Subscription Economy Benchmark

How Direct-to-Consumer (DTC)
Companies can Unlock Value in
Their Subscription Business
Amy Konary, VP, Chair of the Subscribed InstituteIntroduction
As the Subscription Economy has become
more ubiquitous in almost every sector, Zuora
now has a robust data set—the largest andrichest in the industry—on what’s working andwhat’s not for the top subscription businesses
in the world.
To dig into the data, Zuora collaborated with
McKinsey & Company to analyze 150 B2C
subscription companies—from consumer
memberships to “stuff in a box” subscriptions
to digital media—to better understand what
drives growth.
This research yielded not only somefascinating data results, but gave us insights
about what action steps you can take to makethe most of this data and grow your business.

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The state ofsubscriptionsin B2CB2B companies, particularly those in softwareand tech, have been leading the transformation
to the Subscription Economy. But in the past
few years, the demand for B2C subscriptions
has skyrocketed. More and more companies
are making the pivot to subscriptions because
they want to build deeper and longer lasting
relationships with their customers.
They realize that by developing a closer
relationship with their customers throughsubscriptions, they have a much greater
chance of increasing customer lifetime value(LTV). And by shifting to a recurring revenue
model, they’ll avoid the dreaded boom-andbust aspect of transactional sales models.
But perhaps the biggest driver of B2C
companies transitioning to subscriptions is therealization that to succeed, they need to meetcustomers where they are.

And today, that means giving customers more
control over how, what, and when they buy. Itmeans offering products and services that canbe easily tailored to fit a customer’s specificneeds. And it means having an offering that’ssimple and flexible.
And while the customer is the most important
person in the room—always—investors are
increasingly bullish on subscription companies
for all the same reasons you are: predictable
and sustainable revenue, less customer churn,and a more nimble approach to doing businessin the 21st century.
So how do you embark on a transformationof your own to capture the upside of theSubscription Economy? We’ve got the insights.

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“ TODAY, IT’S NOT ONLY CUSTOMERS THATARE REALLY ENJOYING THE SIMPLICITY AND
FLEXIBILITY OF THE SUBSCRIPTION BUSINESSMODEL, IT’S ALSO INVESTORS WHO PREFERTHE STABILITY OF RECURRING REVENUE.
THAT’S WHY WE’RE SEEING AN
ACCELERATION IN THE NUMBER OF
B2C COMPANIES MAKING THE PIVOT.
Nimish Mittal, Associate Partner, McKinsey & Company”

3Back to Basics.
The three areas
B2C companies
need to focus on:
DEVELOP A DIFFERENTIATED
OFFER AND VALUE PROPOSITIONTHAT SOLVES A CLEAR CUSTOMERPAIN POINTDESIGN THE RIGHT PRICINGSTRATEGY TO BALANCE NEWCUSTOMER ACQUISITION AND
PROFITABILITYCAPTURE VALUE ACROSS THE
FULL CUSTOMER LIFECYCLE

4How to growyour DTC
subscription
business
Before we get into the steps you can take to
add rocket fuel to your subscription offering,
we want to make sure we acknowledge therealities of making the shift to a modern
subscription approach. The transition isn’t
easy. It requires different skill sets, different
infrastructure, and, most importantly, adifferent mindset than transactional modelsof the subscriptions of the past. The goodnews is that when you make the commitment
to and investment in modern subscriptions, therewards aren’t just great, they’re sustainable.

THE SHIFT TO A MODERNSUBSCRIPTION APPROACH
ISN’T EASY BUT, THE REWARDS
AREN’T JUST GREAT, THEY’RE
SUSTAINABLE.
5Insight 1:
NOT ALL CONSUMERSUBSCRIPTIONS ARE THE
SAME—THERE ARE MANY
WAYS TO DIFFERENTIATE
While many people’s minds go to Netflix orThe New York Times when they think of B2C
subscription companies, there are many,
many different approaches to developing
a subscription offering or a subscription
business. Each approach offers different
value propositions designed specifically forthe customer and the desired outcome of thebusiness. For example, Hello Fresh, the “mealkit in a box” subscription, is a recurring offeringthat plays in the “life as a service” territory.
They promise to help their customers enjoy
cooking again by taking out the drudgery ofshopping and prepping. Lyft, the ridesharecompany, is a platform offering that customers
can access anytime and anywhere. Their value
proposition is to always be “ready when youare” to get you where you need to go.

THERE ARE MANY DIFFERENTAPPROACHES TO DEVELOPINGA SUBSCRIPTION OFFERING.
6McKinsey has created a taxonomy for how tothink about what your subscription offering
could be, what the value is to the consumer,
what that means for what you’re trying toaccomplish as a business, and how you
derive value as a business.

NOT ALL SUBSCRIPTIONS ARE THE SAME—THERE ARE MANY WAYS TO DIFFERENTIATE
ONE-TIME
OFFERING

RECURRING
OFFERING

PLATFORM
OFFERING

Return or
replace/upgrade

Delivered on a set recurring
schedule to the customer

Can be accessedat (almost) any time

RentalUpgradeanytime

Convenience

CurationAccessValueEnhancement

Evergreen

VALUE
PROP

Only pay forwhat/when
you need

Alwayshave “thebest”

Save time,hassle,and money

Find new &interestingproducts

Accessexclusiveproducts1

Accessdiscounts& rewards

Gain premium
experience/features
vs. free

Always haveaccess tolatest content
or services2

DESIREDOUTCOME

Improveasset LTV

Drive faster
upgradecyclesLand & expand/ Upsell topremium tier(s)Monetize acrosscustomerlifetime

SUBSCRIPTIONARCHETYPE

EXAMPLE
PLAYERS

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Where primary spend is on products other than the subscription itself
Where the primary spend is on the subscription itself

Createhabit

Enhanceloyalty7

Insight 2
WHEN IT COMES TO PRICING,
PACKAGING, AND BILLING,
KEEP IT SIMPLE
We’ve learned from looking at these B2C
leaders that consumers prefer simplicity inalmost every aspect of a subscription offering,but especially when it comes to pricing,packaging, and billing.
So to unlock the flywheel effects of yourofferings, you want to explore different
strategies that balance simplicity with choice.
This is best done through iteration to answer
some key questions: Does your pricing andpackaging drive adoption? Does it drive
revenue lift acquisition? Are you attracting
the right customers? And are your strategies
driving churn six to twelve months down theroad?
One of the things that stood out in our
research is that the companies that have
simple structures (one or two rate plans) havehigher growth and better churn rate thancompanies that have more complex offerings(three rate plans or more).

Now, to be fair, there are cases where it makes
sense to have more than two rate plans, buta lens that’s helpful to apply to your pricing
and packaging strategy is: Does each rate
plan target a specific audience? We see a lotof companies default to the old “good, better,best” standby, without offering a tremendous
amount of differentiation. They often load abundle of additional premium features into the“best” plan to justify a higher price point, but
smart customers (and they are smart!) don’t
like paying for features that they don’t want.
The best strategy is often to have a set priceand make add-ons available for additional fees.
Billing frequency is another where the datashows that customers want less choice thanmore. And consumers also want transparency:
how much is it going to cost over time. Tying
the timing of your billing cycles to the timing ofthe value that you deliver to the customers is a
critical guiding principle for determining whatbilling options you offer.

8Insight 3
A BALANCED AND FOCUSEDPRODUCT PORTFOLIO CANCREATE FLYWHEEL EFFECTS
By this point, you’re likely sensing a trend:
simplicity rules in the Subscription Economy.
And the structure of your product portfolio isno exception. When you adopt a balanced andfocused—versus complex—portfolio approach,
you compound the positive effects of yoursubscription program.
Here’s how a focused portfolio helps:• Creates multiple entry points to the flywheel• Enables pathway to cross-sell and upsell• Makes the value of bundling moretransparent to customers• Allows tailored go-to-market strategy foreach individual offering“Balanced and focused,” doesn’t just apply tothe product or service set. This also means thecombination of products, services, and rateplans. Think about how telecom companiesused to do business: dozens of phone options
and rate plans, some with contracts, somewith no contracts, lots of add-ons, a varietyof billing options.

For the modern consumer, it became too much.
And now the best telecom companies have
simplified and focused their portfolios.
And our research confirms the success of thisapproach. Even though complex portfolios may
seem appealing when you look at initial churnrates, it’s clear that over the full customer life
cycle, a focused portfolio generates betteroverall growth and lower churn rates.
As you go to design your offering, bethoughtful about the value you’re bringing tothe table and focus on simplicity and clarity
for the value proposition of each offering (nothrowing spaghetti at the wall and seeing whatsticks). It’s also important to make sure it’s
clear to your customers what they’re getting—
and where they go from their initial entry point.
The last thing you want to do is give them
“analysis paralysis.”

9Insight 4
TAKE A PAGE FROM THE B2B
PLAYBOOK AND FOCUS ON
NET RETENTION RATE
The real beauty of the Subscription Economy isthat it offers you the opportunity to monetize
the lifetime value of customer relationships. Tounlock that coveted lifetime value, you should
follow the lead of the most successful B2B
companies and focus on net retention.
Why net retention versus simply looking at
Churn or Average Revenue Per User (ARPU)?
Early tenure churn is high for most companies
and evaluating its effect on your long-termbusiness can be complex. ARPU is even morechallenging. It’s impossible to look at ARPU
and understand the impact of upsell versus
downsell until you dis-aggregate the wholething back out again.
In contrast, net retention is typically calculatedusing annualized cohorts, so we see the basetend to stabilize a lot more than it does in its
first year.

Looking more deeply at thedata, two things stand out:
GREAT B2B SUBSCRIPTIONCOMPANIES DRIVE UPSELL,
THE CLASSIC “LAND AND
EXPAND” MODEL.
We love the idea of implementing thismetric in B2C because it makes it relatively
simple to measure the impact of upsell anddownsell independently and then design
your tactics and strategies accordingly.

95% OF COMPANIES LOOK AT
CHURN FROM A SUBSCRIBER
STANDPOINT.
Even though what the data might suggest
is that those may be your lower-tier
subscribers. Understanding who ischurning is valuable information.

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HOW DIRECT-TO-CONSUMER (DTC)
COMPANIES CAN UNLOCK VALUE IN
THEIR SUBSCRIPTION BUSINESSKey Takeaways
There is no one-size-fits-all approachto a B2C subscription business. Figureout what your customers need, what
their pain points are, and build anoffering that delivers on both.
When it comes to pricing, packaging,and billing, it’s all about simplicity.

A balanced and focused portfolio
improves your net and gross subscriber
growth, as well your churn rate.
Focusing on net retention rates—likethe successful B2Bs do—helps you
unlock lifetime customer value.

The Subscribed Institute
Zuora’s Subscribed Institute is a dedicatedthink tank focused on the Subscription
Economy. The Institute supports its 1500+
business executives across 600+ global
companies with critical data, thought
leadership, and connections. Research
provided by the Institute helps businessleaders and their organizations to maximize
the opportunities of the Subscription Economy.
More at www.subscribedinstitute.com

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