Inflation, market volatility, and fear of a downturn have many people understandably spooked. Recently, the analysts have turned their eye on the Subscription Economy. Headlines like, “Is the ‘subscription economy’ going to feel the Netflix effect?” and “The Great Unsubscribe,” are stirring both discussions and suspicions about the future of subscriptions.
The arguments generally fall into two camps. First, the pandemic accelerated our adoption of subscription services; ten years worth of adoption got compressed into 18 months. But now that we’ve all signed up for Netflix, we’ve hit a saturation point, and there’s no more growth.
The second narrative is more dire and argues that subscription models were a fad. When we were stuck at home, the thinking goes, we all signed up for streaming and monthly “stuff-in-a-box” services to keep ourselves entertained. But now that we’re back outside, we’re dumping all those subscriptions.
So is a Great Unsubscribe happening? To delve deeper, we turned to the Subscribed Institute.
Zuora’s Subscribed Institute has been publishing the Subscription Economy Index (SEI) since 2016 to track the progress of modern recurring revenue businesses who jumped on the shift to the Subscription Economy. For example, the SEI found this group of recurring revenue businesses has grown 4.6 x faster than the S&P 500 over the past decade, that recurring revenue businesses were remarkably resilient through the chaos of 2020, and that, in 2021, recurring revenue businesses held on to the customer and subscriber gains they made in 2020.
The last SEI report on the Subscription Economy was published in February 2022, and suffice to say a lot has changed since then. The Subscribed Institute has just taken a new look at its index of leading subscription businesses to determine whether the resiliency and agility of subscription businesses is standing up to the current macroeconomic challenges.
Before we dive in, let’s do a modern business refresher. There are three main levers that can be pulled in order to be successful with recurring revenue models: acquisition, retention, and growth. That means acquiring more customers/subscribers, reducing churn by retaining them, and increasing revenue per user.
Mapping onto that, we decided to examine churn, average revenue per account (ARPA), and subscriber acquisition. We looked all the way back to March 2019, and zoomed in on the last three months to draw conclusions based on pre-pandemic to current time, as well as on the recent macroeconomics impacts.
Let’s start with churn. Does our recent data show that we are going through the Great Unsubscribe? Quite the opposite.
Our data is showing us the opposite is true: monthly churn rates continue to be lower than pre-pandemic levels, decreasing 19% compared to three years ago (March-May 2019 to March-May 2022), and 11% in just the past three months (March to May of 2022). While some high-profile streaming services have seen cancellations, our data shows that consumers and businesses are holding on to their subscriptions (in fact, industry experts have found that streaming continues to grow in the US).
This is not to say that subscription companies should get complacent. Consumers and businesses are scrutinizing their spending more so than in the past, and they will cancel services that are not providing value. That goes back to my constant reminder of creating services that are indispensable. But overall, customers still expect and demand convenience over owning more things, which is why so many keep the services they love, whether this is enterprise software for businesses, or news and entertainment subscriptions for consumers.
But once you tame churn, subscription businesses actually have two levers to grow: they can acquire new subscribers or they can grow the value of each of their subscribers. Ideally, if your plan is to have a successful subscription business, you should be doing both. Realistically, there will be points in time where one takes a half-step in front of the other, making true growth difficult to see at first.
Which brings us to our next data-driven insight. While we are seeing an understandable slowdown in subscriber acquisition in recent months (by up to 60% depending on the geography, industry, and month when comparing March-May 2019 to March-May 2022), we’re also seeing revenue per subscriber continue to increase, exceeding pre-pandemic levels by about 3x.
What’s going on? Well, we’ve actually seen this before: when subscriber acquisitions slow, subscription businesses shift their focus to maximizing revenue per subscription to maintain their growth rate. For example, Hulu and ESPN have run promotions to add Disney+ for just a few extra dollars. That’s just one example of a subscription business doing just fine, while holding on to their gains from the past two years. That’s the power of a subscription business.
Zooming in on just the last 3 months, we’re also seeing that while average revenue per subscriber is up dramatically compared to pre-pandemic levels, it’s actually down slightly over the past three months, decreasing by 5% from March to May of 2022. What’s going on there? Well, most savvy subscription businesses know: it’s better to keep a customer than to lose one. We’ve learned during the deep pandemic months how important it is to offer customers the flexibility to downgrade or pause their subscriptions. Looking at this data point coupled with the churn data, it’s clear that companies are holding on to their subscriptions, even if it means offering them more economically appealing offerings.
When you take this altogether, subscription businesses are adapting to market conditions while showing flexibility and resiliency to continue growing during uncertain times. Just last month, GoPro announced their subscription and service revenue is up 73% year-over-year. Aside from Netflix, streaming revenues are up 23%. Meanwhile, The New York Times just hit a record 10 million digital subscribers earlier this year. Spending habits during times of uncertainty still point towards choosing services and usership due to accessibility. In fact, one way subscriptions play a role in a potential future recession is that they make spending more predictable. You get more money for your short-term dollar and an opportunity for some cost savings.
What’s next? We will continue digging into the data much deeper over time and will look to share more detailed reporting with segmentation and recommendations. Long live subscriptions!
