Since its founding in 2007, Zuora has been the champion of the subscription economy, as a differentiator for companies that sell products as services and have to bill and collect monthly rather than engaging in a single one-time transaction.
Few people realize how complex it is to run a business that requires customers to pay little up front but more over time. The billing, finance and commerce implications can be profound.
Keeping it straight is the company’s niche, and in the process it compiles huge amounts of data that it is now analyzing (anonymously) to spot trends in its industry.
The Subscription Economy Index, or SEI, is Zuora’s attempt to glean new economic information from this market data.
Some Zuora findings:
- Subscription businesses grew revenues nine times faster than S&P 500 company revenues (15.1 percent versus 1.7 percent) and four times faster than U.S retail sales (15.1 percent versus 3.6 percent) from Jan. 1, 2012, to Sept. 30, 2016.
- The combined annual revenue of companies in the SEI is more than US$9 billion, a figure that has increased 20 times over the past five years, and there are 10 times the number of companies included in the SEI since 2012.
- B2C churns more annually (31 percent) than B2B (24 percent).
B2B subscription businesses grew fastest: 22 percent per year for 2015 and 2016; in that time B2C grew 16 percent.
Understand Customer Needs
This analysis is important for subscription companies and may be important for the broader economy as well. It’s tempting to say these are small numbers and a small base, but that might be missing the point.
It’s true that subscription revenues are small in comparison with businesses that sell whole products and collect for them up front. Nonetheless, it’s easier to grow revenues when you’re a $100 million company than it is when you have revenues of a billion. So the comparison with the S&P 500 strikes me as less interesting. A better comparison would be among peers.
On the other hand, subscription revenues are smaller in the present, but they can be substantial down the road — one reason subscription vendors track customer lifetime value. This is exactly the point that SEI is meant to support. For subscription businesses to have a future, they must be diligent at understanding customer activity and needs, which is what the index supports.
With so much at stake, a subscription company cannot afford to miss customer signals that could indicate brewing dissatisfaction as well as enhancement requirements or other needs.
Beat the Churn
Subscription vendors like Zuora have become adept at reading tea leaves and forecasting the future of their businesses, and this might be the greatest revelation for the general economy.
Subscription companies generally have displayed greater awareness of customers and their requirements, and as the subscription economy has spread, they have educated consumers about what reasonably can be expected from vendors. This raises customer expectations of all vendors, placing conventional vendors at a competitive disadvantage.
Finally, the churn numbers represent a broad sample, but they should not be praised. Top-performing subscription companies operate with churn around 10 percent or less. These churn numbers show the reality that it’s hard to get to that point.
This might turn out to be the most useful bit of information to other subscription vendors, however. Beating these churn numbers should be on every manager’s mind.