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.
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If you’re a subscription business that has avoided the worst of the crisis so far, the two most important assets you have right now are resilience and empathy. Things are undoubtedly hectic, but you’re not in a tailspin. You’re not wrapped up in an ugly knife fight for immediate revenue. You have the ability to not just empathize with your partners and customers, but also act on that empathy. You have a number of levers at your disposal. Because your finances are nice and stable and boring, your services can get creative and interesting. Your main goal right now should be to double down on your subscriber relationships, but depending upon how this current crisis is affecting your company, tactics can vary widely. D2C companies might want to open their services to help out more people at home. B2B companies working with vendors who are struggling may want to offer discounts or credits. There are lots of different ways to help. But guess what? You will benefit in the long run! Remember, it’s all about building lifetime customer value: if you help your customers now, build loyalty, and keep them longer, your value will rise as well. It all comes around. But let’s focus on what we can do right now. Here are some of the ways we’re seeing Subscription Economy Leaders do this. The Guitar Maker If you’re lucky enough to be seeing a surge in new demand for your service, your first instinct might be to capitalize on it. To ask for money. Don’t! Instead, embrace that new audience with a warm hug. Everyone knows Fender. They make amazing guitars and amplifiers. They also have a hugely popular video learning program called Fender Play. Last month, their management was brainstorming ways to help out folks stuck at home, and decided to offer a free 3-month subscription to their Fender Play tuition app to 100,000 people. The immediate demand was so high that they upped the quota to 500,000. And now, after reaching the half-million mark, the company has extended this offer to 1,000,000 learners! Today they’ve got a huge new cohort of new members that didn’t exist 6 weeks ago, and a significant percentage of them will turn into loyal subscribers for years to come. Win win. The Gym Chain What is a gym supposed to do in a lock-down? Just hunker down and hope that not too many people will cancel? One national chain took the opposite route. They decided to proactively suspend all of their memberships. It was a smart move that instantly freed them from having to field lots of cancellation requests, and kept their membership base intact until their facilities can open up again. Giving your customers the flexibility to suspend and later renew their subscriptions is always a good strategy. In fact, even during good times, we've seen that companies offering the option to suspend and resume have an average churn rate of 25%, compared to 30% churn rate for those that do not. The Restaurant Reservation Service With restaurants taking a serious hit these days, the back-end reservation service Resy decided not to charge any fees to their restaurants or consumers for a couple of months and refund the restaurants they already charged (and they made this decision early, way back on March 9th). Not only that, but they switched their service from handling reservations to handling take-out and delivery. Talk about pivoting on a dime! They’ve also got a great blog promoting great take-out options as well as restaurants that also sell groceries. Consider giving your subscribers a free pass for a few months by issuing credits or term extensions. If your finance department can issue these balance adjustments without spending time manually processing each one, this should be a pretty straightforward effort. The Meditation App Many subscription companies are taking the opportunity to extend free offers to populations that are being particularly affected by the crisis. The wildly popular meditation app Headspace, for example, is offering free access to all US healthcare professionals working in public spaces through 2020. All you need is a National Provider Identifier (NPI) and an email address. They’ve also opened up a number of guided meditations to everyone called “Weathering the Storm.” Being a good corporate citizen doesn’t just mean volunteering and making donations to worthy causes. If you have a service that you think people on the front lines of this crisis will find worthwhile, give it away, give it away, give it away now! The Online Learning Company Every sector of our economy is hurting right now, and the technology industry is no exception (that grim spreadsheet of startup layoffs is now at 30K and climbing). Now might be a good time for IT folks, developers, and data professionals to brush up on a skill set, or pick up a new coding language. That’s why the online tech education company Pluralsight is offering free access to its entire Skills platform this month: over 7,000 technology courses available for free, with no credit cards required, and no watch limits. They’ve essentially suspended their entire business model for a month! Imagine Netflix trying something like that. It’s pretty amazing. The idea is to stay home, stay safe, and skill up. The Developer Platform Particularly in the B2B space, we’re seeing a lot more need for service bundles that can accommodate bigger teams of remote workers. And now GitHub, which currently has over 40 million developers on its platform, is absolutely free for teams. The company had been planning a freemium option for some time, but the crisis made it a priority. They also lowered the prices of their enterprise services across their entire customer base. Existing customers will have their bills automatically reduced going forward. Make it easier for bigger teams to take advantage of your service. Be like GitHub. Be a good host. The Car Marketplace CarGurus is a research and shopping resource that lets you compare local listings for new and used cars, and puts you in touch with a dealer if you find a car you like. They work with thousands of dealerships across the country, who are obviously being affected by the crisis right now. So what did CarGurus do? They immediately issued a blanket 50% discount to all of their automotive partners in March, and then extended that offer through May. “We are doing everything we can to continue helping our customers manage through this period,” said President and COO Sam Zales, “including connecting dealers to shoppers so they can hit the ground running when the situation settles and shopper behavior returns to normal." Amen to that. Got any examples of other subscription businesses that are being creative with payments and service offers? Share them with me below. I'd love to hear about it!
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It’s a stressful time, to be sure. What’s most top of mind right now is keeping each other safe, and doing our part to avoid the spread of COVID-19. But given how the health crisis is spilling over into the broader economy, I’ve been getting a lot of questions about how to think about this from a subscription business perspective. Here’s my short take: it’s time to double down on relationships.
If the Subscription Economy is about anything, it’s about a fundamental return to relationships, as opposed to transactions. A long time ago, we used to know all the people who made the things we bought and sold. Many of those relationships got lost over the last 100 years, but today they’re back (just in a digital format), and more important than ever. At its core, the Subscription Economy is about designing your organization and business model around those relationships.
Outside of the immediate health concerns, I’m also mindful of the fact that jobs and businesses have already been disrupted, which is very painful. Hopefully I’m offering a constructive assessment of the situation based on the interests of the readers of this newsletter. So let’s take a look at the current crisis from three perspectives: existing subscription providers, individual subscribers (e.g. all of us), and those companies that have not yet made the switch.
First, if you’re running a subscription business that hasn’t been immediately affected, you are probably grateful for the power of recurring revenue to help you weather this storm. Unlike one-off sales, you can count on recurring revenue as a stable base of future income, and you are not looking at a precipitous drop in revenue and the need to slash expenses to match. That’s great, but please don’t take it for granted. Now is the time to double down on the customers that have gotten you here. Reach out to them. Continue to provide value and innovate. Consider doing something special, like Zoom’s free K-12 School Program. Also realize that many of your peer businesses are suffering, whether they manage subscriptions or not. You are part of a community, so take care of that community.
Second, as an individual subscriber, if it’s at all possible, please continue to support the services and organizations that you like and find worthwhile. You’ll want them to be here when this is all over. By working hard, listening attentively, and doing their best to keep you happy, these businesses have also been loyal to you, so please try to support them. And given that companies like Netflix and Spotify will be fine, if you have the resources, now might also be the time to consider upping an annual subscription to a humanitarian non-profit. I’ll be writing more about non-profits in the future, but notice my emphasis on “subscription” as opposed to “donation.” Give the gift that keeps on giving.
For larger businesses who are relatively new to digital services, or are just beginning to test the waters, now is a good time to move forward. Why? Because you’ll want to have these services ready to go when the economy comes roaring back. Nothing about this moment changes the broader macroeconomic shift towards subscriptions and services. If anything, these days we’re rediscovering the importance of digital services both at work and at home. So here’s the question to ask yourself: do you want to be the company that’s asleep at the line when that starting gun fires again, or do you want to be ready to take off running?
Here’s a quote from a recent McKinsey paper called “The CIO’s moment: Leadership through the first wave of the coronavirus crisis” that I found worthwhile:
We know from past crises, in fact, that companies that take a slash-and-hold approach fare worse than those that both prune and thoughtfully invest.
CIOs need to take a through-cycle view and stay committed to broader transformation goals they’ve been leading such as programs on data, cloud, and agile…The goal for CIOs is to emerge from this not having just “managed” the crisis but being stronger because of it.
For this reason, it’s important for CIOs to keep a steady hand on initiatives and programs that can help the business become tech forward.
Finally, if you are a local business that doesn’t currently offer a monthly subscription or membership plan, please consider doing so. You have loyal customers that would love to support you, so a membership model makes sense (Fivestars is a Zuora customer that does great work with local businesses). Turn those happy customers into happy subscribers. Ask people to subscribe to your bar, your coffee shop, your restaurant, your store. Set yourself a goal to turn ten percent of your revenue into recurring revenue by the end of the year.
Just as a thought experiment, think about how you would run your small business “as a service.” A tier-based plan might make sense. If you’re looking for a great case study, check out Keep It Cut, a chain of subscription-based barbershops in Phoenix. They have monthly haircut plans starting at $29 a month for the Regular (unlimited haircuts) all the way up to $44 a month for the Whole Hog (unlimited haircuts, washes, and grooming).
Build those relationships. Support, or if you can, subscribe to your local businesses.
Do you know of any small businesses that are currently offering subscription plans?
Tell me about them in a comment below.
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