Special Feature
Part of a ZDNet Special Feature: Coronavirus: Business and technology in a pandemic

The impact of COVID-19 on the subscription economy

What is the impact of COVID-19 on the subscription economy? The 2020 Subscription Impact Report by Zuora found that subscription companies prove their resilience during the pandemic. Overall, the report found that 53.3% of companies have not seen a significant impact to their subscriber acquisition rates.

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The Subscription Impact Report: COVID Edition, written by Tien Tzuo, founder and CEO of Zuora, found that subscription businesses are proving to be resilient. Here are the key findings of the report. 

Overall, the COVID-19 Subscription Impact Report found that 53.3% of companies have not seen a significant impact on their subscriber acquisition rates. 

Meanwhile, 22.5% of companies are seeing their subscription growth rate accelerate, 12.8% of companies are seeing slowing growth but are still growing, and the remaining 11.4% of companies are starting to see subscriber churn outpace their subscriber acquisition rates. Of the companies accelerating, slowing, and contracting, we found trends across industries:

  • Accelerating: OTT video streaming, Digital news and media, E-learning, Communications software
  • Limited impact: B2B and B2C software, Information services
  • Slowing: Consumer Internet of Things (IoT), Business IoT services, Software for small businesses, memberships
  • Contracting: Travel and hospitality, Sports-related services
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The impact of COVID-19 on subscription businesses. Subscription companies prove their resilience. 53.3% of companies have not seen a significant impact to their subscriber acquisition rates.

(Image: Zuora Subscription Business Impact Report: COVID-19 Edition 2020)

Key industry findings:

  • OTT video streaming subscriptions grew 7X in March 2020 compared to the previous 12 months. Meanwhile, the annual subscription growth rate for Sports-related services fell significantly.
  • Digital news and media subscriptions grew 3X, as did E-learning.
  • Communication SaaS offerings, such as video conferencing or online collaboration tools, have seen a spike in subscription growth rate by 1.4X,
  • Meanwhile, Software for small businesses fell by half and B2B Software remained mostly unchanged.
  • Consumer memberships, including for gyms, travel, and clubs, experienced a slowdown. It fell to two-thirds its growth rate compared to the previous 12 months.
  • Consumer IoT and Business IoT both saw a deceleration in their subscription growth rates, experiencing one-third and half the growth rate, respectively, from the previous year.
  • Worse still, were Travel and hospitality subscriptions, which fell meaningfully in March.

Q&A with Tien Tzuo, CEO of Zuora

Tien Tzuo is the world's foremost authority on the "The Subscription Economy." He is CEO and Founder of Zuora (NYSE: ZUO), the leading Subscription Economy SaaS provider. Born out of Tzuo's experiences at Salesforce, a pioneer of the subscription model, Zuora was founded in 2007 following his roles as a chief marketing officer and chief strategy officer. He is the author of the USA Today, LA Times, and Amazon best-selling book, SUBSCRIBED: Why the subscription model will be your company's future -- and what to do about Ii.

tien-2386.jpg

Tien Tzuo is the world's foremost authority on The Subscription Economy. He is CEO and Founder of Zuora (NYSE: ZUO).

Evan Chung

How is COVID-19 impacting subscription businesses?

COVID-19 has had a damaging effect on the economy -- it's the worst financial crisis since the Great Depression. We can see this through all the news on recent layoffs, businesses coming short on expectations, and more. But the conversations I'm having with subscription businesses are very different. Rather than a focus on how revenues will fall, these conversations have been about how growth may slow.

That's a huge differentiation. Our latest Subscription Impact Report found that more than half of companies (53.3%) have not seen a significant impact on their subscription growth. One quarter (22.5%) are seeing subscriber acquisition rates accelerate -- they're growing even faster than before! And of the remaining companies seeing their growth slow, half of those (12.8%) are still growing, just at a slower rate.

Now, this begs the question: Why? The subscription business model is proving to be resilient due to the recurring nature of revenue, the ability to rapidly scale and, most importantly, customer relationships.

First off, subscription businesses start with money in the bank, while product-focused companies start with zero. That means that if you're a product-focused company and your customers stop shopping, your revenues will see a sharp decline. However, rather than a focus on driving product sales, subscription businesses are focused on preventing churn and finding new ways to offer innovative value to customers.

Secondly, subscription businesses are built for scale and are using this time to innovate and launch new plans -- efforts that will make their businesses stronger when the economy shifts back. Look no further than Fender Play, ZoomPluralsight, or Box.

But most importantly, subscription-based companies are placing a continued focus on customer relationships. If the Subscription Economy is about anything, it's about a fundamental return to relationships. As a result, not only are subscription companies carefully reviewing usage data and shifting their approach to meet customers' evolving needs in today's climate, but they're building loyalty by doing what's right. In short, if you help your customers now, build loyalty, and keep them longer, your value goes up! 

Are some industries feeling the effects of Coronavirus more than others?

Every subscription business is different and therefore are feeling the effects of COVID-19 in various ways.

Streaming services, digital media, e-learning, telecommunications/utilities, and communication software saw their growth accelerate in March, with subscription growth rates climbing one to seven times the rate of the prior year (February 2019 to February 2020). As anyone might expect, streaming services topped the list, growing their subscriber acquisition rates by 7X.

We've seen many of these companies offer free trials and other extended services to make content available to a broader audience. Zoom, for example, lifted the 40-minute meeting limit on free basic accounts. These strategies, in turn, allow companies to broaden the funnel and quickly capture the time and attention of new subscribers.

On the other hand, sectors with slower subscription growth rates included business and consumer IoT, software for small businesses and memberships (think gyms, clubs and more). However, it's worth noting that while these sectors experienced slower growth rates, they are still growing.

Those seeing contracting growths were, unsurprisingly, travel, hospitality, and sports; however, these contracting sectors still have a large existing subscriber base. As a result, it's critical to remain hyper-focused on renewing existing customers to maintain the recurring revenue base they've built. 

What's next? How can businesses learn from this data?

Leaders must recognize how the world is changing amid today's health crisis and make investments and decisions that underscore what is going to help them remain nimble and agile during and post- COVID-19.

History -- in addition to our latest Subscription Impact report -- has shown us that the subscription model is resilient. But it's essential that businesses not immediately impacted by COVID-19 not take their loyal customers for granted. Continue to innovate and provide new value to meet new and evolving demands. For those who are struggling and may not have a subscription aspect to their business, now is the time to seriously consider shifting to a recurring revenue business model.

While none of us truly know what the "new normal" looks like in the months to come, I urge all companies to try to be the first to figure it out. Try to understand what is changing for better or for worse, and the implications they have on your business moving forward. This will help you identify opportunities to innovate and re-imagine your approach to endure times of crisis.