It’s been a year since we released our first Subscription Economy Index™ (SEI), our landmark report that tracks the rapid ascent of the Subscription Economy. The SEI is based on anonymized, aggregated, system-generated activity on the Zuora platform, reflecting the growth metrics of hundreds of companies around the world and across a wide range of industries.
Recurring revenue-based business models are not new, but they have exploded in recent years with the proliferation of cloud-enabled, pay-as-you-go services. As globalization has placed increasing margin strains on manufacturing and product sales, subscription-based businesses have benefited from stable and predictable revenue projections, data-driven insights from direct consumer relationships, and large economies of scale as a result of relatively small fixed costs.
Gartner predicts that by 2020 more than 80% of software providers will have shifted to subscription-based business models. In addition, IDC predicts that by 2020, 50% of the world’s largest enterprises will see the majority of their business depend on their ability to create digitally enhanced products, services, and experiences.
In the 10 years since we first starting saying that the world was moving to the Subscription Economy, we’ve seen that vision realized. Now we’re seeing that the Subscription Economy has become the engine that’s driving economic growth.
This latest SEI reinforces this point. Since the first SEI in 2016, the number of companies in our study has increased, the sets have grown, and we have more geographic and vertical insights. The SEI is validation that, in the future, all growth will come from subscriptions.
Subscription business revenue growing 8x faster than S&P 500.Overall subscription businesses grew revenues about 8 times faster than S&P 500 company revenues (17.6% versus 2.2%) and about 5 times faster than U.S. retail sales (17.6% versus 3.6%) from January 1, 2012 to September 30, 2017.
The Subscription Economy tracks with broader market trends. The SEI generally tracked with the overall U.S. GDP slowdown around the end of 2016, and the subsequent acceleration in 2017. Both the GDP and the SEI had their strongest growth in the past two quarters since 2015.
Usage-based pricing is an effective growth tool. Our research shows that subscription companies that employed a small amount of usage-based billing in their revenue mix (less than 10%) grew more than twice as fast on average as companies that did not employ usage-based billing at all. The track record of top SEI companies suggests huge potential for companies who have not yet adopted usage-based billing.
Europe is on the ascent. Since April 2016, the EMEA Index grew a cumulative 35.2% (annual rate of 22.3%), just beating North America with 34.7% cumulative growth (22% annual rate).
Company size trends: bigger is still better. Over the last 6 months, the largest companies in the SEI with $100M+ in revenue grew at an accelerated rate (31%) compared to the prior 6 months, while smaller companies all saw their growth rates decline slightly (15-21%).