The Subscription Economy Continued to Accelerate During 2021

The Subscription Economy experienced strong growth during 2021 and may be positioned to exceed pre-pandemic levels during 2022, according to a report from subscription platform consultant Zuora. [1]  This underscores our investment thesis that companies offering subscription-based platforms may provide individuals with an attractive investment opportunity.

 

Significant Sales Growth

Companies in the Subscription Economy Index (SEI) experienced revenue growth of 16.2% during 2021 versus 12% for companies in the S&P 500. [2]  Over the past ten years, companies in the SEI experienced a compound annual growth rate (CAGR) of 17.5% versus 3.8% for companies in the S&P 500. Strikingly, Zuora notes the gap in revenue growth between S&P 500 constituents that are part of the SEI Index and those that are not continues to widen.

 

Subscription-Based Companies Doing a Good Job Holding onto Customers

The flexibility of a subscription-based platform is often one of the biggest problems facing it, namely, individuals may often cancel their subscription at any time.  Or they may cancel after a free or reduced-price trial period. 

 

However, SEI companies are doing a better job of holding onto customers, as evidenced by a declining churn rate.[3]  During 2021, the churn rate experienced by SEI companies dropped to 5.4% from 6.3% in 2020 and 6.5% in 2019.  Zuora attributes the lower churn rate to SEI companies placing a greater emphasis on improving customer journey and service levels.

 

Software Subscriptions Leading the Pack

Software-as-a-Service (SaaS) refers to when software is licensed on a subscription basis to users.  SaaS companies in the SEI index are outperforming all other industries.  SaaS companies in the index experienced a four-year CAGR of 19.4% versus the 16.2% rate of the overall index.

 

Software companies were among the earlier adopters of a subscription-based platform, giving it more time to innovate and refine its offerings.  Additionally, nearly 70% of employees in the United States worked or are still working from home due to the pandemic, according to Zuora.  While more employees will likely return to the office, COVID-19 may have permanently changed the nature of work.  More employees are likely to work from home in the future, or at least require a hybrid work environment that allows them more flexibility to work from home part of the time.

 

Subscriptions May Allow Companies to Grow Faster Than the Overall Economy

Evidence from Zuora’s most recent report suggests that companies offering subscription-based pricing options may be able to grow faster than the overall economy. Over the past ten years, they have grown faster than companies that do not offer a subscription option.  As the subscription-based business model matures, companies are capitalizing by providing the products and services in the form and manner customers prefer. 

 

As such, they may offer an attractive investment opportunity for individuals.

 

 

 How may individuals gain exposure to the subscription economy?

 

The Fount Subscription Economy ETF (SUBS)

The Fount Subscription Economy ETF (SUBS) seeks to provide investment results that, before fees

and expenses, generally correspond to the total return performance of the Fount Subscription

Economy Index.  The Index was designed to measure the performance of companies engaged in the business of providing subscription services, i.e., companies that sell products or services for recurring subscription revenue.


 


[1] All facts and figures sourced from: The Subscription Economy Index: February 2022, Zuora, February 2022

[2] The Subscription Economy Index (SEI) is designed to measure the growth in the volume of business for subscription-based products and services; The SP 500 is a stock market index tracking the performance of 500 large companies listed on the stock exchanges in the United States.  Note that some companies that are constituents of the SEI are also constituents of the S&P 500.

[3] Churn rate – The rate of customer attrition or customer churn measure by dividing the number of attrited customers over a time period by the total number of customers at the start of the time period.

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Bong-Geun Choi Chief Economist

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