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Q&A: Why subscription software companies are still growing during Covid-19

(Image credit: Image Credit: B-lay)

Compared to other industries, what has the impact been to SaaS companies during Covid-19 and how has the demand for communication software subscriptions changed during the lockdown?

Covid-19 has clearly had a significant effect on the global economy. But the truth is, not all companies are being impacted the same. While industries like travel and real estate are facing challenges, our Subscription Impact Report, analysing the subscriber acquisition rates (“subscription growth”) of more than 700 global customers across many industries, found that SaaS companies have experienced an acceleration in or limited impact to their subscription growth rates during this time.

What’s more, our report found the subscription growth rate for communication software, specifically, accelerated by 1.4x in March. With the shift to remote work, SaaS offerings that allow teams to seamlessly work together - including video conferencing, document sharing, developer collaboration and other communication tools - saw a spike in subscription growth. 

On the other hand, as small businesses, especially those in the retail, fitness and beauty space struggle to stay open, software offerings that cater to those companies are seeing slowed growth. Despite this, subscription companies in this space are remaining resilient due to a focus on long-term customer retention. SaaS for small business continued to grow in March 2020, and by May they were back up to 90 per cent of their baseline growth rate.

While software & high tech companies experienced limited impact on new subscription growth, customer upsell and expansion slowed down amid Covid-19. Moving forward, companies will be more selective in software spending so retaining existing customers will be key to withstanding these turbulent times. Software vendors with an effective customer success team and greater commercial flexibility, by offering shorter billing cycles, subscription pauses, or creative discounts for longer contracts, will have an advantage.

What do you predict for the SaaS industry as we enter the "new normal"?

More than ever before, SaaS companies are going to double down on customer relationships to showcase their true value. Whether they’re serving small businesses or global enterprises, as budgets tighten, SaaS platforms will come under increased scrutiny and will need to find ways to build and sustain long-term loyalty. How? By offering added flexibility to their customers. In times of uncertainty, customers appreciate working with a partner who embodies empathy and provides added support.  

High profile investor Gavin Baker recently wrote a Medium Post disputing a quote from CEO and founder of Vista Equity Partners Robert F. Smith that said “software contracts are better than first-lien debt.” Baker argued that software companies that work with small businesses in high-risk industries are going to take a hit, that contracts based on utilisation or seats will likely suffer, and that fewer customers will pay cash upfront so we’ll see payment terms lengthen significantly. Baker continues that value propositions are going to be called into question and companies that aren’t truly mission-critical might find themselves on the chopping block.

To echo the sentiment of Zuora’s CEO Tien Tzuo in a recent newsletter, whilst this is all true, it doesn’t matter, because the stability and predictability of the subscription business model is absolutely essential to overcoming these issues. And no matter the industry, this resiliency is what’s going to separate subscription-based-as-a-service companies apart from the rest.

Why are subscriptions proving to be resilient?

There are a number of reasons why the subscription business model is defying the odds despite today’s economic uncertainties.

Firstly, subscription businesses start each quarter near the finish line, not the starting line. If you think about every quarter as a 100 metre sprint, then traditional linear or transaction-based businesses begin at the starting line. This is compared to subscription businesses, which are sitting comfortably at the 20 metre line before the race has even begun. Whilst Covid-19 has created some hurdles on the track, having monthly recurring revenue is a major competitive advantage.

Secondly, the subscription model is based on relationships, not transactions. For most companies, you either secure revenue through a one-off transaction, or you don’t. And in many cases, losing a prospective customer at this point often means you’ll never see them again. However, subscription businesses are built on long-term relationships, meaning you could take a slight hit today by offering a free trial or discount on the first month, but it doesn’t matter when the future recurring revenue is waiting for you the next. This ongoing relationship with customers results in much more operational flexibility.

Lastly, subscription-based businesses know their customers and therefore have the knowledge at their fingertips to adapt much faster. Businesses that sell through one particular channel carry a lot more risk if that channel were to fail. Take any business right now that relies on brick and mortar sales to sell its products as an example. Rather than focusing on products and channels, subscription businesses focus on their customers and use the deep relationships and rich data they have to adapt in smart ways that are empathetic towards their customers.  For example, recently, Fender gave away a million new music tutorial subscriptions, whilst Headspace gave free meditation classes to health professionals and the unemployed.

While there will be short-term challenges even for subscription businesses, because they are focused on long-term value, it’s much easier for them to hunker down and weather the storm. And as Tzuo pointed out, this is why retail goliaths like Neiman Marcus and J.Crew are declaring bankruptcy, while subscription businesses are thriving. Zoom offered free licenses to K-12 students and saw its daily active users increase by 20X in just a few months. Another great example is Fender, who extended its 14-day subscription trial period to 3 months to help people enjoy a new hobby during their time at home. Fender originally set the limit at 100,000 new sign-ups, but the offer was so popular that Fender raised the limit to 1 million new subscribers.

What can companies do to limit future churn as lockdown restrictions eventually lift?

The SaaS companies that will survive have taken swift action to deepen loyalty and sustain long-term relationships.

According to the Subscribed Institute, subscription businesses who are agile enough to respond to changing customer needs grow at three times the rate of their peers. With a flexible platform, companies can offer customers more options and greater control over their subscriptions.

By doing this, companies were able to build trust and focus on longer-term retention. During Covid-19 many subscription companies used various strategies to offer short-term payment relief for struggling customers. We saw subscription companies across many industries quickly pausing billing, updating pricing, launching trials, or introducing new bundles in the past few months to help customers adapt to Covid-19.

By offering customers options to suspend subscriptions, the Institute also found that subscription businesses can save 1 out of every 6 customers from churning.

At the end of the day, the companies that show they care now will see a return on the investments they made in their customer relationships far beyond any short-term impact to revenues.

John Phillips, General Manager, EMEA, Zuora