Could the recession accelerate a shift towards subscription-based business models? Image: Zachary Keimig at Unsplash
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- The current downturn will accelerate the existing shift towards subscription-based business models.
- Companies thinking of making this move today face a critical choice: invest in building subscription services, or cutting back to preserve capital.
- Here are four factors for firms to consider before making their next move.
2020 has been filled with headlines that revolve around the word 'crisis'– the coronavirus crisis, the financial crisis, the climate crisis, and many more. The word can be traced back to the Greek word 'krisis', meaning 'turning point in a disease'. It denotes a critical moment, a time to evaluate and make a decision. This is the krisis that businesses should pay attention to — because the best companies are those that decide to innovate in times of crisis.
We believe that the current downturn will accelerate the global shift to subscription business models beyond the technology industry. Below, we outline why businesses must make subscriptions a priority, the tailwinds and headwinds to anticipate, and recommendations for growing your subscription businesses during the current crisis.
Why subscriptions and why now?
The global shift towards subscriptions is being driven by changing customer preferences and expectations, financial markets that reward companies with healthy recurring revenue businesses, and competitive pressures from digital natives as well as market incumbents that are transforming their businesses around innovative subscription models.
The 2020 edition of the Subscription Economy Index found that subscription companies continue to outperform their product-based peers by wide margins even during the global pandemic. Overall, subscription sign-ups are on the rise, and while S&P 500 companies have seen sales contract at an annualized rate of -10% in Q2, subscription businesses actually expanded at a rate of 12%. It’s proof that when faced with a crisis, subscription companies have demonstrated resilience.
Experienced investors are usually willing to invest in innovation for the long-term. According to BCG's COVID-19 Investor Pulse Check for June this year, a whopping 91% of investors believe it is important for healthy companies to prioritize building business capabilities even at the expense of delivering earnings per share (EPS). And only 45% of investors think healthy companies should prioritize margins at the expense of investing in the business.
Headwinds and tailwinds
There is no doubt that the pandemic is accelerating the shift to the subscription economy. This new era of innovative, subscription-based business models is driven by a global shift in consumption preferences that favours access to services over the ownership of physical products. One of the primary drivers of this shift is the lack of capital or a reluctance to spend capital in the face of adversity, which is resulting in companies reducing their capital expenditure budgets. This works to the advantage of subscription businesses as the shift to quarterly or annual operational expenditure for an ongoing service becomes increasingly attractive to customers.
According to the June Pulse Check, 60% of companies negatively impacted by COVID-19, and 34% of companies more resistant to the impacts of COVID-19, have delayed upgrading existing hardware. In sharp contrast, just 23% of companies negatively impacted by COVID-19, and 8% of companies more resistant to the impacts of COVID-19, have deferred the renewal of software licenses.
Another key driver is the impetus to get closer to the end customer by offering valuable digital services and experience through direct-to-consumer subscriptions. This is not to say that subscription businesses do not need support from channel partners to go-to-market and support. The key is to ultimately own the customer relationship and customer data.
As rewarding as subscription business models can be, there are challenges that the current environment poses — mainly a shortage of developmental capital and the adoption of a new subscription culture.
It’s highly likely that businesses will consider scaling back future investments on a subscription offering that hasn’t delivered its return on investment yet. This is also the case if the project is still in the pre-launch phase, or if it’s a nascent initiative that contributes a small portion of overall revenue. Overcoming internal reluctance to keep the lights on can be challenging.
Another hurdle is internal cultural change. In product-centric companies, teams are functionally siloed because of what we call a ‘hit product culture.’ The goal is to come up with a hit product and the organizational structure follows that mandate – engineering or manufacturing works to build a hit product, sales try to sell as many as they can, and the cycle continues. But in a subscription model, businesses innovate with the customer and focus on the outcomes for the customer. Subscription culture requires a reorganization of internal structures to facilitate more cross-functional collaboration and development of new skills.
Companies that have been developing new subscription-based digital services now face a critical turning point: Reduce investments in these new digital businesses to conserve capital? Or invest in scaling these new subscription businesses to build more resilience for the future?
Based on current market conditions, here are four recommendations for firms developing subscription services:
1. Prioritize market-ready digital services
Take a hard look at what's market-ready and what's not. Evaluate your projects to identify minimum viable products (MVP) that are ready to monetize and scale. Prioritize those projects that already have compelling value proofs with existing customers and can move quickly and iteratively. In uncertain market conditions, agile initiatives are more resilient than rigid or waterfall approaches.
2. Shift focus from 'land' to 'expand'
It’s important to shift growth strategies from 'landing new customers with hit products' to 'expanding relationships with existing customers'. Given the current market conditions, it will be easier to sell to a customer base that is already seeing value from your services than convincing new prospects to invest in a new service. And it’s always less costly to keep an existing customer rather than find a brand new one.
3. Price for adoption
Pricing and packaging play a key role in subscription success. Given the current market conditions, it’s best that businesses price to increase subscriber acquisition with a long-term monetization strategy. Typically, this would take the form of entry-level or free tiers that drive adoption and experimentation with logical upsell motions clearly defined.
4. Establish a subscription centre of excellence
Identify internal resources to focus on and own the subscription project. This includes dedicated commercial resources, executive commitment, and establishing a set of mid-term metrics for success.
We believe that the current 'krisis' is a turning point for businesses and that it is imperative to innovate and emerge from this period of change and uncertainty in a stronger position. Subscription business models provide a strong foundation to do just that.
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The views expressed in this article are those of the author alone and not the World Economic Forum.
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