It doesn’t require much examination to reach the conclusion that we’ve entered a golden age of recurring revenue.
Subscription king Netflix has been trading at record highs. Recent IPOs from Spotify and Dropbox underscore the value investors place in subscription-based business models. And the growth in curated, home-delivered products available by subscription, one of the biggest recurring revenue stories, is exploding.
Led by providers such as Ipsy, Stitch Fix, Dollar Shave Club, and Blue Apron, subscription box services have grown by more than 100% in each of the past five years, according to a recent McKinsey & Company survey.
Traditional retailers like the Gap are racing to catch-up. All in all, CFOs responsible for top- and bottom-line growth at many of these subscriber based companies have been basking in the glory of recurring revenue.
But a closer look reveals a number of challenges on the horizon that could impact financial performance. The emergence of so many subscriber-based companies and services in the marketplace has created threats in the following areas:
Churn. Many subscription-based companies have been plagued by high churn rates, on average as high as 40% for subscription box business, according to McKinsey. That number is even higher for gourmet meal kit providers like Blue Apron, whose stock has floundered since its IPO in 2017.
Subscription Gluttony. As new subscription services flood the market, over-saturation is leading to subscriber burnout. The concept of “subscription fatigue” has led to the emergence of a growing number of “unsubscribe” services like Trim, TrueBill, and Hiatus. These services scour customers’ monthly expenses to uncover subscriptions they pay for but never use or forgot they had, and then automatically cancel them.
Consumer-driven Consolidation. Consumers are buying more goods and services through subscription, but want fewer relationships to manage and fewer bills to pay. We’ve seen this reality addressed in the TV business, where viewers who want to simplify access to popular over-the-top (OTT) streaming services like HBO, Showtime, and Starz can now get them bundled with content aggregators, including Amazon Prime, Hulu, DIRECTV NOW, and Sling.
It can be expected that, over time, consumers will want the convenience of consolidating their subscriptions with a single provider.
Those challenges within the consumer space have shifted at least some of the focus to the enterprise side, where prospects have never been brighter. Why?
Expansion on the Horizon. Unlike the consumer markets, movement is away from consolidation and toward expansion. Business-to-business customers want more options and are embracing the cloud and engaging a range of new business technology services, many of which require complex recurring revenue models and billing services.
Digitization Driving New Revenues. Digital innovation continues to be a huge driver of recurring revenue. Organizations turn to cloud services to gain their requisite digital chops, driving revenues for service providers like Microsoft and Amazon to soaring heights. In 2017, commercial cloud computing was Microsoft’s fastest growing business. And, despite Amazon’s dominance in selling and shipping physical products, all of its profits for 2017 came from its cloud services division, Amazon Web Services (AWS).
The Service Economy. The growth of on-demand capabilities delivered through the cloud, collectively known as everything as a service (XaaS), is another key driver and generator of recurring revenue.
XaaS, expected to grow at a 40% clip by 2020, can deliver just about anything a corporation might need, from artificial intelligence to network security to data storage and more, with each service on a pay-as-you go basis. XaaS providers are, in and of themselves, drivers of recurring revenue, as they rely on third-party platforms to deliver their applications.
It is imperative for subscription companies that want to be among the “keepers” to ensure their services remain relevant and indispensable for each individual subscriber, consumer or corporate. Newcomers to subscription-based models must master the art of curating and replenishment. And CFOs of recurring revenue businesses must master the difficult art of pricing and have the ability to dynamically support an array of variable pricing mechanisms. That means not just subscriptions plus usage, but also one-time charges and, increasingly, shared revenues in multivendor engagements.
Whether they serve consumers or B2B customers, companies seeking to maximize recurring revenue must have the basics down cold — personalization, impeccable service, immediacy, pricing, and packaging. The advantage will belong to those companies that have the foresight to make the necessary investments in things like innovative billing systems and other tools that provide the data-driven insights required to continuously adapt to subscriber demands, competitive forces, and market disruptions.
Brendan O’Brien is chief innovation officer of Aria Systems, a cloud-based monetization platform.