We understand that the implementation of subscription-based services is a large contributor to the incremental growth of businesses across various industries. But what does the future of this industry look like?
I talked with Tien Tzuo, Founder and CEO of Zuora, about his predictions for how the subscription economy is evolving, his insights on up-and-coming subscription-based models and opinions on the future of software licences.
M.R. Rangaswami: Over the last 10 years, you have predicted the adoption of the subscription economy – how do you see these business models changing over the next 10 years?
Tien Tzuo: I see many more entire industries (not just individual companies) making the shift to subscriptions because quite simply, this model brings growth. According to our own Subscription Economy Index, over the last six years, subscription businesses have grown revenues 5 times faster S&P 500 company revenues as well as U.S. retail sales (18.1% versus 3.3% and 4.1% respectively). The long-term historical average growth rate of our client base is just over 17%, which is pretty remarkable. Eventually, everything we use and buy — food, housing, transportation, clothing, retail, business software — will be available as an on-demand utility, much like water or electricity is consumed today.
M.R.: Given your visibility of business models at Zuora, is there a new subscription business model that is multiplying that our readers may not be aware of (Base fee + usage, all you can eat, microusage, referral)
Tien: It depends on the business of course, but I generally suggest a combination of tiered and usage-based pricing. A recurring tiered price (ex. bronze, silver and gold plans) helps to smooth out your financial forecasting, but usage pricing is really, really important. Without usage-based pricing, you limit customers and your growth. Customers lack choice in your product and can’t grow naturally within it. If they want more, they’ll churn, and if they need less, they’ll also churn.
Without a consumption-based pricing strategy, you’re losing out on upsell opportunities. But here’s the thing — too much or too little usage pricing as a component of your overall revenue is a bad thing. Zuora’s own research, based on the world’s largest cohort of successful subscription businesses, found that companies using usage-based pricing making up between 1-50% of their overall revenue grew by 28% year-on-year. That is 1.5x higher compared to companies with no usage-based pricing at all, and 1.2x higher compared to companies with more than 50% of revenue coming from usage. So there you go. Some free data-driven insights. (Come to our Subscribed conference to learn more!).
M.R.: Are perpetual software licenses dead? What is the rate of growth of subscription vs. perpetual?
Tien: Yes. Perpetual license software is dead or dying. But don’t just take my word for it — IDC just put out a report stating that by 2022, 53% of all software revenue will be purchased with a subscription business model, and right now SaaS has a CAGR of 18.2%. What’s the CAGR of licensed software? Just 1.5% It will represent only 19% of all software revenue in 2022 (with maintenance revenue making up the remaining 28%). But as I’ve said many times, this isn’t just a software story we’re talking about — it’s a global economy story. This model is industry agnostic!
M.R. Rangaswami is the co-founder of Sand Hill Group and publisher of SandHill.com.