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the subscription
economy
The race for recurring revenue
in Asia Pacific
From razors to restaurants, and from Three quarters say the shift to
groceries to car rentals, subscription- subscription is a board-level priority
based models are extending to almost Most have made progress in
every type of business. developing a strategy to guide it.
However, very few have a clearly
Companies that once sold goods on a
defined subscription strategy that is
one-time basis are now convincing many
aligned across the organisation.
customers to pay recurring fees, rather
than purchase a product outright. Revenue + loyalty = long-term growth
The subscription revenue model is Most expect subscription to have a
proving its growth potential around significant impact on long-term revenue
the world. According to Zuora, a billing growth, but even more expect the
software provider, companies in the biggest gain to be better customer
‘subscription economy’ have registered retention and stronger customer
CAGR of 18% between 2012 and 2019, relationships. And the vast majority
a rate five times faster than that of the see an opportunity to become a lead
S&P 500 1. disruptor in their industry.
Asia Pacific has taken note. Fear of failing… and missing out
To better understand how companies The chief barriers are fear of a
are embracing the subscription short-term decline in revenue, and
economy, Citi surveyed 580 senior low awareness within the business of
business executives in the region. It subscription’s long-term potential.
also conducted in-depth interviews Such concerns contribute to a lack of
with senior leaders who are leading alignment on subscription objectives
subscription revenue initiatives in and strategy between key functions,
their organisations. especially finance and digital, which
impedes progress.
1. www.zuora.com/press-release/subscription-economy-grows-300-last-seven-years
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Signing up to the subscription economy | The race for recurring revenue in Asia Pacific
About the
research
The survey was
conducted in July and
August 2019. It was
carried out on behalf
of Citi by Longitude, a
Financial Times company.
The respondents were based
in 14 countries, with the largest
contingents hailing from India,
Indonesia, Singapore, China,
Hong Kong and Australia. Five
sectors were represented:
• Industrial
• Technology, media and
telecommunications (TMT)
• Consumer goods and
healthcare
• Energy and power
• Insurance
3
Section 1
Asia embraces
the engagement age
in 20182. Q. To what extent do you agree or disagree with the following statements about the future of subscription-based
models?; Q. Please indicate the level of growth of subscription-based models in the industry sector within which your
organisation operates.
According to Anna Choi, Head of
Digitalization, Asia Pacific, at Schindler
Group, a manufacturer of elevators and forward three years and 46% predict Industrial manufacturers are also
escalators, customers were not used to that subscription will be widespread in now testing the subscription waters.
subscription pricing until fairly recently. their industry, and 12% even believe it will One example is Geely, a Chinese auto
‘In 2019, however, they are starting to be the industry standard. producer that plans to launch a car-
see the value and are willing to pay [on a sharing service in autumn 20195.
Respondents in TMT and consumer
recurring basis],’ she says. ‘Demand for
and healthcare are the most upbeat ‘Adopting a subscription model is an
subscription in Asia is growing strong and
about subscription growth, which evolutionary journey,’ says Saurabh
becoming more sophisticated.’
is reflected in recent subscription R Gupta, Director, Asia Pacific
Companies in the region building a initiatives in these sectors. Examples Sales Sector Head for Consumer &
subscription model are finding that include China’s Xiaomi, a consumer Healthcare, Treasury & Trade Solutions,
success takes time. More than four in ten electronics firm that in 2017 began Citi. ‘Industries will evolve at different
respondents (44%) to our survey say offering a monthly subscription to inflection points. In the consumer
implementation of the model has been its mobile services3. In 2018 Grab, industry, the inflection point has
slower than anticipated, and 41% report Singapore’s popular ride-hailing already come. In an industrial context,
little or no progress at all to date. service, began offering a subscription some sectors are capital intensive and
plan for customers looking to obtain there are bigger barriers to entry.’
Nevertheless, the survey provides a clear
discounts on rides and food deliveries4.
indication of subscription’s appeal. Nearly
half (46%) of respondents see adoption
growing within their industry today. Fast
2. Zuora introduced an Asia Pacific sub-category of its Subscription Economy Index in January 2018. The sub-category consists of companies in Australia, New Zealand
and Japan. 3. www.gizmochina.com/2017/12/26/xiaomi-starts-%EF%BF%A59-9-super-vip-monthly-subscription-model-no-advertisements-cloud-storage
4. www.thedrum.com/news/2019/01/15/grab-strengthens-offerings-subscription-model-it-looks-entice-users-stay-its 5. www.autonews.com/china/geely-unit-launch-car-
sharing-service-september
4
Signing up to the subscription economy | The race for recurring revenue in Asia Pacific
5
Figure 2. Drivers of subscription adoption
and anticipated areas of impact
Improved margins
62%
6
Signing up to the subscription economy | The race for recurring revenue in Asia Pacific
Why the subscription model sells Four in ten respondents (41%)—and 64%
What’s driving companies in the region of CFOs— say that customer expectations
to develop a subscription model? One are driving pressure to improve
factor is, simply, intense competition. experience faster than their organisation 49%
Almost half of respondents cite pressure can deliver it. This pressure is most in agree that most
to keep pace with market rivals. But evidence in the consumer/healthcare, customers lack the
the vast majority (82%) also see an insurance, and energy and power sectors. long-term commitment
opportunity to become a lead disruptor necessary for
Juliana Chua, Head of Digital subscription models
in their industry.
Transformation at NTUC Income to succeed.
At another level, most respondents (Income), a Singapore-based insurer,
expect subscription to have a positive says that digital natives are seeking
impact on long-term revenue growth, more pricing flexibility and transparency
but even more expect the biggest in insurance products. ‘So, the challenge
gain to be better customer retention for us is to personalise insurance into
and stronger customer relationships. right-sized products that customers can
Increased cross-selling to the subscriber subscribe to.’ 64%
base is one way that greater retention
‘Insurance has a long-established of CFOs agree that
will contribute to overall revenue growth.
business model,’ adds Ms Chua. ‘We customer expectations
One of the most effective ways to want to disrupt ourselves before are driving pressure to
unlock these benefits is by mining the disruption finds us, deliver an excellent improve experience
huge amount of data that recurring customer experience, and immerse faster than their
transactions with customers brings ourselves in a digital ecosystem play organisation can
deliver.
in comparison with one-off product with a variety of partners.’ Income has
sales. ‘Once you build a subscription recently taken a step in that direction
relationship with a customer, you gather by launching a partnership with
usage data from them regularly and ZhongAn Tech, a Chinese insurance
you get to know them better,’ says technology provider. Income’s aim
Michael Mansard, Principal – Business is, with its partner’s collaboration, to
Transformation & Innovation at Zuora. ‘As reach digitally savvy and previously
they pay for this relationship, they accept
the mutual sharing of insights. That
inaccessible customer segments with
new products6.
63%
creates the ultimate competitive moat.’ agree that subscription
Eric Cheung, Group Transformation models only appeal to a
Such mining and analysis of data can Director of Tricor Group, a leading younger demographic
clearly work to mutual advantage, further business expansion specialist, highlights (e.g.18-35).
cementing relationships. According to Ms another big advantage that C-suite
Choi, Schindler’s customers use its data executives see in the model: cash-flow
to better understand and serve their predictability. ‘In the traditional model,’
own customers. he says, ‘one-off revenue can occur
at any time during the year. But, with
This points to another motivation for
subscription, we get regular cash flow
subscription adoption: demand. ‘In
and can predict what the customer
our avionics business, we’re selling to
lifetime value will be. Annual budgeting
companies that are very advanced in
is a bit complicated at first, but then it
their own transformation,’ says Stephan
gets easier.’
Liozu, who is Chief Value Officer
with the Thales Group, a technology As we will see, by highlighting such
company. ‘They tell us that they need the advantages, the internal champions of
subscription option, so we have to adjust subscription pricing can help to gain
and be ready to respond.’ vital buy-in to the model from the CFO
and finance function.
6. www.businesstimes.com.sg/banking-finance/ntuc-income-chinas-za-tech-join-hands-to-develop-innovative-digital-insurance
7
Section 2
Converting
ambition to reality
Regardless of their degree of Figure 3. Current and future subscription implementation plans
progress to date, at the vast
majority of surveyed firms
(75%) the shift to subscription Current progress 1% 14% 44% 17% 24%
is a board-level priority.
Anticipated
More than 80% of C-level progress in three 14% 45% 17% 24%
respondents confirm this, as years' time
do nine in 10 CDOs, who are
often leading the charge for Subscription is an intrinsic revenue stream Implementation is ongoing, recurring revenues are increasing
subscription (see below). Implementation has begun, but progress is slower than anticipated
No progress to date
Little progress, although we have a plan
7. www.businessinsider.com/alibaba-introduces-88vip-subscription-service-2018-8?r=US&IR=T
8. www.theinvestor.co.kr/view.php?ud=20170829000849
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Signing up to the subscription economy | The race for recurring revenue in Asia Pacific
The hybrid
approach
Established companies, especially
providers of physical goods,
are likely to employ a hybrid
model, combining traditional
and subscription pricing, for an
extended period of time.
‘It’s a long journey to subscription,’
says Michael Mansard of Zuora, ‘so
there may be a need, especially
for manufacturers, to sustain
both models at the same time.
Companies that are best-in-class
tend to try, learn and iterate from
day one.’
One reason that large companies
take this approach is that few have
the capabilities and technology in
place to make a rapid, wholesale
shift to subscription. Stephan
Liozu of Thales points out that
established businesses often go
the route of acquiring digital start-
ups to get their subscription model
off the ground quickly.
A regional example of this is
LG Household and Healthcare,
a division of the large Korean
conglomerate, which launched a
subscription-based male grooming
service in 2017 after acquiring a
local subscription-based apparel
service provider8.
9
Section 3
Subscription
culture shock
Whichever member of More consumer and healthcare firms, More than two-thirds (67%) of
and also manufacturers, struggle with respondents say stronger alignment
the leadership team is the these factors than others. between business and finance is needed
champion of the subscription to make subscription models successful.
Such concerns are naturally ever-
revenue model, their biggest present within finance. In established
Within the C-suite, 78% of CTOs support
this view, compared with 66% of
challenge is convincing the businesses with entrenched revenue
CFOs, suggesting that weak finance-
rest of the business to focus models, the challenges posed by a shift
technology interaction is a particular
towards subscription can be daunting.
on it long-term. According to PwC’s Jim Woods,
risk to the model’s success.
CFOs in traditional organisations
The greatest barrier to implementing Figure 5. The role of finance and treasury
follow tried and tested methods of
the model, respondents report, is fear monitoring investment and setting up It is the remit of finance and treasury to
of a short-term decline in revenue. A accountability structures, and usually communicate the impact of a subscription-based
closely related hurdle, and cited nearly expect a quick ROI on both the top and revenue model to the rest of the business
as often, is a low level of awareness bottom lines. ‘In subscription-based 73% 7% 20%
within the company of the long-term models,’ he says, ‘revenue flow is much The finance function has a high-degree of
potential of a recurring revenue model. more protracted and back-end-loaded, autonomy to manage external relationships
and profit generation even more so. (e.g. with investors and banks)
Figure 4. Top barriers to implementing That requires a very different mindset.’ 70% 4% 26%
subscription-based models ‘Subscription is a whole different The finance function is empowered to
business,’ says Stephan Liozu of communicate business model change to
investors and customers
Potential short-term decline in revenues Thales. ‘We have to disrupt our legacy
68% 5% 26%
61% processes in finance, in cost modelling
Low awareness of long-term potential and controlling. Imagine a traditional
Agree Neither agree nor disagree Disagree
for recurring revenue models legacy business that’s been around for a
58% hundred years, with finance people that Base: N=580
Outdated accounting systems go through the same long-established Q. To what extent would you agree or disagree with
and/or valuation models training, and now we’re telling them to do the following statements regarding the remit of your
organisation’s finance/treasury department?; Q. To what
31% something different.’ extent do you agree or disagree with the following statements
about accountability for delivering a subscription-based model.
Cultural factors (e.g. lack of growth mindset, silo
mentality, outdated company values) Getting the business up-to-speed
31% The finance challenge is not just about The CFO and finance function are
No strategy to support business model change changing trusted methods of revenue also responsible for communicating
31% recognition and cash flow. Once on the virtue of adopting the model
board with the introduction of a to customers, investors and other
Base: N=580
subscription-based model, the CFO and external stakeholders.
Q. In your view, which of the following are, or have been, finance team are the ones responsible
the biggest barriers to implementing a subscription- for communicating its impact to the Nearly 70% of survey respondents
based revenue model in your organisation? Q. Does your
organisation have a clearly defined strategy to support rest of the business. But, at many confirm that the finance function
the growth and innovation of subscription model revenue companies, a lack of alignment and is empowered to communicate
streams over the coming three years?
dialogue between finance and other business model change to investors
business functions means that the and customers. But Anna Gong, CEO
latter can remain unconvinced of the and Founder of Singapore-based Perx
need for change. Technologies, a software provider,
10
Signing up to the subscription economy | The race for recurring revenue in Asia Pacific
11
Section 4
Better customer retention Figure 6. Top five tools to maximise subscription success
and cross-selling are the
ultimate prizes for many 60%
12
Signing up to the subscription economy | The race for recurring revenue in Asia Pacific
13
Are finance and digital
sufficiently aligned?
Survey respondents broadly
agree that all members of the
management team need a
strong, shared understanding of
the subscription strategy.
‘In healthy subscription-based businesses,
the finance and tech teams tend to be
very aligned,’ says Michael Sherman, Chief
Strategy and Transformation Officer at BT.
‘Traditional businesses think in terms of
quarterly revenue whereas subscription
businesses focus on intrinsic trends around
their subscriber base. In the future, both
teams need to prioritise the subscription
base first to understand how pricing and
revenue move long-term profits.’
Full alignment is particularly vital between
the CFO and CDO and their respective
teams, as they will carry most of the
burden of establishing the infrastructure,
systems and capabilities. It may be a
cause for concern, then, that the survey
indicates a degree of misalignment
between the two functions.
For example, although the vast majority
of all executives affirm that moving to
a subscription model is a board-level
priority, many more CDOs (as well as CIOs
and CTOs) are certain of this than CFOs
(93% versus 80%). And many more CDOs
than CFOs are confident that they have
the right tools in place to measure the
success of the model.
Are CFOs in Asia Pacific, cautious and
risk-aware by nature, more reluctant than
their senior technology colleagues to take
the plunge?
14
Signing up to the subscription economy | The race for recurring revenue in Asia Pacific
“
While most businesses
are trying to embrace
disruption and
collaboration, the
interaction between
finance and the business
remains reactive.”
Saurabh R Gupta • Director, Asia
Pacific Sales Sector Head for
Consumer & Healthcare, Treasury &
Trade Solutions, Citi
15
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