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    Zuora Research Shows Major Growth in ‘Subscription Economy’

    Written by

    Chris Preimesberger
    Published November 17, 2017
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      With cloud services now a standard way of running IT business in most sectors, we’re hearing now about how this change is creating new digital economies.

      Naturally, these are self-serving in some ways for their creators, but there’s an element of truth in all of them. The “Service Economy” is one that goes back decades in time; recently, we’ve added a couple of new ones: “The Membership Economy,” as espoused by author Robbie Kellman Baxter in her book of the same name. This is based partially on the Subscription Economy, which was thought up by Redwood City, Calif.-based business process servicer Zuora.

      The membership and subscription economies are all about customers signing up for products and services made available in monthly or yearly retainer-type accounts, similar to how Netflix, Pandora, Salesforce, Box, Neat and many others do business.

      Zuora sees the market in its own terms. On Nov. 16 the cloud-based business platform provider released its second report, “Subscription Economy Index 2017,” issued by Zuora Chief Data Scientist Carl Gold. The SEI is based on anonymized, aggregated, system-generated activity on the Zuora service, a comprehensive platform for subscription-based businesses.

      Research Spans Cloud, Telecom, Media and Others

      This index reflects the growth metrics of hundreds of companies around the world and spans a number of industries including SaaS, media, telecommunications, and corporate services.

      The breadth and depth of the data analyzed in this study speak to the rapid ascent of the Subscription Economy. Gartner predicts that by 2020, more than 80 percent of software providers will have shifted to subscription-based business models. In addition, IDC predicts that by 2020 50 percent of the world’s largest enterprises will see the majority of their business depend on their ability to create digitally enhanced products, services and experiences.

      Key findings in the latest Zuora research:

      —The Subscription Economy Index (SEI) accelerates in Q2-Q3 2017. Overall subscription businesses grew revenues about eight times faster than S&P 500 company revenues (17.6 percent versus 2.2 percent) and about five times faster than U.S retail sales (17.6 percent versus 3.6 percent) from Jan. 1, 2012 to Sept. 30, 2017.

      —In 2017 the index level increased by 46 points for the year, from 209.1 to 254.2 from October 2016 to October 2017. That represents annual growth of 22.0 percent, which beats the long-term average of 17.6 percent.

      —Total number of constituents included in the study has grown 18 percent year over year.

      —Looking only at revenue growth of subscription businesses from Q1 2015 to Q3 2017, the SEI growth was more than 20 times that of the S&P 500: The SEI grew 64 percent over period, while the S&P Sales index posted only 3.1 percent growth after slumping in 2015 and only started growing again in mid-2016.

      —The Subscription Economy tracks with broader market trends. The SEI Index generally tracked with the overall US GDP slowdown around the end of 2016, and the subsequent acceleration in 2017. Both the GDP and the SEI had their strongest growth in the past two quarters since 2015.

      —Usage-based pricing is an effective growth tool. The first of a series of planned guides into successful Subscription Economy growth strategies has determined that subscription companies that employed a small amount of usage-based billing in their revenue mix (less than 10 percent) grew more than twice as fast on average as companies that did not employ usage-based billing at all. Companies that employ usage-based billing also have significantly lower churn rates than those that do not, at all levels of usage-based revenue mix.

      —Global Markets: Europe on the ascent. An EMEA Index was added with a history dating back to the beginning of 2016. Since April 2016, the EMEA Index grew a cumulative 35.2 percent (annual rate of 22.3 percent), just beating North America with 34.7 percent cumulative growth (22 percent annual rate).

      —Company Size Trends: Bigger is still better. Over the last six months, the largest companies ($100 million+ in revenue) in the SEI grew at an accelerated rate (31 percent) compared to the prior six months, while smaller companies all saw their growth rates decline slightly (15 to 21 percent).

      Growth Rates by Business Model, Industry, Revenue

      Business Model Growth Rates (last 12 months vs. long term average):
      –B2B growth: 23 percent vs. 22 percent
      –B2C growth: 18 percent vs. 16 percent
      –B2A growth: 11 percent vs. 13 percent

      For more information or to download a copy of the full report, go here.

      Chris Preimesberger
      Chris Preimesberger
      https://www.eweek.com/author/cpreimesberger/
      Chris J. Preimesberger is Editor Emeritus of eWEEK. In his 16 years and more than 5,000 articles at eWEEK, he distinguished himself in reporting and analysis of the business use of new-gen IT in a variety of sectors, including cloud computing, data center systems, storage, edge systems, security and others. In February 2017 and September 2018, Chris was named among the 250 most influential business journalists in the world (https://richtopia.com/inspirational-people/top-250-business-journalists/) by Richtopia, a UK research firm that used analytics to compile the ranking. He has won several national and regional awards for his work, including a 2011 Folio Award for a profile (https://www.eweek.com/cloud/marc-benioff-trend-seer-and-business-socialist/) of Salesforce founder/CEO Marc Benioff--the only time he has entered the competition. Previously, Chris was a founding editor of both IT Manager's Journal and DevX.com and was managing editor of Software Development magazine. He has been a stringer for the Associated Press since 1983 and resides in Silicon Valley.
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