The Latest Subscription Economy Index™ Data Shows Enterprise SaaS Thrives, Churn Falls, and Discounts are Cut

Data:

Overall revenue growth for Enterprise SaaS stayed constant from Q4 2020 to Q1 2021, at 13%, a very healthy double digit growth rate, But, in other ways, Enterprise SaaS has continued to thrive. Annualized ARPA growth, defined as the growth rate of Average Revenue Per Account, more than doubled from 6% in Q4 2020 to 13% in Q1 2021. Which means, growth is picking up in terms of the accounts and the average revenue per account.

Analysis:

I’d point to this as continued evidence of something we call “subscription resilience” — and why we posit that transitioning to a subscription model is the best way to “future proof” your business.

Recurring revenue models have the advantage of predictability, and are built to weather economic storms. Subscription businesses start every quarter with an established customer base and contracted revenue. This allows them to withstand economic fluctuations better than companies that have to acquire a new set of customers and find new revenue streams every quarter.

And when the going gets tough, subscription companies continue to fare better because they have established, long-term customers, their services are affordable, and they’re able to pivot and adapt far more easily.

This is especially true for Enterprise SaaS. Whereas perpetual software licenses require large upfront capital outlays, as well as large internal IT teams to manage on-premise systems, the costs of SaaS offerings are much more transparent and easy to budget for over time. Plus, Enterprise SaaS responds to customers demands for ongoing value, delivering on-demand innovation and ensuring that customers always have access to the most secure, up-to-date software available.

Recommendations:

The future of Enterprise software is SaaS! If you haven’t already made the shift, the journey to usership should start now.

The resiliency of the model hinges on increasing revenue from current customers. According to a recent Subscription Economy Benchmark, on average, 70-80% of the revenue of a successful high-growth subscription business should come from existing customers. To make this happen, we’ve seen companies focus on the following strategic levers to increase retention and grow revenue within the existing install base:

• Upsells and cross-sells. Customer engagement is an important factor in turning ‘light users’ into ‘heavy users’ of the service. This, in turn translates to upsells and cross-sells, resulting in topline revenue and bottomline profit growth.
• Subscription changes. Allowing customers to make changes to their current subscriptions can be key to growth. Research from the Subscribed Institute shows that enabling subscription changes drives overall revenue growth. Companies where 1 in 10 subscriptions has a change after the initial sign-up, the growth rate more than doubles to 20% YoY revenue growth.
• Invest in packaging and pricing to empower the “expand” motion. When looking at SaaS companies, we have found that annual recurring revenue (ARR) size can be considered a proxy for a company’s maturity with pricing and recurring revenue management. Those with higher ARR were stronger at acquiring new customers and upselling to their existing base. Higher ARR players were also stronger at net expansion compared to <$50M ARR companies. So pricing and packaging iteration — over a “set and forget” model — is a key growth factor for subscription companies.
• Improve your analytics. If you don’t have a robust analytics system to capture critical data around retention and churn, you won’t have customer insights you need to predict behavior and make better decisions.

Data:

This quarter’s data showed churn decreasing slightly, from 25% in Q4 2020 to 24%. And this decrease in churn is particularly pronounced within certain industries, specifically media where churn decreased from 33% – 28%.

Analysis:

While some churn is to be expected, most subscription businesses are laser focused on reducing churn. Since we’ve been tracking churn in our SEI, we’ve seen average churn hover around 24%. In some sectors, such as publishing, churn averages a little lower. In others, such as OTT Media, average churn is higher than 24%.

As we come out of the pandemic, it’s to be expected that we will see some reshuffling of subscription dollars as people’s behaviors change. Perhaps many of us will spend less time at home binging Bridgerton! But the fact that churn is already slowing shows that media companies offering high-value content can still acquire and retain consumers.

Recommendations:

At the height of the pandemic, we saw many companies taking on new strategies to try to get a handle on churn. As churn decreases, subscription companies can continue to use the following tactics to manage churn:

• Usage Pricing: B2B companies with any amount of usage pricing have lower churn (23-24%), on average, than companies with no usage pricing (29%).
• Suspend and resume: Our benchmark data on suspend and resume shows that offering customers the option to suspend subscriptions can help businesses save 1 out of every 6 churning customers.
• Auto-renewing termed subscriptions: According to our data, both auto-renewing termed subscriptions and evergreen subscriptions have lower churn rates than standard termed subscriptions, but it’s most advantageous to go with auto-renewing termed subscriptions to reduce churn and increase customer lifetime value.

Data:

Discounts refer to the reduction of the regular price of a service. Within the SEI, we look at two facets to discounts: Percent Discount Accounts and Average Account Discount. Percent Discount Accounts refers to how many accounts received a discounted price. Average Account Discount refers to what the average amount was for those discounts. Overall, Percent Discount Accounts has stayed steady from Q4 2020 to Q1 2021 at 8%. But, across some sectors, we see a decrease in average discount amount, notably in Manufacturing (7 to 4%), Education (11 to 9%), and Media (9 to 7%).

Average Account Discount has dropped slightly from 21% in Q4 2020 to 19% in Q1 2021. With some of the most pronounced differentials showing up in Manufacturing (from 24 to 15%), IoT (from 26 to 18%) and Education (29 to 20%).

Analysis:

At the height of the pandemic, we saw businesses across industries adapting to new challenging circumstances and putting their customers first by offering much needed flexibility and discounts. Sometimes these discounts took the form of free trials. For example, as COVID-19 forced school to close, Zoom made their video conferencing platform free for K-12 students — growing users by 20X — and Fender offered 1 million customers a free trial of their Fender Play subscription. In other cases, companies offered a discount off full price. For example, at the start of the pandemic, Cargurus noticed that their auto dealers were struggling and responded by covering 50% of fees for dealers for a month.

Discounting is an effective way for companies to acquire new customers and grow revenue over time. But with the economy showing an uptick, discounting can once again become a strategic tool for customer acquisition rather than just a reaction to challenging times.

Recommendations:

Subscribed Institute research has discovered that companies that are flexible around discounting show higher revenue growth. In this case, “flexible,” can mean offering different types of discounts, running different promotions at different times, targeting certain segments with certain offers, etc. Businesses need a subscription management platform that allows them to easily spin up — and turn off — new offers, as needed to optimize growth.