The Blog

  • November 18, 2016
  • Zuora Launches Subscription Economy Index (SEI)

    Tien Tzuo, CEO Zuora

    Tien Tzuo, CEO Zuora

    Zuora has been the champion of the subscription economy, as a differentiator for companies that sell products as services and have to bill and collect monthly rather than engaging in a single one-time transaction, since it was founded in 2007. Few people realize the complexity of running such a business where customers may pay little up front but more over time and the billing, finance, and commerce implications can be profound.

    Keeping it straight is the company’s niche and in the process it compiles huge amounts of data that it is now analyzing (anonymously) to spot trends in its industry. The Subscription Economy Index (SEI) is its attempt to glean new economic information from this market’s data.

    Some Zuora findings include:

    • Subscription businesses grew revenues nine times faster than S&P 500 company revenues (15.1% versus 1.7%) and four times faster than U.S retail sales (15.1% versus 3.6%) from January 1, 2012 to September 30, 2016. [Figure 1]
    • The combined annual revenue of companies in the SEI is more than $9 billion, a figure that has increased 20 times over the past five years, and there are 10 times the number of companies included in the SEI since 2012.
    • B2B subscription businesses grew fastest: 22% per year for 2015 and 2016; in that time B2C grew 16%.
    • B2C churns more annually (31%), than B2B (24%).

    This analysis is important for subscription companies and may be important for the broader economy as well. It’s tempting to say these are small numbers and a small base but that might be missing the point. It’s true that subscription revenues are small in comparison with businesses that sell whole products and collect for them up front. Nonetheless it’s easier to grow revenues when you’re a $100 million company than it is when you have revenues of a billion. So the comparison with the S&P 500 strikes me as less interesting. A better comparison would be among peers.

    On the other hand, subscription revenues are smaller in the present but they can be substantial down the road, one reason subscription vendors track customer lifetime value. This is exactly the point that SEI is meant to support. For subscription businesses to have a future they must be diligent at understanding customer activity and needs, which is what the index supports. With so much at stake, a subscription company cannot afford to miss customer signals that could indicate brewing dissatisfaction as well as enhancement requirements or other needs.

    Subscription vendors like Zuora, have become adept at reading tealeaves and forecasting the future of their businesses and this might be the greatest revelation for the general economy. Subscription companies have generally displayed greater awareness of customers and their requirements and as the subscription economy has spread they have educated consumers about what can be reasonably expected from vendors. This has placed conventional vendors at a competitive disadvantage by raising customer expectations of all vendors.

    Finally, the churn numbers represent a broad sample but they should not be praised. Top performing subscription companies operate with churn around ten percent or less. These churn numbers show the reality that it’s hard to get to that point. But this might turn out to be the most useful bit of information to other subscription vendors. Beating these churn numbers should be on every manager’s mind.

    Published: 7 years ago

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