Subscription businesses proving resilient as economy contracts due to coronavirus

Businesses in tech and beyond are increasingly turning to a subscription model to retain customers and stay flexible amid uncertainty.

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Millions of traditional businesses have been turning to subscription models over the past five years as they see increasing value in keeping customers big and small beyond simple one-time purchases. But the subscription model has seen significant increases in interest since the coronavirus took over the world, according to a new report from Zuora, a company that works to help organizations transform into a subscription business. 

Zuora released a Subscription Impact Report for COVID-19 that showed 22.5% of companies are seeing their subscription growth rate accelerate in March compared to the previous 12 months. Meanwhile, its Subscription Economy Index, which tracks the collective health of the subscription business economy, found last fall that subscription revenue grew by more than 350% through the past seven and a half years.

"Product ownership is now seen as a thing of the past. What we're witnessing is The End of Ownership as industry after industry sees their unit sales go down, and consumption of digital services go up. Successful companies today are focused on adapting to this rapid pace of change, deciding to focus on growing and monetizing a loyal customer base versus shipping more products," wrote Tien Tzuo, founder and CEO of Zuora.
 
"For existing subscription businesses, the data shows that the recurring revenue built on the loyalty of their customers will help them weather this storm. For all other companies, there is more urgency than ever before to rediscover their customers, shift to subscriptions, and discover the power of the recurring revenue model."

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The report found that businesses centered around video streaming, digital news, e-learning, and communications software saw the biggest accelerations in subscription growth rates, while consumer IoT, business IoT services and software for small businesses saw their rates slowing. 

Enterprises involved in travel, hospitality and sports saw their rates contracting as these industries suffered the most from worldwide efforts to contain the spread of the virus. 

The report notes that many organizations using subscription models have not been affected by the coronavirus pandemic but highlighted those most affected by the drastic changes in human behavior that have resulted from societal shifts or the resulting economic downturn. 

"As the COVID-19 crisis shifts consumer behavior and market demands, companies in the 'accelerating' segment have had to quickly scale their systems to meet higher demands. Additionally, many companies began offering free trials or testing new acquisition tactics to capture a wider audience and draw the attention of new subscribers," the report said.

"While 'contracting' companies are impacted by COVID-19 and not signing on new subscribers right now, they still have a large existing subscriber base. With a hyperfocus on renewing existing customers, these subscription companies have a better chance of maintaining the recurring revenue base they already have today."

The report added that companies seeing slowed growth are now focusing efforts on keeping their existing customers by quickly sending out customer communications and offering adjustments, such as temporarily pausing a subscription or issuing credits for subscribers most impacted.

Part of the value businesses have found in subscription models is the ability to adjust quickly to the business climate in ways that allow them to work with customers as opposed to product-focused companies that rely on immediate demand to survive. 

The subscription model is inherently centered on the long-term value of repeat customers and the Zuora report highlights the situation of businesses in industries that have cratered as a result of COVID-19's economic impact. Subscriptions companies are now seeing obvious increases in customers who are not able to pay in time and need significant adjustments, credits or refunds, particularly those involved in the restaurant industry. 

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One clear example cited in the report involves technology companies that helped restaurants with reservations and are now offering reprieves or credits for the month of March as a way to show loyalty and build camaraderie with customers who need help. Companies providing airlines with in-flight internet are already working to give businesses the chance to temporarily pause subscriptions. 

Even subscription businesses seeing increases in interest are doing what they can to give customers discounts, free trials or monthly payments off, taking a longer-term view of the business instead of trying to price gouge while people are stuck at home looking for things to occupy their time or tools to help them work from home.

The rise of the subscription business

In an interview, Zuora CPO Chris Battles said he spent years as a business leader frustrated with the inflexibility of internal systems that failed to drive growth and provide the kind of customer-centric value his companies needed.

"Subscriptions are a living thing. When I came to Zuora I learned that the subscription economy was bigger than just SaaS companies. What you find is more than half of our customers are from businesses that aren't traditional technology or software companies," Battles said. 

"All shapes and forms of companies out there, from manufacturing to healthcare to industrial to consumer to IoT to media firms, are shifting how they're having relationships with customers. They stop being these transactional relationships and they actually start to be these ongoing enduring relationships built on continuous value. We think subscriptions are going to take over and be a core part of essentially every industry out there."

One of the best examples Battle cited was big equipment manufacturer Caterpillar. The company quickly realized that with technology it could provide far more than just bare-bones equipment. Caterpillar can now equip trucks and machines with sensors that can provide customers with a trove of valuable data to help them optimize their activities and better understand the health of their fleet.

Businesses in every industry are looking for ways to transition away from one-time transactions and into enduring relationships based on the premise of continuous value delivery. 

This style of business is better for the long-term health of a company because it provides enterprises with consistent revenue and monetized relationships in the place of one-off deals that require you to constantly go out and convince new customers of your value. 

This trend is not for every industry and requires companies to figure out what exactly they can provide customers with that would be worth a continuous purchase. Battle also said that companies have to be ready to scale in case there is huge interest while also being flexible about pricing in the event that consumers respond with concerns. 

Battles mentioned a number of retailers across the world that are switching to subscription models as a way to fight against business lost to Amazon and news outlets that have had to transition from print subscriptions to digital models that keep providing value to customers.

"It's easy to say that you'd like to have a recurring revenue stream with a customer, but you have to be certain that you have an experience or you're creating the right value that a customer would want to pay for on a recurring basis," Battles said. 

"You can't take something that is a one-time transaction and just say 'Hey, you're gonna have to pay me all the time for it' unless there's a real reason. You need to have that clear customer benefit that you're going to deliver that is essential."

Editor's note: This story has been updated to clarify the details about the impact of COVID-19 were released in a new report from Zuora, not in its regularly updated index.

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