The “Subscription Economy" refers to companies that have shifted their business models to ongoing subscription-based revenue streams. These shifts have been a growing trend for several years, with Gartner predicting that three-quarters of B2C organizations will offer subscription services by 2023. And B2B companies aren’t far behind.
In The Automatic Customer, author John Warrillow says a subscription business’s value can be eight times higher than that of a competitor without a recurring revenue stream. Proof indeed that the move away from one-off sales has many advantages for enterprises. Investors understand how predictable revenue and expense streams allow for better planning. However, some of the benefits of the model are subtler.
The Enterprise SaaS sector has been one of the earliest and most successful adopters of the Subscription Economy. Here are 10 ways the Subscription Economy impacts this sector:
1. Increased Focus on Customer Retention
With subscription-based revenue models, customer retention is critical. Investors look at the ratio of customer lifetime value (CLTV) to customer acquisition value (CAC) to determine the financial attractiveness of a subscription investment. Instead of selling a product and moving on to the next customer, subscription companies must ensure that their existing customers are satisfied and continue to find the service valuable. This leads to a greater focus on customer experience and building long-term customer relationships.
2. More Predictable Revenue
Companies can better predict their revenue streams with subscription models. This makes financial planning and forecasting easier and creates a more stable business model.
3. Greater Upsell and Cross-Sell Opportunities
Subscription-based revenue models encourage companies to build deeper customer relationships. This means the sales team can offer additional products or services that the customer will likely be interested in, leading to increased revenue through upsells and cross-sells.
4. More Agile Development
Subscriptions allow for more frequent updates. With shorter development times, companies can be more responsive to customer needs and market changes, allowing them to make improvements and add features more quickly. This also means testing new ideas and pivoting, if necessary, is easier.
5. Reduced Risk
With subscription-based revenue streams, companies rely less on one-time sales or specific customers. This means that if one customer leaves, it is not as damaging to the business overall.
6. Increased Technology Adoption
Subscription-based models often require the use of cloud-based technology, which leads to increased adoption of cloud-based and SaaS technology among companies.
7. Greater Focus on Customer Success
Because customer retention is critical to subscription models, companies are likely to invest more in ensuring their customers succeed with their products or service. This leads to increased focus on training, support, and consulting services.
8. Deeper Insights into Customer Behavior
With ongoing and regular customer interactions, companies can obtain deeper insights into customer behavior and preferences. This allows for more targeted marketing and more streamlined product development.
9. More Collaborative Relationships
Subscription-based revenue models require more collaboration and communication between companies and customers. This facilitates a deeper relationship and a greater sense of partnership.
10. Designed for Scale
Subscription services support technologies that are designed for scale. They typically cover the entire customer journey from discovery to billing. In many cases, the customer never directly deals with the company's staff.
The Shift from Ownership to Access
The rise of the Subscription Economy is linked to a significant shift in customer mindset. Natixis Thematic Asset Management reports almost 70 percent of adult consumers no longer value owning physical assets. Instead, flexibility is taking priority. So, for example, people are happier to pay a per-ride premium for the flexible use of a car than buy one outright. They don’t want their money tied up in an asset that requires regular maintenance and sits unused for most of the day and all night.
What Could Go Wrong?
Critics of the subscription economy have long predicted the onset of "subscription fatigue." This is a theoretical point at which consumers will tire of a fixed share of their wallet being allocated upfront. There's no sign that this is seriously dampening subscription revenue yet, though. And it is, in any event, more likely in a B2C environment than B2B, since businesses appreciate predictable expenses as much as predictable revenue.
It is more likely that a move to a subscription revenue model will fail when traditional businesses fail to anticipate just how different their operations will need to be run. Such companies must be prepared for a significant initial drop in revenues. Instead of getting large payments upfront, they must build up their monthly subscriptions. That could mean finance costs that impact profitability long-term, or downsizing operations for a period.
Investors should also remember that traditional income statements don’t adequately differentiate between traditional and subscription business models. Not only do they not distinguish between recurring and once-off revenue, they treat sales and marketing expenses as historical CACs instead of investments in future customers. Finally, they report historically without any indication of future performance, when predictability is one of the key benefits to a subscription model.
Overall, the Subscription Economy has already significantly impacted the Enterprise SaaS sector. It has led to increased focus on customer retention, greater flexibility, more predictable revenue streams, and deeper relationships with customers. These benefits have helped companies in this sector adapt to changing market conditions and navigate increasingly competitive landscapes.