The 2020 Fall Edition of the Subscription Economy Index™ (SEI) finds that subscription companies continue to outperform their product-based peers by wide margins, growing revenues approximately 6X faster than S&P 500 companies (17.82% versus 3.16%).
Overall, subscription sign-ups are on the rise. While the S&P 500 companies saw sales contract at an annualized rate of -10% in Q2, companies in the SEI study actually expanded at a rate of 12% demonstrating that subscription models drive growth.
And subscription sales across industries largely remains resilient even amidst the pandemic.
And this subscription growth isn’t confined to just a single industry. As noted in a recent EY Research report, “Over 90% of technology companies are embracing subscription or consumption business models. However, this seismic shift in delivery systems is not exclusive to the technology industry…Amid the strain of COVID-19, it’s wise to challenge business as usual and rethink your offerings for a changing world.”
That said, we’ve seen a particularly interesting impact on the manufacturing sector as traditional manufacturing companies reorganized their workforces, leaned into free trials, and innovated to monetize new digital offerings.
As the pandemic spread across the globe, manufacturing companies could not go on operating without reorganizing their facilities to allow for remote work, as well as new protocols to monitor for symptoms of COVID-19 in the workforce.
With employees unable to continue business without being in-person or working directly with machinery, the sector slowed significantly, and the S&P Industrial index dropped to a three-year low in the index price level. Revenue growth for manufacturing companies in the SEI, whose services offer connected solutions for heavy construction, also dropped to single digits, but stayed positive while S&P industrial sector revenue declined.
Following the manufacturing sector’s pause, most workers were eventually deemed essential, and they were able to return to work, explaining the uptick in revenue following the initial dip.
The rebound among these subscription companies may also have been in part due to the tactics a recurring-revenue model enables. Manufacturers increased their free trial offerings in Q1 and Q2 2020, which allowed them to address customer needs and eventually increase demand after a multi-week manufacturing pause.
At the same time, manufacturing’s average revenue per user is lower than the rest of the sectors in the SEI. Manufacturers should take this as a sign of a pivotal time for the industry: Their massive net account growth (up 24.7% in Q1 and 14.7% in Q2) means they must act to keep customers and continue revenue growth once free trials and discounts expire.
IoT, on the other hand, hasn’t fared as well during the COVID-19 pandemic. Customers of business and personal IoT typically take advantage of endless options to upgrade and expand services, but amidst the pandemic, consumers appeared to be reassessing their spending. As a result, the Smart Home industry in particular took a hit. In 2020, the sector saw record low subscription sign-ups and high account churn. And Omida forecast the global smart home market would fall nearly $20 billion.
However, there’s hope for IoT companies. Average revenue per user growth has risen from Q1 (4.6% in Q1 2020 vs. 11.4% in Q2 2020). This increase may be in part due to the fact that business IoT services help customers cut costs which was an important service amidst COVID-19..
According to McKinsey, remote assistance and maintenance tools can yield a 10%-40% reduction in field-service costs, and improved performance management can help companies boost labor productivity by 20%-40%. IoT service subscriptions can help companies see gaps in their global supply chains in the current crisis; robotics. IoT, and other forms of automation help these companies gain resilience in the event of a disaster in the future as well, as Michael Mansard, Principal Director of Subscription Strategy at Zuora, told Design News in July.
In the second half of the year, manufacturers must continue to assess their toolbox of pricing strategies and other elements related to the subscriber experience—such as shifting from free trials to tailored customized packages—to retain customers and continue to grow accounts and revenue.
And, as we approach the end of the year, IoT companies should take the steps now to invest in the subscriber experience to prepare for a surge ahead as rebuilding businesses return to IoT for innovative solutions that will help their bottom line.
For more on subscription growth, check out the full Subscription Economy Index™ (SEI). The SEI is produced by The Subscribed Institute, a dedicated think tank focused on the most critical business problems of the Subscription Economy. The Subscribed Institute serves as a unique source of ideas, data, and connections for business leaders and their organizations.
