Thriving through recurring revenue models

John Phillips at Zuora argues that the subscription boom is far from over

 

It is well documented that the subscription economy boomed during the pandemic. Stay-at-home orders encouraged individuals around the world to think differently about the way in which they purchased and consumed both products and services.

 

Whether it was entertainment, fitness or food related, the ease and stability of subscriptions meant that their popularity reached new heights and the businesses that offered them thrived. In fact, recent research from Zuora found that quarterly subscription growth has not only continued over the last two years, it has doubled.

 

More recently, however, the outlook has been a little less positive. As consumers grapple with the ever-increasing cost of living,  subscriptions have been one of the first things many have opted to cut back on. Reports that over one million subscription payments have been cancelled since last summer, alongside the news that streaming giant Netflix is axing shows to try to recoup after subscriber losses, will come as no surprise given the circumstances.

 

However, all is far from lost. In fact, when used correctly, recurring revenue models can actually provide some respite for households who are feeling the economic squeeze.

 

Subscription businesses across all sectors need to act now in order to survive the current turbulence and sustain previous levels of growth. The key will be to remain flexible and become a valuable asset to their customers during this time of economic hardship and beyond.

 

The fall of a subscription giant?

With the pandemic, energy crisis, war in Ukraine and current inflation, it is hardly surprising that people are feeling the pinch. There is no doubt that subscription business have been hit hard as the cost of every-day items and essential services has increased.

 

Streaming is one industry that has been particularly impacted, with Netflix loosing 200K subscribers in the first three months of the year and witnessing a record decline in share price. The resulting investor panic also translated into falls in the shares of Disney (Disney+ offer) and Warner Bros Discovery (owner of HBO Max), two of its main competitors.

 

However, to write Netflix off as dead would be rash. It may have lost 200,000 users, but it still has 221 million left and its revenues have not stopped growing: it generates some $30 billion annually. It remains the undisputed market leader.

 

Furthermore, the model on which Netflix built its overwhelming growth is simply coming to the end of its first chapter: the capturing phase, where the goal was to attract customers at rock-bottom prices. Now it is time to monetise these relationships, retain users and make the business profitable.

 

Like Netflix, most subscription businesses will hit a bump in the road and subscriber rates will either flat line or drop. But, it doesn’t have to be the end. The ongoing economic crisis is a perfect example because low-cost subscription models – like that implemented by Netflix - often will suffer when the going gets tough.

 

The important thing is for businesses to take a step back, reassess their offering and refocus in on adding value to their subscriber base.

 

Getting subscription models right

When implemented correctly, subscription models could actually encourage consumers – even those who are counting the pennies - to stay with a brand long term. This is because they are based on relationships, rather than a series of single transactions.

 

For example, subscriptions offer increased flexibility. This is a really important consideration for today’s consumer who typically wants the freedom to consume on their own terms.

 

In fact, the fear of being bound to a company or service is enough to put 42% of consumers off signing up in the first place. They want to escape the burdens associated with ownership, whether that’s obsolescence or time and location barriers. Therefore, the ability to opt-out or even just temporarily suspend a service is seen as a really important factor.

 

This is even truer in the current climate, where having control of and being able to schedule payments could help individuals to better manage their finances over certain periods of time. Having this knowledge - and acting upon it - could be what sets a business apart and enables them to stand out in an extremely competitive market. 

 

By enabling customers to put subscription payments on hold rather than cancelling them, businesses don’t just reduce churn rate, they maintain valuable consumer data. This data can help curate competitive pricing structures and develop strategies to entice customers with tailored offerings when they are able to restart their subscription.

 

These tailored offerings are the perfect way to win loyalty and build stronger, long-term relationships.

 

Whilst some subscription businesses have taken a knock over the last couple of months, this is far from the end. By focusing on creating value and increasing flexibility for their customer bases, businesses across all sectors can become a true asset during a time of economic hardship.

 

When implemented correctly, subscriptions could pave the way to a more resilient future for all businesses. 

 

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John Phillips is GM EMEA at Zuora 

 

Main image courtesy of iStockPhoto.com