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Expert opinion

Subscription economy: the size of the market growth

Wednesday 8 May 2019 | 11:31 AM CET

Andrew Dailey, MGI Research: This shift to new business models – and the underlying need to invest in systems to exploit the new models – has proven to be a durable trend

Driven by a variety of factors, organisations of all types are adopting new business and pricing models. Commonly referred to as the ‘subscription economy’, this transformation is sweeping across industries, compelling organisations to re-think their existing processes and systems.

Every element of the Quote to Cash process plays a role in enabling the subscription economy; however, the reality is that most of the systems in place today are not designed to handle the new requirements of a subscription model. Over the next five years, virtually every type of business and organisation will be required to invest in new systems and processes to exploit the opportunities created by new business models and to meet the changing expectations of business and individual consumers. The total amount of this investment will exceed USD 172 billion, according to MGI’s quantitative forecasts. For purveyors of technology solutions that facilitate subscription business models, this represents a huge addressable market. For user organisations looking to adopt new business models, investing in agile solutions is becoming a business-critical priority.

Today’s customer – be it an individual or an enterprise – wants more pricing options, more flexible payment plans (eg via op-ex instead of as a capital expenditure), and transparent, easy-to-understand invoices and billing. Currently, subscriptions, demand-based price models, pay-per-use, and increasingly complex enterprise agreements with a litany of unique entitlements are the norm.

Technology disruption accelerates the demand for these new pricing models, which are everywhere, from the Internet of Things (IoT) to autonomous vehicles, artificial intelligence, and digital disrupters like Netflix, Airbnb, and Uber. Neither multinational companies nor corner stores are immune to this revolution. Reacting to these new business needs, organisations are looking to revamp their core business systems, particularly in the area of monetisation.

In an effort to quantify the investment required to support the move to more flexible pricing and services delivery models, MGI Research closely tracks current spending trends related to all segments of agile monetisation platforms (AMP), including billing, CPQ (configure, price, quote), commerce, contract lifecycle management (CLM), customer service (CRM and customer support), financials, order management, and revenue recognition. MGI Forecasts use a bottom-up approach to quantify market opportunities and aim to model how typical companies of various sizes, in different industries and geographies, acquire and adopt new software.

A core element of the AMP TAM forecast is an extensive data model. MGI Research sourced, distilled, and normalised data on 37,000 publicly trading companies worldwide with revenues exceeding USD 1 million/year. Afterwards, this initial data set was filtered down to 34,817 operating companies and classified based on geography, sectors, industries, company sizes, and growth profiles. The AMP TAM forecast used a relatively conservative set of assumptions for economic growth around the world with an average GDP growth forecast of just above 1.3%.

While this is a huge jump from the 2015 forecast (which used a GDP growth estimate of under 0.4%), it reflects an emerging rather than a sustained global growth recovery. Impact of currency exchange rates was not explicitly factored into the AMP TAM model, although it is implicitly affecting GDP growth forecast. The estimates tend to reflect minimal typical spend over the five year forecast period. The source data addresses companies from 116 countries across 10 major geographic regions, from within 10 core economic sectors and 66 underlying industries. 

The total addressable market (TAM) for cloud-based AMP exceeds USD 172 billion, from 2018 to 2022, according to MGI Research. The forecast also looked at the market size and growth based on the impact of three key trends: digital transformation, the rise of IoT, and the shift to subscription business models. Companies undergoing a huge or meaningful digital transformation will account for over 50% of all AMP spend from 2018 to 2022. 73% of the spend will come from industries with huge or meaningful adoption of IoT. Subscriptions are forecast to represent nearly 50% of spend around AMP. These market forces, taken as a whole, explain in part why every segment of AMP is growing at a compound annual growth rate (CAGR) of at least 25%, with most growing faster than 30%.

On a geographic and industry basis, Europe is playing a key role in this growth. Germany is expected to become the third largest single market for AMP components, and core industries like industrials, consumer discretionary, and IT are predicted to represent the largest three verticals.

Overall, this shift to new business models – and the underlying need to invest in systems to exploit the new models – has proven to be a durable trend. In times of growth, the ability to offer greater pricing flexibility is a competitive weapon that enables faster customisation of offers and quicker response times to market forces. When economic growth slows, modern monetisation tools give companies the ability to optimise revenue and margins based on individual customer cases. Subscription and recurring revenue models are valued for their predictability and supplier-customer alignment – customers only pay as long as the services delivered meet expectations. As customer expectations continue to evolve, new pressures on pricing models and commerce systems will undoubtedly appear. The one constant, however, will be the need for agile business applications that adapt and support new pricing models. In periods of economic upswings and downturns, the demand for solutions that support the subscription economy will persist.

About Andrew Dailey

Andrew Dailey is a Managing Director of MGI Research, an independent research and advisory company focused on disruptive business and technology trends. Mr Dailey leads the agile monetisation and quote to cash coverage for MGI. He has over 25 years of diversified technology and financial services experience as a software executive, industry analyst (Gartner), and advisor to Fortune 500 companies. He is a co-founder of Gartner’s Software Asset Management service, and served on the team that coined the term ERP in the early 1990s.

About MGI Research

MGI Research is an independent industry research and advisory firm focused on disruptive trends in the technology industry. The firm was founded in 2008 by a team of senior analysts and executives from firms such as Gartner, Mastercard, and Morgan Stanley. MGI is the only firm with a dedicated practice around agile monetisation, including billing, CPQ, financials, commerce, payments, and revenue recognition.

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