Subscription Economy

What is the Subscription Economy?

The subscription economy describes the trend away from asset ownership and toward asset access. Primarily driven by the Fourth Industrial Revolution and widespread adoption of digital services, it’s rooted in the ubiquity of cloud technologies and the scalability of digital infrastructure.

There are two main business models in the subscription economy: consumption-based and subscription-based.

• Consumption-based pricing: With consumption-based pricing, customers pay only for the services or products they use, when they use them. This works best for businesses that offer on-demand services with wildly varied usage needs, like cell phone data and cloud computing.
• Subscription-based pricing: In a straightforward subscription model, customers pay a flat rate for a bundle of services or products they can access anytime. Businesses that offer products or services with consistent usage needs, like Software-as-a-Service (SaaS), video streaming platforms, and meal delivery services, benefit most from this.

In a way, the subscription economy came about naturally. Since Salesforce developed the first SaaS platform (its CRM) to gain traction and widespread use in 1999, the industry has grown exponentially.

Before then, there was no real reason to subscribe to anything. Most people and businesses owned the products and services they needed because everything served a concrete purpose.

However, accessing information or services without truly owning them is considerably easier, cost-effective, and more efficient. Obvious issues with ownership — procuring, maintaining, and switching between products — were practically eliminated when software became scalable.

Digital subscriptions are completely software-enabled in that sense. Without advancements in cloud computing, offering customers instantaneous access to online services for a set monthly price would be impossible.

Synonyms

• Subscription business growth
• Subscription trends

Subscription Economy Statistics

What started out as one company in the early 2000s is projected to grow to $1.5 trillion by 2025. Let’s take a look at how far the subscription economy has come.

• Of the $1.5 trillion subscription market size, cloud services comprise about 45%.
• The ecommerce subscription market is growing more than 65% year over year and will surpass $900 billion by 2026.
• Over the last decade, subscription revenue growth has been 437%, outpacing the S&P 500 by 4.6x.
• Digital subscription companies have a combined market cap of $15 trillion.
• In 2021, US consumers spent $430 more on subscription services each year, a 15% increase from 2018.
• 98% of consumers subscribe to at least one streaming service.
• Millennials have an average of 17 media subscriptions.
• The global SaaS market is set to reach $908.21 billion by 2030.
• 99% of businesses use at least one SaaS vendor.

According to a 2022 report on subscription commerce, current subscription companies have seen a 31% increase in customer base from the prior year. Since monthly recurring revenue (MRR) has also increased across the board, this underscores a continuously rising interest in the subscription model and the potential for a consistent revenue stream.

How the Subscription Business Model Has Changed Buying Behavior

The birth of the subscription economy represents a massive paradigm shift for businesses and customers. With new technology, companies can offer customers products or services entirely new ways.

This also means, however, customers have adapted.

Customers now have higher expectations.

Brands benefit tremendously from all the insights they get from subscription services. They use them to serve their buyers (or potential buyers) targeted content and offers to keep them engaged and loyal.

But they’ve been doing this for a while now. B2B and B2C customers alike have come to expect seamless, personalized experiences in return from sign-up through delivery and billing.

Sometimes, those expectations are impossible to meet.

Technological advancements (namely, automation) and higher personalization through subscriptions has pushed businesses to be more customer-centric.

But the fact remains that 90% of customers expect a seamless experience, no matter the touchpoint. And 86% would leave a brand they trusted after just two or three experiences that missed the mark.

Although customer expectations are seemingly unlimited, business capabilities aren’t. No matter how much data they gather from their subscribers, preventing subscription churn and delivering exactly what customers are looking for 100% of the time is practically impossible.

Buyers want value upfront.

As cited by 62% of respondents in a McKinsey subscription survey, the most compelling reason for customers to sign up for a subscription service is a good value for the price.

How exactly a business defines value (or, rather, how its customers define it) varies depending on countless factors, but the underlying principle remains the same.

Pricing strategy alone is highly unlikely to convert buyers, especially as they become more accustomed to promotional offers. High quality and variety of items and experiences across all touchpoints, as well as accommodating and convenient customer support, are now the primary factors that influence subscription choice.

The most common way companies offer value to their buyers is through a freemium product or free trial period. That way, they can try the product without risk before fully committing.

The Paradox of Choice works against them.

In most cases, customers can choose from dozens of similar services. With so many options to choose from, it’s difficult for them to make a decision.

Called the Paradox of Choice, this phenomenon is defined as “the idea that too much choice can be paralyzing and, paradoxically, reduce a person’s satisfaction or happiness.”

In one sense, the abundance of choices levels the playing field — no one company has too large a market share. But it also creates immense pressure for businesses to stand out and offer buyers something unique without complicating their lives.

That means companies have to be agile and responsive to customer needs if they want to survive, a challenge that is hard enough even without the abundance of subscription alternatives.

Advantages of the Subscription-Based Business Model

Although the subscription business model entails some inherent challenges, those using it are better positioned to meet customer demand and deliver value.

Let’s take a look at some of the most critical advantages of the subscription model.

Predictable Revenue

Monthly and annual subscriptions offer a huge for businesses advantage over ad hoc sales: they receive a payment from each of their customers on a recurring basis.

Businesses with recurring revenue have an easier time forecasting growth and more predictable cash flow. With better revenue insights, they can plan strategically for future investments like marketing campaigns, product development, or a go-to-market strategy.

Scalability

Because subscription businesses have recurring revenue, they don’t have to constantly chase another source of income. With reliable sources of monthly cash flow, they can invest in growth initiatives instead (provided they can maintain their customer base).

It’s this exact characteristic that makes recurring revenue models so enticing to investors. A subscription company can expect a revenue multiple 8x higher than a one-time sale business.

Higher Customer Lifetime Value (CLV)

Subscription companies have an edge when it comes to CLV because they can track how many times a buyer returns. They can then use this data to improve their products, create better experiences, and provide targeted promotions.

For most software platforms, it doesn’t make economic sense to sell standalone products, either.

Adobe Photoshop, for example, used to be available as a one-time purchase. Now, the company offers it as part of their Creative Cloud subscription, which means its customers are spending on subscription services each year what they would have paid for complete ownership of the product.

In return, it’s automatically updated and runs on cloud infrastructure.

Customer Retention

Customer acquisition is five to seven times more expensive than retention. Sales and marketing infrastructure is extremely expensive and can be difficult to scale.

Retention-focused subscription companies have an advantage: their customers are locked in for a certain period of time, so they don’t have to spend all their resources on new customer acquisition.

Plus, businesses get access to valuable user data that can help inform decisions about product development and marketing strategies for future acquisition efforts. And those that focus on customer retention end up providing better products, services, and experiences to their valued customers.

Low Barriers to Entry

Some industries are harder to enter than others, as are their respective business models. But the technology driving the subscription economy has made it easier than ever to generate subscription revenue, regardless of the industry.

Ten years ago, building a SaaS MVP for less than $100,000 was completely unthinkable — development, testing, validation, and deployment were too expensive and complicated.

Now, no-code platforms, cloud infrastructure options like AWS or GCP, and Environment-as-a-Service (EaaS) make it possible to build and validate bare-bones product for less than $1,000 in just a few days without much coding experience.

The booming subscription market has also created new revenue drivers for content marketers, such as email newsletters and weekly/monthly podcasts. Although these aren’t explicitly subscription services, they’re still good examples of how the subscription economy has made it easier for entrepreneurs to make money without having to invest an exorbitant amount of time and resources.

Cross-Selling Opportunities

Buyers are still open to one-off purchases. They’re more than happy to work with a subscription vendor on an implementation project, hire them for a consulting job, or buy an add-on plugin to their existing service.

Businesses should be paying attention to this trend and develop strategies that leverage cross-sell opportunities.

Conversely, they should also be on the lookout for upsell opportunities — customers are often willing to pay more for higher tiers of service or additional features.

Easy to Budget For

Recurring payments are easy to budget for since customers know exactly how much they’ll be paying out each month. Compared to one-time repeat purchases, subscriptions make it easier for end users to manage their spending more closely.

As an added benefit, it’s easier for customers that use the service frequently to justify paying that monthly fee than it is to shell out hundreds of dollars upfront for a one-time purchase.

How Companies Can Grow Revenue in a Subscription Economy

Characterized by considerable scalability and high customer lifetime value, the subscription economy reduces barriers to entry for new businesses. Thanks to technology, operating costs are lower (for startups, extremely low) and companies can focus on customer retention instead of chasing after new users.

This doesn’t mean it’s “easier” per se — focusing on retention, automation, and operational efficiency gives more organizations the opportunity to make more money, but pulling it off is actually much more challenging.

Figure out what customers actually want.

In the subscription economy, an abundance of accessible data makes it easier than ever to uncover customer needs.

But these requirements are also more complex — a buyer doesn’t just want the product, they want to be part of an experience. And some of their needs won’t have anything to do with its functionality.

Despite the Gold Rush in industries like SaaS, the vast majority of new subscription businesses fail because they:

• Don’t find their product-market fit
• Fail to help their customers form habits or workflows
• Aren’t able to find the right pricing
• Can’t optimize or automate their processes
• Become overwhelmed with the complexity of simultaneously growing and retaining their customer base

Customer data is a subscription business’s best friend. Use it to track usage patterns, identify usage trends, and refine messaging.

Offer convenience and simplicity.

Convenience and simplicity are two things every customer wants throughout their entire experience. This includes:

• The sales/buying process. It shouldn’t be difficult to purchase or cancel a subscription. B2B and B2C subscription businesses should have online customer self-service portals to make the purchase process easier.
• The onboarding experience. The customer should be clear about what they’re getting and how they can use it most effectively. This includes tutorials, webinars, guides, and walkthroughs for new subscribers.
• The customer service experience. Customers need fast, reliable help if something goes wrong. They also want helpful answers to their questions and more information when they feel like they’re missing something important.
• The product itself. Subscription services should be tailored to the customer’s needs and be easy to use with minimal friction. The most important features should be readily usable (or clickable) and the user interface should be intuitive.

Companies also need to put themselves in their customers shoes when offering their subscriptions. With the average consumer having well over a dozen subscriptions, juggling multiple passwords, applications, and payment methods can be overwhelming.

For added personalization and value, success in the subscription economy requires multiple subscription plans, with flexible billing options — monthly, quarterly, annual — and different levels of service so customers can find the best fit for them.

Reward customer loyalty.

The easiest way to let customers know you appreciate them is by rewarding them for their continued subscription.

Discounts, special offers, and other incentives like exclusive access to new products or services at no extra cost are low-cost for the business and high-value for the customer.

You can also offer points or rewards systems that allow customers to accumulate points over time and redeem them at a later date.

Many subscription companies take their loyalty incentives a step further by personalizing offers to customers and based on their individual behaviors, preferences, purchases, and usage patterns.

It’s important to remember that not all promotions are worthwhile — customers are increasingly accustomed to discounts and freebies. Ensure you’re not giving away too much for free (or at a discount) that it affects your bottom line or perceived value.

Optimize pricing.

Price optimization is a tricky equation for most companies because it requires understanding of what customers are willing to pay and what a profitable operation looks like.

As mentioned above, the actual cost of a subscription service is fairly low on the list of important factors for customers, which means prices need to reflect the value of the product they’re buying.

Although software, industry benchmarks, and historical data are useful, most businesses need to test it repeatedly (and respond to continuously changing market dynamics) to get it right.

Automate billing.

The billing process, done manually, is one of the most error-prone and time-consuming parts of a subscription business.

Automating it with technology can give organizations the confidence to scale quickly and securely, without worrying about billing errors, revenue leakage, or customer dissatisfaction.

Leverage data insights.

Perhaps the best thing to come out of the subscription economy is the abundance of data. What once took weeks or months of market research can be carried out much more quickly for a tiny fraction of the cost.

Subscription data can provide insights into customer preferences and behaviors, usage trends, churn rates, and more — all of which businesses can use to tailor product offerings, develop new marketing campaigns, and optimize pricing strategies.

Ironically, data is available through other subscription services. Business operations software, BI tools, third-party data platforms like ZoomInfo and Apollo, and research firms like McKinsey and Forrester all require subscriptions to access different kinds of customer and market data.

​​Technology Enabling Growth of the Subscription Economy

Technology is the main driver of the subscription economy. If it didn’t help businesses operate more efficiently, they wouldn’t be able to manage massive volumes of subscribers, billing nuances, payment processing, and data so easily.

Customer Relationship Management (CRM)

CRM is the backbone of a successful subscription business — it helps organizations track and manage customer interactions, from sales to support.

Since it houses all types of customer data, CRM is also one of the most valuable sources of predictive analytics.

With CRM as the center of a subscription business’s tech stack, they can listen to their customers, develop go-to-market strategies, and innovate much faster.

Subscription Management

Susbcription management software is more of an enablement tool for the subscription economy than CRM. Without it, subscription models would be too inefficient and error-prone to be worth pursuing.

At its core, subscription management tools automate the entire customer lifecycle from onboarding to billing to cancellation. They automate collections, subscription activation/upgrades, and renewal notifications.

Contract Lifecycle Management (CLM)

Contract management software is another “must” for subscription businesses. It stantardizes the creation, signature, execution, tracking, and management for contracts with customers.

CLM solutions also help teams become more efficient by automating document management tasks from redlining to e-signatures.

With contract management on autopilot, organizations don’t need to worry about when a subscriber is up for renewal or if there’s a discrepancy between the contract and what’s actually billed. And they won’t have to create a new service contract every time a new customer signs up for their platform.

Configure, Price, Quote (CPQ)

Businesses that have slightly more complicated product offerings use CPQ software. Whether it’s on the backend of the company website or integrated with a CRM system to drive sales team performance, CPQ solutions help businesses create accurate quotes and proposals for new subscription customers in real-time.

The biggest benefit of CPQ is its ability to optimize the sales process. When buyers can get instant, accurate quotes for different products and services, they’re more likely to follow through with a purchase.

Billing

A comprehensive billing platform is a key tech piece for the subscription economy. Usually, it’s integrated with subscription management, though companies with one-off products and add-ons will need to find a software that takes care of both.

Subscription billing tools reduce churn by automating recurring payments and sending automated payment reminders. And since they support multiple payment methods, subscription businesses can give customers more control over how they make payments.

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