Subscription Businesses Prove Their Resilience (Surprise, Surprise)
This is the worst financial crisis since the Great Depression. Every sector of the economy is being hit, and technology is no exception. An online tracking spreadsheet shows approximately 25,000 startup workers have been laid off so far. The general sense is the world is falling apart. But my conversations with other subscription companies have been different. In fact, often the conversations have been about how much growth will slow, as opposed to how much revenues will fall.
This dichotomy is even more apparent in the data included in the Subscription Impact Report we released this past week, which compares subscriber acquisition rates in the month of March to the previous 12 months. The results are fascinating — you can read the entire study here.
The headline is this: Subscription-based businesses are proving very resilient in the face of this crisis. Incredibly, almost nine out of ten companies in the study sustained or grew their subscriber base last month.
More than half of the companies in our study have not seen an impact on their subscriber growth. One quarter are actually seeing subscriber acquisition rates accelerate — they’re growing even faster than before. And of the remaining companies who are seeing their growth slow, half of those are still growing, just at a slower rate.
So why are most of these subscription businesses proving so resilient? Let me offer four primary reasons:
1. It’s much easier to renew existing customers than chase new revenue.
At the risk of sounding obvious, if you’re a product-based business, every quarter you start with zero. You’re constantly chasing new business. And if for some reason your customers stop shopping, your revenues plummet.
Subscription businesses, on the other hand, start with money in the bank. Instead of being at the zero yard line, and scratching and clawing their way forward, they start at the 50-yard line, and focus on preventing churn. Only then do they focus on finding new customers to surge forward. That’s the power of a renewal based model.
It’s very difficult to plummet to zero with this model. Your entire subscriber base would have to cancel.
2. Subscription businesses can scale on a dime.
Because of the nature of providing shared services, subscription businesses are built for scale. What do you think the accelerators in our study are doing right now? They know that we’re all at home watching our streams, reading our news, taking online classes, and videoconferencing. So are they just sitting back and enjoying all that usage? No way. They’re all in aggressive subscriber acquisition mode.
They are launching new plans. They are spinning up new bundles. Fender Play rolled out a 90 day free trial. Zoom launched a free service for educators. Pluralsight kicked off #FreeApril for online tech classes. Box flexes and says add all the users you need for the next 60 days, while we are all in lockdown. And news sites like the FT and the Seattle Times are dropping their paywalls for COVID-related articles, and taking advantage of the traffic to acquire new customers.
When demand hits, they can strike.
3. Subscription businesses know their customers.
Subscription businesses aren’t just selling stuff off shelves to strangers. They can take a look at usage data and adjust their service accordingly: look at all the virtual gym classes happening right now. The huge amount of customer insight inherent in this model allows for all sorts of creative thinking.
They can dial down as well. For example, restaurants and their providers are obviously hurting right now. As a result, the restaurant subscription app Resy is not charging its restaurants for two months. It also refigured its settings so that users can now “book” a take-out meal. Talk about a smart pivot! When this is all over, those customers will be there for them.
How much do you know about your customers if you’re still selling stuff in stores?
4. Subscription businesses have more levers at their disposal.
If you’re a product company in a downturn, the only thing you can really do is: try to sell more.
But subscription companies that focus on lifetime customer value can look into the future: if you help your customers now, build loyalty, and keep them longer, your value goes up! Like the Resy example, you can do this a number of ways: offer credits, new services, let folks suspend and resume. That’s way more beneficial in the long run than just pitching your product. Hence this model’s popularity in all sorts of industries.
As Romit Dey, a partner at PwC Consulting, notes: “Everyone is seeking ways to sustain revenues and fuel growth. The subscription model offers immense value through recurring revenues that promise predictability to the business. This is equally true for technology companies that struggle with lumpy deal flow and quarter-to-quarter fluctuations, and also for other non-tech industries such as industrial manufacturing, automotive and consumer products, which are all hurting right now. The question facing these companies is, ‘how fast can we get there – to some form of the subscription model in our business?’
What’s going to happen when this is all over? What will the new normal look like? Your guess is as good as mine. But one thing is certain: companies around the world are waking up to the power of this business model. So much for subscription fatigue. If anything, the present moment is a massive forcing function that is accelerating the widespread adoption of subscription-based digital services: telemedicine, usage-based insurance, online learning, remote work solutions, etc.
It’s also changing how we define what it means to be a modern company. As the legendary former Cisco CEO John Chambers, who took Cisco from $70 million in annual revenue to $40 billion at the end of his tenure, recently said during a conversation with March Capital Partners, “If I had to do Cisco all over, I would do it all as a subscription-based model.”
Amen to that.