and expand your distribution network of partners or channels to increase reach.

Let’s look at a few examples of adopting this strategy during the crisis. HeadSpace, the meditation app, is customizing its offerings to meet the needs of its subscribers at the current moment with a special ‘Weathering the Storm’ collection. “We’re here for you” is the message it wants to send its subscribers.

Another example is Disney, which is releasing the much-awaited Frozen 2 movie months ahead of schedule on its streaming service. The company sees the move as a way to “surprise families with some fun and joy during this challenging period.”

In the B2B world, CarGurus, the global automotive marketplace, proactively issued a blanket 50% discount to all of its automotive partners through May. The supportive gesture is intended to help ease the burden for dealers at this difficult time as the COVID-19 situation continues to impact automotive retail.

Key Takeaway: In this scenario, subscription businesses may need to add new features or tailor existing offerings to answer an unusual challenge like COVID-19. Such strategies will help companies prevent churn, increase revenue from existing customers, and reduce the negative impacts on their businesses.

Hunt For New Prospects

A second strategic lever for companies that already have subscription offerings is to venture into new customer segments. This strategy is right for businesses whose existing offerings can easily serve other customer segments. In fact, one of the business upsides of this pandemic has been that some companies have found new markets overnight. Therefore, businesses that can serve other segments should consider expanding or at least piloting their services in new markets without necessarily changing their core subscription offerings.

Examples of strategic initiatives include:

  • Expanding from B2C to B2B or vice-versa
  • Expanding into a new city or territory
  • Going global or expanding into new geographies

This is a common growth strategy in the Subscription Economy. Think of file hosting service Dropbox, which started off targeting B2C consumers and later expanded to B2B customers. Or the music streaming service Spotify, which started off serving a handful of countries in Europe and experienced rapid growth through global expansion. Lyyti and TOTEM are more recent examples of companies using this strategy during the COVID-19 period. Lyyti, a Finland-based SaaS event management platform, saw its revenue potentially evaporating due to the massive impact of the pandemic on in-person events. The company reacted swiftly and expanded its services to digital event management. But it didn’t stop there. Lyyti then pivoted to serve an entirely new segment of customers—retailers. In a matter of hours, it repurposed its service to support Carrefour, the large French retail group. Lyyti is helping the company continue operations at 600 stores by providing daily store headcount tracking services. The timely move not only ensured continued business but also helped Lyyti see a whopping 26% year-over-year increase in growth for the March-May period.

TOTEM, a France-based B2B startup that offers flexible and customized mini-cafeterias for its nearly 150 corporate customers, was witnessing a 4% week-over-week growth rate prior to the pandemic. But when the pandemic hit, the company saw its market fading overnight as lockdowns closed its customers’ offices. TOTEM strategically decided to pivot to a direct-to-consumer (D2C) model and quickly repurposed its supply-chain and digital capabilities to offer home delivery services. In just six days, the startup was serving a brand new customer segment and was receiving more than 500 orders per week. TOTEM managed to preserve vital cash flow, save jobs, and ensure that it’s business continued to grow despite the pandemic.

Key Takeaway: In this scenario, subscription businesses must be ready to quickly pivot and make the most of new markets and opportunities emerging from the crisis.

Expand Offerings

This strategy calls for the launch of subscription-based offerings that cater to current customer segments. It typically applies to product-based companies that have not yet fully adopted the subscription business model and have only a small portion of subscription revenue in their revenue mix. Think of firms where the core activity still revolves around driving one-time sales. These can be products as well as services such as consulting and training, which are still sold using the old product-based business model of one-time sales.

It also applies to companies that can easily offer their products as subscriptions but have not yet adopted the model. As stated earlier, with customer demands for more flexible consumption models on the rise, the time is right for such companies to fully embrace the subscription model.

Examples of strategic initiatives include:

  • Repackaging existing products or services as a subscription
  • Launching a subscription outside of current offerings
  • Including another company’s subscription service as part of your offerings
  • Partnering with another company to jointly launch a new subscription service

An example of a quick pivot to increase its offerings by adding a subscription component is San Francisco based restaurant, Samovar. With the Shelter-in-Place order restricting restaurant dining, Samovar decided to offer a meal plan subscription, for pick-up or delivery for its customers stuck at home. The move helped the restaurant retain its employees, continue to serve its customers, and bring in revenue.

An example of a longer-term and essential pivot is HPE. The software company realized that it needed to accelerate its shift from a product-based business model to a subscription business model to succeed in the post-pandemic world. To this end, HPE is undergoing a reorganization to be able to offer its entire portfolio of products “as-a-service” by 2022. On its recent earnings call, Tarek A. Robbiati, EVP & CFO, said that the company planned to accelerate the pivot “to drive long-term, sustainable, profitable growth.”

Key Takeaway: In this scenario, businesses must strive to grow beyond their traditional offerings and use subscriptions to extend their current portfolio.

Explore New Horizons

This strategic lever is perhaps the boldest but also the most rewarding. It’s deployed either as a matter of survival for businesses with declining growth or is motivated by the promise of new growth opportunities.

This initiative is right for situations where existing offerings are simply not enough for market opportunities that have opened up. The strategy here is to launch an entirely new subscription service targeting new customer segments. It requires businesses to think like startups and identify new ways of providing value to customers. The current pandemic has definitely acted as a catalyst for innovation by companies, large and small.

Examples of strategic initiatives in this fourth domain include:

  • Extending your brand in a meaningful way to reach new customers with new subscription offerings
  • Applying your expertise of serving customers effectively in your current markets to a new market through new subscription offerings
  • Spotting new opportunities early on and exploiting them faster than the competition

A good example is Joffrey’s Coffee & Tea Company, the official specialty coffee brand of Walt Disney World and Disneyland. With most parks around the world closed due to the pandemic, Joffrey’s introduced a subscription offering that allows subscribers to have a bit of the park brought to them each month. The offering gives people access to the Disney Specialty Coffee Collection, which is made up of more than 20 coffee blends that are served at resorts and signature restaurants within the parks.

Lyft is another great example of a company that pivoted quickly in response to changing market needs. With demand for rides plummeting during the pandemic, the company launched a new pilot service called “Essential Deliveries,” which provided drivers with new earning opportunities. The service delivers food, medical supplies, and other necessities for nonprofit groups, government agencies, businesses, and healthcare organizations.

Another example of a timely and opportunistic launch is Trevco, a leading apparel manufacturing company that managed to launch MaskClub.com, a D2C monthly subscription service for face masks, in just four days. The service provides subscribers a new face mask every month with themes ranging from emojis to Batman to NASA. While it’s possible that Trevco’s mask subscription might become obsolete once the pandemic is over, the learnings of launching and operating this pilot subscription offering will be extremely valuable in helping the company craft future subscription offerings.

Key Takeaway: This scenario represents the boldest of all the four strategies and is suited for companies that are ready to take the plunge and launch a new subscription. Businesses need to identify new ways of providing value to new customer segments using the subscription model.

Conclusion

The beauty of the subscription business model lies in the fact that it allows businesses to be flexible and monetize their resources and capabilities in many different ways. We hope the four strategic growth avenues outlined above help companies identify potential new growth opportunities. It’s important to remember that these strategies are not mutually exclusive and can be used at the same time. In fact, it might even be a good idea to test and compare them against each other through different pilot projects.

The pandemic has made it very clear that the winners will be companies that are willing to make bold decisions and act quickly to respond to changing market conditions. So, if you’ve considered joining the Subscription Economy or expanding your subscription services, the time to do it is now. With the right technology and partnerships, even large companies can transform themselves to be as nimble as startups. These initiatives don’t necessarily have to be expensive, multi-year transformations. It can simply be sowing the seeds for the future with a small pilot project or expanding a current service. It’s important to understand that fast commercial prototyping doesn’t need everything to be perfect. Get started and co-create with your customers for mutually beneficial outcomes.

As we have seen, subscriptions have driven immense business growth over the last few years and have proven to be very resilient during the COVID-19 period. History teaches us that crises also bring opportunities. Based on our learnings from the last financial downturn, we believe that the current crisis will lead to an acceleration in the adoption of the subscription business model. To put it simply, the Subscription Economy is undoubtedly the future of business. And now is the time to go all-in on subscriptions and future-proof your business.

Source: INSEAD and The Subscribed Institute

Published by Jeannette Scott

, a wellness coach specializing in stress management and quality of life. She’s covered topics from nutrition to psychology, from sexuality to autoimmune diseases and cancer.