The Rise of Recurring Revenue Payments in the Subscription Economy: A Comprehensive Overview

Introduction

In recent years, recurring revenue has become an increasingly valuable asset for businesses leading to the adoption of subscription-based payment models. Subscription-based payment models offer customers flexible, customisable, and commitment-free options. The Subscription Economy Index report by Zuora states that the subscription economy has grown by over 435% in almost a decade, which is expected to continue. This blog post explores the growth of recurring revenue payments and their impact on businesses worldwide.

The Growth of Recurring Revenue Payments

The pandemic has further accelerated the shift towards recurring revenue payments as customers seek flexible, commitment-free subscription-based services. The volume of instant payments and e-money transactions in total non-cash transactions is expected to increase from 17% in 2021 to 28% in 2026.

Businesses stand to benefit from having subscribers, as it provides them with a predictable revenue stream and opportunities for gathering customer insights and delivering enhanced customer experiences. Subscription services now come in various forms, such as curated boxes, replenishment services, and access models, further driving the growth of this sector.

Expected Growth of Subscription-Based Businesses

The ongoing digitalisation of the economy is expected to drive the continued growth of subscription-based businesses. The digital subscription economy is currently a USD 650 billion market and is set to more than double by 2025, reaching a market size of USD 1.5 trillion. This represents an impressive 18% compound average growth rate. New technology enables businesses from all sectors to offer membership services to their customers while falling data storage costs and rising computing power enables businesses to offer services at a low cost.

Additionally, the generational transition to younger cohorts, such as millennials and generation-Zs, is expected to drive the growth of subscription-based businesses further. Consumer surveys suggest that younger generations prioritise always having the latest product, lack of maintenance, and environmental concerns over traditional ownership considerations.

Top 10 Countries and Industries Taking Recurring Payments

According to TAMI, the top 10 countries with B2B businesses taking recurring payments are:

1. United States
2. United Kingdom
3. Australia
4. Canada
5. India
6. Germany
7. Netherlands
8. France
9. Ireland
10. New Zealand

The top 10 global industries taking recurring payments include:

1. Technology and Electronics
2. Retail
3. HealthCare
4. Professional Services
5. Sport & Recreation
6. Education & Academia
7. Advertising & Marketing
8. Financial Services
9. Travel & Hospitality
10. Property & Real Estate

Payment Trends in the Subscription Economy

Credit and debit cards accounted for around 41% of global non-cash transaction volume in 2020, with many subscription-based services relying on these payment methods. Digital wallets, such as Google Pay, Apple Pay, and PayPal, are also increasingly popular and are estimated to have 4.4 billion users by 2025. Many digital wallets support recurring payments, making them popular for subscription-based services.

Bank transfers accounted for 25% of global non-cash transaction volume in 2020, but they have been overshadowed by the convenience of digital wallets and recurring revenue payments. Cryptocurrencies like Bitcoin have gained popularity but still need to be improved in use for subscription-based payments due to their volatility and lack of widespread adoption.

Benefits of Subscription-Based Business Models

Reduced Uncertainty:  Subscription-based business models provide greater certainty when generating revenue and profits in the long run. This is because subscribers commit to paying a recurring fee over an extended period, ensuring a predictable and steady income stream for companies.

Constant Stream of Data: Companies that adopt subscription-based business models enjoy greater certainty with respect to their revenue and profit generation over the long run. This is because subscribers commit to paying a recurring fee for an extended period, which provides a predictable and stable source of revenue for the company.

Challenges of Subscription-Based Business Models

Upfront Costs: One of the significant challenges associated with subscription-based business models is the upfront costs incurred in acquiring new customers. Sales and marketing expenses can be substantial, and it can take time for companies to recoup these costs through regular subscription revenue.

Revenue and Expense Misalignment: Subscription-based businesses often face a misalignment of revenues and expenses, with customer acquisition costs incurred upfront while revenues are recognised over time. This can lead to challenges in accurately assessing the company’s proper financial health.

Customer Churn: Subscription-based businesses are also susceptible to customer churn, as subscribers can cancel their subscriptions anytime. This can lead to a loss of revenue and a reduction in the customer base.

Conclusion

In conclusion, the growth of recurring revenue payments has been fuelled by the rise of subscription-based services and supported by the increasing use of credit/debit cards and digital wallets. Businesses can benefit from subscribers, providing them with a predictable revenue stream and opportunities to deliver enhanced customer experiences. As the subscription economy continues to grow, companies must adapt their payment models to remain competitive and meet the needs of their customers. While there are challenges associated with subscription-based business models, the benefits of predictable revenue streams, constant data, and improved customer experiences far outweigh them.