The move away from physical stores to online shopping is doing much more than making our lives easier and Amazon-founder Jeff Bezos incredibly rich. It is leading to completely new kinds of software solutions that would never have seen the light of day if we hadn’t started swinging our virtual credit cards.
That is doubly true for possibly the hottest online shopping topic – subscription-based eCommerce – whose potential is increasing rapidly thanks to the emergence of a new type of subscription software company.
The subscription explosion
Let’s start with some facts and figures about online shopping.
Today, more than half of Americans and 67% of US Millennials prefer doing their shopping online. As of December 2016, Amazon’s market value was larger than the combined value of eight of the country’s biggest brick-and-mortar chains – including Walmart. This is by no means just an American phenomenon. Global online shopping revenue reached around $2 trillion dollars in 2016, projected to double by 2020.
Today, more than half of Americans and 67% of US Millennials prefer doing their shopping online.
A growing percentage of revenue will come from subscriptions, which an MGI Research study projects to reach north of $100 billion by 2020. I think that is a very low estimate, although I don’t agree with Zuora CEO Tien Tzuo, in part famous for coining the term ‘subscription economy’, who thinks that subscription companies extremely impressive growth figures will lead to subscription and pay-as-you-go models making up most of the world economy.
However, I do agree with the point that the eCommerce subscription model is a winner. You can use it to sell anything from apples to airplane tickets. It has already disrupted large parts of the commerce space. I’ve written about it here, and some of the companies that are doing the disrupting here.
The eCommerce subscription model is a winner. You can use it to sell anything from apples to airplane tickets.
The road made easier
Subscription eCommerce companies will continue to expand. In no small part thanks to a group of new software companies that make it a proverbial piece of cake to get the best out of an online subscription business model.
These companies, which can broadly be described as Subscription Billing Platforms (SBP), have realised that there is a hole in the market. Both start-ups and well-established companies wishing to change their business model face the same challenge: existing software systems, such as Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM), are ill equipped to deal with the specific needs associated with an online subscription model.
Both start-ups and well-established companies wishing to change their business model face the same challenge: existing software systems are ill equipped to deal with the specific needs associated with an online subscription model.
”Traditional software solutions struggle with efficiency and flexibility in connection to everything from new signups, relevant cross sales, billing to cancellations,” Rasmus Foged, CEO and founder of the SBP-start-up Upodi, says.
Creating stickier customer relationships, more flexible sales, clearer invoicing and accounts for both staff and customers, business insights and more customer-focused reporting are other areas where CRM and ERP can struggle with subscription eCommerce.
Upodi and other SBP companies offer what I would refer to as backbone services. It means that their software systems take on most of the back-office functions a company needs to run a successful subscription model, as well as integration with related line-of-business systems, like CRM and ERP.
In other words, a company can focus on creating and marketing products, and let a SBP take care of the rest via a cloud-based software as a service (SaaS) model, instead of having to develop it themselves.
Giants – and market holes
The need for the solutions offered by these companies is evident when looking at their success in the American market.
For example, the top SBP companies like SAP hybris Digital River, Zuora and Aria Systems handle subscription revenues worth more than $300 billion on behalf of their clients. Companies like GoTransverse, Apttus and Vindicia also handle billions of dollars or in the high triple-digit millions.
On the customer side there is no shortage of big name brands that are using the services provided by SBP companies. Audi, Dell, Financial Times, HBO Nordic, Philips, Sony, Symantec Verizon and Zendesk are just a few from a long list. A list that covers many industries. A further indication of how subscription eCommerce models are spreading.
From a market standpoint, there still seem to be many unexplored opportunities. For example, there doesn’t seem to be the same market saturation in Europe as in the US.
A Forrester report on the SBP industry focused on companies handling more than $500 million of subscription revenue a year and, interestingly enough, it didn’t include any European companies.
“That is not on oversight. It is an illustration of the fact that there aren’t any European SBP companies that are big enough to make it onto Forrester’s radar,” Rasmus Foged says.
Upodi is one of a handful of companies aiming to change that. In part by focusing on servicing companies of a size that is somewhat below the level where the American giants operate.
“We are looking at a perfect storm where existing and new companies are integrating subscription models. Many of these are SME companies who are looking for solutions where they have up to 10.000 subscriptions. This is an area that is uncontested at the moment,” Rasmus Foged says.
Smart money – and wider consequences
The market situation and potential has led to investment and M&A activity in the space.
Aria Systems has received more than $130 million in funding over five rounds. Zuora has received just shy of $250 million, and spent some of that money to acquire Frontleaf in 2015. Subsequently, Zuora launched Z-Insights, a subscriber analytics solution. The deal illustrates something I believe we will see more of in coming years. As the industry matures, companies will look to differentiate themselves through integrating new services. This will, as it has previously done in many other software sub-industries, lead to acquisitions.
The appetite for acquisitions will be bolstered by the fact that PE/VC money is also flowing into the industry space. As an example, Digital River, which was acquired by Siris Capital Group in 2014. There is also interest from big software companies, like Amdocs - who acquired Vindicia in 2016.
As the industry matures, companies will look to differentiate themselves through integrating new services. This will lead to acquisitions.
What is happening – and will happen – in the SBP space will be of interest for companies far beyond subscriptions, or software for that matter.
SBP is essentially about providing the backbone / connectors for a new kind of behaviour (in this case shopping) that is growing / made possible due to increased connectivity and technological advances. The same kind of development is happening across many sectors and industries – and increasingly to our infrastructure. Smart cities are going to need the same connections between systems, as are driverless cars, and our increasingly decentralised energy production.