“Why own anything anymore?”
It’s not an expression you’d expect to hear coming from an entrepreneurial tech titan (and an American one at that!), but this is the oft repeated mantra of the somewhat legendary Tien Tzuo, CEO of Zuora, the subscription billing, commerce and finance solution, formerly employee number 11 at Salesforce.
It all began with razors – why not have a new batch delivered to your door every month – but Tzuo believes it will happen with cars, houses, well thanks to Uber and Airbnb it already has, but also educational materials, clothing – even beer!
But of course, whilst developments in the world of B2C might grab the media headlines, its within B2B that the biggest changes are occurring, and so it’s worth paying close attention to Zuora’s Subscription Economy Index, published today.
The index is based on “anonymized, aggregated, system-generated activity” on the Zuora platform, and covers industries including SaaS, media, telecommunications and corporate services.
Research from Gartner quoted in the report suggests that by 2020, more than 80% of software providers will have plumped for subscription based business models, and according to IDC, “65% of the world’s largest enterprises will have committed to becoming information-based companies, shifting their organizational focus from product sales to ongoing services.”
A Bird In The Hand…
It’s all to do with recurring revenue models, which “have exploded in recent years”, according to Zuora, thanks to the emergence of the Cloud, big data, AI, machine learning etc. “Stable and predictable revenue projections”, it seems, are infinitely preferable to the uncertainty of making one-off sales of products.
Given the turbulence of the past year, perhaps it is hardly surprising that even the world’s largest firms want to know where their next wedge of cash is coming from – a subscriber who renews every 6 months or annually, creating a relationship of trust over time, reduces uncertainty, fixed costs, and “margin strains”, as well as generating data-insights which can be interpreted and applied to new products.
So far so good, but for the model to work, Churn must be managed and reduced, and in many circumstances firms may have to settle for some short-term pain, or “a correctional phase when the net new accounts decreased”, for long term gain – an “increase in the average revenue per account.”
According to Zuora’s findings, the “Subscription Economy Index” has grown at a rate 9x faster than S&P 500 sales over the past five years (15.1% versus 1.7%), and 4x faster than US retail sales (3.6%).
SEI driven by ARPA and NAG
Two key measurables the subscription economy likes to look at are Average Revenue Per Account (ARPA), and net account growth, and the reason for this is simple. If revenues go up at a subscription economy based business, it’s either because revenues per account have gone up, or more subscribers have signed up to the service.
Zuora have labelled the past two years as a “Goldilocks” period of growth, that has seen both ARPA and net account growth increase steadily, contributing to the “solid” growth of the Subscription Economy Index (SEI).
This is vital, because, according to consultants McKinsey, within the B2B software sector, for example, a company that grows less than 20% annually has a 92% chance of failure.
Within B2C, “net user growth is the key metric. Successful B2C companies increase subscriber acquisition rates with rapid pricing experimentation, increase retention and ARPA by tailoring offerings based on behavioural insights and willingness to pay, and increase capture rates by taming the complexity of electronic payments.” But B2C suffer disproportionately from “high churn rates owing to poor pricing and packaging decisions, fickle consumer behaviour and / or lost revenue owing to poor payment and acquisitions.”
Who’d be a B2C start-up founder, eh?
“Size matters in the Subscription Economy”, Zuora say, and “For start-ups, the real challenges appear to lie after the initial sub-million dollar “honeymoon” growth period.” Having a great idea and finding customers is the beginning, not the end, of the process of building a successful start-up.
Ultimately, to be a successful Subscription Economy firm, be it within B2B or B2C, eliminating churn is what counts, and, stop me if you’ve heard this before – the devil is in the detail. Every departed customer should feel like a major catastrophe, and autopsy’s must be carried out.
There are simply no easy wins, it seems. Even an idea as game-changing as the Subscription Economy quickly consolidates (nature abhors new business ideas as much as vacuums) and as more and more players come to the party, attention to detail, business acumen and an ability to maximise small wins are the factors that dictate who wins and who loses.
Meet The New Boss
In conclusion (download the full report to draw your own, doubtless more sophisticated ones) the new data-driven, recurring revenue fuelled boss of the economy, is not so very different from the old.
We refer you (once again) to the “Red Hat” theory. You may be running just as fast as you can with your new subscription product, but it is no more than you must do just to stay in the same relative position.
Still, we can all marvel at the pace of technological change, while we wait for the robots to take over. The much-heralded singularity can’t come quickly enough.