Subscription models are good investments

Subscription models are good investments

With the current outlook for many corporates looking increasingly challenged, we expect business model resilience to be sternly put to the test. 

During such periods, we look to assess the quality of business models and how these might evolve. From our analysis, we anticipate the continuation in growth of the subscription model as it benefits companies in both good and bad times.

As more companies look to address the acceleration in remote working, there are also important considerations around the ever-changing technology landscape, proliferation of data and the evolving workforce demographic.

Key Points

  • Covid-19 is forcing companies to rethink their business model.
  • Those models that are based on subscriptions are more resilient.
  • Subscription models offer defensiveness and earnings quality.

This requires businesses to be more agile and adaptable to client demands, in some instances resulting in a sizeable shift in business strategy.

The move to a model where customers pay a subscription fee for usage is becoming increasingly prevalent across multiple industries. Whileit has not always found success, its financial benefits are becoming more prominent.

Streaming apps such as Spotify and Netflix have operated this model for some time. 

Disney has more recently been successful on its direct-to-consumer launch. 

Video game developers Electronic Arts and Ubisoft have achieved further monetisation of back catalogue content through monthly subscription service.

Meal-kit services like Pasta Evangelist and HelloFresh have also boomed in recent months.

Meanwhile, subscription within food manufacturing and consumer goods is still a niche market and has seen mixed fortunes.

Nestlé and Procter & Gamble have looked to become a greater participants, though it is questionable whether it has previously yielded material benefit for Mondelez or Unilever.

Why is this model becoming increasingly important?

For companies, there is the principal idea of greater visibility on growth and cash flow from a recurring revenue stream. This works best for products that have low churn as it offers a better way to monetise content or a service.

Importantly, it provides higher total lifetime value. 

From the customer viewpoint, there is the benefit of greater accessibility, flexibility, simplicity in pricing and value. Think of Spotify versus buying CDs. For the average person, you will likely find they probably have paid more over 10 years.

However, the wealth of choice and access is unparalleled as it offers a tremendous amount more for your money.

Turning our singular attention to UK tech, there are two examples within the software industry where penetration of this model is on the rise.

Industrial software provider Aveva is driving the digitalisation transformation of process industries.

Two years ago the group completed its merger with the industrial software business of Schneider Electric, with the combined group now a market-leading visualisation software, real-time data and analytics company.

At the time, it announced a series of medium-term targets to improve the operational performance of the business. If we fast forward to the recently announced full year results, we can see that the business model transition is progressing ahead of plan.