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Which industries are showing the most resilience in these unprecedented times? Our partners at Zuora analyzed the earliest trends of how COVID-19 has impacted subscription growth from the last month vs. the previous 12 months. Here are their findings.
The worldwide spread of coronavirus (COVID-19) has had a quick and damaging effect on the global economy. However, amongst operational disruptions, supply chain restrictions, and a global recession, subscription businesses are proving to be resilient. In an analysis of hundreds of subscription-based companies, more than half have not seen an impact on their subscriber growth, while one quarter are actually seeing subscriber acquisition rates accelerate even faster than before. And, of the remaining companies who are seeing their growth slow, half of those are still growing.
For the past three years, Zuora has published The Subscription Economy Index™ (SEI), a report on the collective health of the Subscription Economy, developed by Zuora’s Chief Data Scientist and widely cited by publications such as Business Insider, Barron’s and CNBC. The SEI has found that subscription revenue grew by more than 350% for the past seven and a half years as recurring revenue-based business models exploded due to digitally enabled, pay-as-you-go services. In fact, the SEI consistently showed subscription revenues to grow 5x faster than S&P 500 Industry benchmarks.
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.
While the SEI provides a long-term view to illustrate the sustained and predictable returns of recurring revenue models, this special Impact report focuses on the earliest trends of how COVID-19 has impacted subscriber acquisition rates (“subscription growth”) from March 1-31, 2020 compared to the previous 12 months (February 2019-February 2020).
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.
Download a PDF copy of the report here.
Subscription companies prove their resilience.
Overall, the COVID-19 Subscription Impact Report found that 53.3% of companies have not seen a significant impact to their subscriber acquisition rates. Meanwhile, 22.5% of companies are seeing their subscription growth rate accelerate, 12.8% of companies are seeing slowing growth, but are still growing, and the remaining 11.4% of companies are starting to see subscriber churn outpace their subscriber acquisition rates. Of the companies Accelerating, Slowing, and Contracting, we found trends across industries:
The following industry analysis focuses on the < 50% of companies that are seeing an impact (acceleration, slowdown, contraction) and how these companies are responding. It does not include the industries seeing limited impact.
Accelerating: Companies in this segment saw an increase in growth rate by more than 25%.
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.
Slowing: Companies in this segment are still growing, but saw a slow down in growth rate by more than 25%.
While the growth rate of companies in this segment has “slowed”, these companies are still growing. To adjust to COVID-19, they are focused on retaining existing customers by quickly sending out customer communications and offering adjustments, such as temporarily pausing a subscription or issuing credits, for subscribers most impacted.
Contracting: Companies in this segment saw a slow down in growth rate by more than 25% and had a contraction in subscriptions in March 2020.
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.
In working closely with Zuora customers and the wider subscription community, four common subscription business responses have emerged:
Subscription businesses are inherently more flexible than traditional product centric business models that are dependent on new, one-time sales. With a subscription business model, companies maximize for long-term customers rather than immediate cash to create a predictable revenue stream. Given the COVID-19 economic impact on various industries, a number of subscription companies have seen a spike of subscribers who cannot pay on time, which results in the need for large volumes of adjustments, credits, and refunds. Instead of focusing on maximizing cash to keep the business afloat during these uncertain times, subscription businesses can focus on retaining their customers past this pandemic and maximizing customer lifetime value.
EXAMPLE Given the struggles that restaurants are facing, a company that provides software for restaurant reservations issued full credit memos for its customers in the month of March. While the company will not collect against any invoices for the month, they are using an act of goodwill to build trust and loyalty with subscribers.
As the COVID-19 pandemic rippled through many countries, many companies saw an increase of customer requests to suspend subscriptions.
Our research shows that companies that offer customers the flexibility to change their subscriptions see a significantly lower churn rate (<20% churn rate) compared to companies that do not offer that option (>30% churn rate). Our research also tells us that companies that offer customers the option to suspend and resume their subscription services have a 5% lower annual churn rate compared to peers.
EXAMPLE As flight travel stopped around the world, an inflight internet service provider proactively paused subscriptions during the month of April, a gesture that builds trust and demonstrates customer empathy.
Within days, many subscription companies announced pricing discounts or free trials to help their customers adjust to the COVID-19 situation. Because subscriptions are not tied to any single product, companies have the flexibility to quickly adjust pricing plans to do right by their customers.
EXAMPLE With small businesses struggling to stay open, an auto information services company that serves dealerships proactively reduced pricing for all existing customers by 50% by mid-March.
As noted above, several segments such as OTT Video Streaming, Communication Software, and eLearning are seeing an Accelerated subscription growth rate due to COVID-19. Many of these companies have offered their content for free, or for extended free trials, to help consumers through the pandemic. By offering such trials or creating new pricing bundles during this time, these companies are also able to take advantage of the increase in demand by broadening the funnel and quickly capturing the time and attention of new subscribers.
EXAMPLE With shelter-in-place orders issued, a guitar learning application extended their 14-day subscription trial period to 3-months to help people develop a new hobby during their time at home.
EXAMPLE To enable teams working from home, a B2B software company quickly created a “Remote Work Bundle” that groups multiple offerings into one subscription, free of charge for the first 6 months.
For Appendix and Methodology click here.