Subscription economy defies economic headwinds, fuels recurring growth

Organizations with subscription-based business models have not only survived the recent global economic challenges but have also outperformed their traditional, product-based counterparts, according to The Subscription Economy Index (SEI) report for 2023 by Zuora.

The latest SEI findings reveal that subscription-based companies have grown remarkably, outstripping traditional business models significantly. Specifically, over the last 12 years, companies within the SEI ambit have burgeoned 3.4 times faster than their counterparts in the S&P 500, underscoring a compound annual growth rate of 16.5% against the latter’s 4.8%.

This stark contrast in growth trajectories is more than just numbers. It encapsulates a transformative shift towards “total monetization” strategies, where businesses increasingly adopt innovative, customer-centric models to ensure sustainable growth. The shift from static, one-size-fits-all subscription models to dynamic, usage-based pricing or creative bundling and unbundling of services demonstrates “subscription-based businesses’ flexibility and innovative mindset.”

Amy Konary, senior vice president and founder of The Subscribed Institute at Zuora, emphasized the importance of agility and flexibility in staying competitive in her findings in the report. According to Konary, companies’ ability to adapt their monetization strategies to evolving market demands is crucial for achieving sustained and recurrent growth.

CIOs benefit from the transition to the subscription model

The rapid adoption of new technologies, driven by an ever-steepening technology hype curve, facilitates this shift toward more versatile business models.

“One of the significant advantages of subscription software is its inherent flexibility, allowing CIOs to adjust subscriptions based on the current needs of the organization,” said Abhishek Gupta, CIO of Dish TV. “This adaptability is crucial during periods of growth or special projects, providing scalable technology solutions with minimal delay. However, selecting reliable subscription software vendors remains critical and involves a comprehensive evaluation process. This process encompasses assessing the technology’s maturity, ensuring it meets business requirements, engaging stakeholders in decision-making, defining project success criteria, establishing a governance model, and conducting thorough legal and regulatory vetting of the vendor. These steps form the cornerstone of a robust supplier evaluation framework, ensuring the chosen subscription services align with the organization’s strategic goals.”

According to the SEI report, despite a general slowdown in growth in the SaaS domain, companies leveraging consumption-based models or hybrid approaches continue to outperform, indicating a shift toward more flexible and customer-aligned pricing strategies.

“The advent of Software as a Service (SaaS) and ‘pay-as-you-go’ models offers businesses the flexibility to explore and learn from new products quickly and efficiently without significant cost implications,” said Mahendra Upadhyay, chief technology officer at the Indian Broadcast Audience Research Council. “Essentially, this approach aims to minimize the risk of failure by learning from both successes and setbacks, rather than solely relying on internal trial and error.”

Technology providers have raced to offer SaaS solutions to replace existing on-premises products in many markets, supporting customers’ cloud-first strategy, said DD Mishra, VP Analyst at Gartner.

However, sounding a caution, Mishra said, “We have also noticed that despite the numerous benefits for customers, providers still face challenges in persuading existing customers with perpetual licenses to switch to subscription-based solutions.”

Sharing the challenges from a CIO perspective, Upadhyay said that embracing new technologies is crucial for any business aiming for relevance, expansion, and scaling in the current landscape. However, challenges such as the viability of the technology and the availability of skilled talent can impact the journey’s success. Consequently, these models are set to evolve, with insights from the industry “enabling quicker go-to-market (GTM) strategies for new products” and enhancing customer experiences.

The current market presents significant growth potential driven by economic factors. Providers are increasingly adopting subscription models that require minimal initial investment from customers and place a greater emphasis on continually proving value to ensure renewals.

“Executives and investors view this business model as a key driver for stable annual revenue and greater resilience against economic shifts,” said Mishra. “As a result, the software industry is transitioning from traditional perpetual licenses to subscription-based models, with many evaluating the best timing for this change.”

This transition towards a subscription-based model for IT spending not only aligns with the CFO’s objectives but also accelerates the CIO’s adoption of digital services and innovations, which are often more readily available through subscriptions, said DishTV’s Gupta. “This synergy between CFO and CIO strategies fosters a conducive environment for exploring new ventures.”

The SEI report’s geographic analysis further underlines the global reach and appeal of the subscription model, with significant revenue growth in the EMEA and APAC regions outstripping local stock indices. This global trend underscores the universal adaptability of subscription-based models across diverse markets and industries.