Businesses that have adopted the as a Service model are thriving. Research by cloud-based subscription management platform Zuora for its biannual Subscription Economy Index confirms that for 28 consecutive quarters, subscription business revenues have grown more than 300 percent, a CAGR of 18 percent. This growth is five times faster than S&P 500 companies and US retail sales during the same period.
The report points out that companies that sell via a subscription-based model have two growth levers: average revenue per account and net accounts. In recent months, growth has resulted from subscriber acquisition, which increased from 11.7 percent in 2017 to 14 percent in 2018. Average revenue per account increased by 8 percent, which is 3.3 percent less than in 2017.
Software as a Service (SaaS) was the fastest growing sector in 2015 and 2016, but IoT surpassed it in 2017. Telecommunications as a Service growth picked up steam in 2018 to equal SaaS growth by the end of the 2016-2018 period.
Growth that Outpaces Churn
Zuora found that the average churn rate for subscription businesses increased slightly in 2018 to 26 percent from 24 percent in 2017.
The index report points out that to build recurring revenue, you need to increase the number of your subscription or as a Service customers at a rate that exceeds churn. It’s also a vital part of successful as a Service business’ strategy because building strong customer relationships that last give you the opportunity to sell deeper into those accounts over time.
The report advises that companies minimize church “by investing in high-quality services, sticky features, and customer success.”
As a Service Business Growth as an Economic Indicator
The Subscription Economy Index also provides insights into how as a Service businesses are impacting the overall economy. In a press release, Zuora CEO and Founder Tien Tzuo states, “The Subscription Economy® has been a leading indicator of broader economic trends for the past seven years. For the first time with the Subscription Economy Index, there is data suggesting that the growth of subscription revenue tracks ahead of the US Gross Domestic Product.” For example, the index shows a Q1 2018 peak subscription business growth, followed by a GDP peak in Q2. The index report also points out that in 2017, as a Service businesses experienced a one-year period of growth and then the GDP grew late in the year.
Carl Gold, chief data scientist at Zuora, says, “All these data points suggest the Subscription Economy is getting bigger and more important than anyone expected.”
How Fast is Your Business Growing?
If you’re still providing the majority your IT solutions on a break-fix basis, you may have trouble keeping up with your as a Service counterparts.
Recurring revenue from as a Service or subscription contracts lets you start the month knowing your expenses are covered, helping you budget and plan more easily. Moreover, the automation tools that managed services providers use give them insights into the status of IT solutions, allowing them to shift their focus from reacting when something goes wrong to keeping everything working right — which can go a long way toward building customer trust and loyalty.
Adopting a new as a Service model takes effort, resources, and investment, but the Zuora index shows that the benefits of transitioning from a break-fix model to a subscription model aren’t just conjecture. The transition can truly lead to growth — to the tune of 300 percent growth over seven years.