The Subscription Economy in 5 Charts

Rejoice! The latest Subscription Economy Index is here. This is an unofficial holiday for the Subscribed Institute and its amazing data science team.

For those of you new to the study (which you can download here), the SEI report is based on anonymized, aggregated, system-generated activity of hundreds of subscription companies across several key verticals: SaaS, Media, Manufacturing, Internet of Things (IoT), Business Services, and Communications/Video Conferencing.

This edition of the SEI (as of February 2022) features new data from the 12 months ending December 31, 2021, and provides the best available snapshot of the Subscription Economy as a whole.

So what’s my biggest takeaway? Well, I think this study might surprise some people. It answers a key question that’s been floating around in the news lately.

We all know that a variety of subscription businesses, including the well-known “Stay At Home Stocks,” thrived during the pandemic. But now the backlash has arrived.

A recent Fortune article called “Was the Pandemic Bad for Peloton and Netflix?” sums up the basic thinking: Sure, plenty of subscription companies went into hyperdrive during the pandemic, but that growth was simply unsustainable. The crash was inevitable.

But here’s the surprising fact that our new study shows: Subscription companies are keeping most of the gains they made during shelter-in-place.

The fact is that churn significantly dropped in 2021 for SEI companies, with a 14% improvement. Subscription companies are clearly becoming much smarter about keeping their customers happy.

As you’ll see in the first graph below, we may be returning to normal (or at least the new normal), but we’re also hanging onto our subscriptions.

Here are five key charts from the latest SEI:

Churn is at an all-time low.

In fact, it’s a full percentage point lower than pre-pandemic levels. Amazing.

As Amy Konary, founder and vice president of the Subscribed Institute, recently told Inc., the churn rate is “a sign that the subscription economy is maturing to the point that companies are getting really good at giving customers things that they want to continue to subscribe to.”

The growth gap between the SEI and the S&P 500 is widening.

We are seeing a tale of two economies. The SEI has experienced a 17.5% 10-year CAGR versus a 3.8% for the S&P 500, and the distance between those two figures is increasing.

It’s important to note, however, that the SEI features companies in a whole range of verticals. This is not about cool start-ups versus Fortune 500 dinosaurs. This model is available to any company that wants to embrace it: retail, healthcare, financial services, manufacturing, the list goes on.

The SEI is about resilience and stability; the S&P 500 is about fluctuation and reaction.

Just look at the difference between 2020 and 2021. While the SEI decelerated a little and is now returning to pre-pandemic levels, the S&P 500 is swinging around like a yo-yo. Next year I would not be surprised to see the S&P 500 figure drop back down to earth. That’s the power of deferred revenue.

Quarterly growth has doubled over the last two years.

When it comes to quarterly growth, the SEI is certainly not immune to seasonality, but the broader trend is clear: it’s climbed from roughly 2% to 4% over the last two years.

Someone from outer space would have a hard time identifying a global pandemic in this chart. That drop from 2.4% to 2.3% (followed by a bounce back to 2.7%!) is pretty remarkable, considering what was happening in the world in March of 2020.

SaaS is still the king.

Software as a Service (SaaS) remains the fastest-growing sector in the index. It showed no sign of slowdown during the pandemic, allowing it to open up even more distance between the other verticals.

But remember: The Subscription Economy is about much more than SaaS! And just to prove it, I’ll sneak in a final sixth chart:

Subscriptions are super-powering manufacturing.

Connected services are revolutionizing the manufacturing industry by helping companies turn their products into services. This business model is industry agnostic!

There’s lots more in the study, including growth rates by industry and region, as well information about churn rates, net account growth rates and usage-based billing.

We’ll also be hosting a special SEI-dedicated webinar on March 16th featuring several vertical experts from the Subscribed Institute and our partner, Deloitte. We hope you can join us!

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Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.

The Subscription Economy in 5 Charts

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