The breakneck growth pace of the “subscription economy” moderated somewhat for the six months ended March 31, pulling back to 16.1% growth. For the prior six-month period, which ended last September, the rate was 21.6%.
The data is courtesy of Zuora, a provider of billing and financial tools for companies with subscription-based business models, which this month issued the second iteration of its subscription economy index (SEI). The index tracks the sales performance of approximately 400 Zuora customers.
The company now has more than 1,000 customers following its May acquisition of Leeyo. But the SEI’s methodology requires that, to be included in the index, a company must have revenue running through Zuora’s platform for at least two years.
The growth slowdown for subscription companies coincided with a falloff in growth for U.S. gross domestic product, which peaked at 3.5% in the third quarter of 2016 before sinking to just 0.7% in this year’s first quarter.
However, the SEI still grew, in the most recent six-month period reflected in the index, at 80% of its growth rate for last year’s third quarter, while the GDP was far off its performance for that quarter.
From last October through March of this year, subscription businesses grew revenues more than eight times faster than S&P 500 companies (15.2% vs. 2.0%) and 4.5 times faster than U.S. retail sales (3.4%).
Like stock indexes, the SEI is weighted by company size. Thus, the sector’s growth rate isn’t distorted by outsized sales gains for small startups. For companies that derive a portion of their revenue from subscriptions, only that portion factors into the SEI.
While software-as-a-service firms comprise a large portion of the universe of companies with at least some subscription elements in their business models, companies of all types are dabbling in subscriptions. They include enterprises as varied as Ford Motor, General Electric, Oracle, Surf Air, Starbucks, and Caterpillar.
Wait. Caterpillar has subscription services?
Why not? All companies in the subscription world are motivated by the same factors, including the fact that subscriptions provides recurring revenue rather than one-shot-and-done revenue from big sales.
Caterpillar, for example, over the past couple of years has installed sensors in thousands of its heavy-machinery products. So, in addition to selling tractors, the company is positioned to sell subscriptions for the use of tractors, with the pricing based on, say, the number of metric tons of earth moved.
“Caterpillar is collecting all kinds of data,” said Zuora chief executive Tien Tzuo in an interview with CFO earlier this month from the company’s “Subscribed” conference in San Francisco, where the logistical challenge of the day was getting a big Caterpillar tractor into the host hotel.
“Now they’re layering on predictive capabilities, and one of the first applications they’re launching tells when equipment needs to be serviced,” Tzuo said. “So rather than be surprised by a breakdown and then having to call a service center, resulting in four days of downtime, you can service the equipment before it breaks, creating maybe only four hours of downtime.”
He continues, “A lot of things are happening with subscriptions. So many companies are transforming. Why is Ford, which sells cars and trucks, now announcing bike sharing? Because it’s not only about the car anymore. It’s about transforming into a transportation service. They’re still going to sell lots of cars, but they understand that consumers today are not just looking for products. They’re looking for outcomes, like getting from point A to point B.”
SNCF, the French train system, is both launching subscription services and linking up with bike-sharing services, providing a new transportation option from a train station to a traveler’s local destination. “So we have Ford competing with both SNCF and Uber,” Tzuo notes. “It really is a new world.”