The Roaring 2020’s: The Decade of Subscription Revenue
By Kieron Ludde and Gianni Fazio
As we roll into the new decade, a wave of direct-to-consumer, subscription-based revenue companies are beginning to disrupt traditional American retail business models, and an alternative roadmap to success is quickly being drawn. Launching a business with a catchy marketing campaign introducing seemingly cheap products and ending with customers hooked for life, the subscription-based revenue platform is shaking up the competition.
The subscription-based revenue wave began with Dollar Shave Club, a company that attracted millions of consumers with a short but catchy video which became an instant classic thanks to a now famous punch line: “Are the blades any good? No,” he says with a deadpan delivery, pausing briefly before adding: “Our blades are [expletive] great!”
Clicking through this enticing ad takes the consumer to a website full of incredibly cheap offerings, incentivizing an initial trial. For only five dollars they can purchase a razor handle, cartridges, and trial sized pre-shave balm, shaving cream and after shave, all with catchy names like “Shave Butter” and “Post Shave Dew.”
Once the consumer has purchased the trial, they may not realize that they have also subscribed to a $40 per month plan, taking care of “all their grooming needs” by mail. The 2020s look like it will be the decade of consistent revenue streams, driven by strong demand from a new generation of customers seeking a refined autonomous purchasing experience. Take Bark Box, which streamlines some of the toughest purchasing decisions for many dog lovers all around the world. In less than five minutes any dog owner can go online to BarkBox.com, enter simple data about their canine best friend, like breed, size, allergies, and food preferences, and within seconds of payment processing will be subscribed to a plan delivering custom-tailored, high-quality dog treats, toys and more right to their front doors.
The modern consumer seems to be spending more time in the “digital world” than in the “real world.” As millennials are spending more and more of their hard-earned money online, many businesses should consider adapting the way in which they generate revenue. The SEI, Subscription Economy Index, which keeps track of many top subscription-based companies “reveals that over 28 consecutive quarters (January 1, 2012 to December 31, 2018), subscription businesses grew revenues about five times faster than S&P 500 company revenues and U.S. retail stores and 10 times the sales growth of the DAX and ASX.” The business themselves, in terms of market cap, have grown about six times faster than S&P 500 companies in the same time frame.
Gartner, a -leading research and advisory company predicts that “by 2023, 75% of organizations selling direct to consumers will offer subscription services and in its Digital Commerce State of the Union survey, Gartner found that 70% of organizations have deployed, or are considering the deployment of, subscription services.” Based on these numbers, companies big and small could potentially see their revenue increase tenfold by switching to a subscription model.
There are many factors to consider when thinking about a transition from a traditional brick and mortar business model to a subscription-based revenue stream. Sales departments will face new challenges in marketing and selling, with an increased focus on attracting the customer and maintaining their attention so that they remain subscribed.
Matching transparent prices with simple product offerings can be tough at first, but is one of the most effective strategies for this model. Simplifying and taking the thought out of the purchasing process is key.
From an accounting point of view, many businesses will have to adapt to new revenue recognition and cash flow practices. IT will have to adapt to a larger number of transactions and will either need to learn how to implement subscription ERP software or choose new software to better suit the company’s needs. C-suite and decision makers will need to learn how to read new data from subscription revenue so that they are able to respond quickly to changes in sales data or use data over time to adjust marketing, sales, pricing, and supply chain challenges.
Mazars has encountered many of these challenges when our customers transition to a subscription-based model. Whether implementing new accounting policies and guiding you through new revenue recognition standards, or consulting with IT to handle the subscription model, Mazars is here to help!