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Signing up to the subscription economyThe race for recurring revenue in Asia Pacific

This report was produced for Citi by Longitude, a Financial Times Company and part of the FT Marketing Services offering

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The subscription revenue model is no stranger to today’s businesses. The publishing and media industries, for example, have been honing it for a century, if not longer.

But the digital era and consumer demand have fuelled its cross- sector appeal.

From razors to restaurants, and from groceries to car rentals, subscription-based models are extending to almost every type of business.

Companies that once sold goods on a one-time basis are now convincing many customers to pay recurring fees, rather than purchase a product outright.

The subscription revenue model is proving its growth potential around the world. According to Zuora, a billing software provider, companies in the ‘subscription economy’ have registered CAGR of 18% between 2012 and 2019, a rate five times faster than that of the S&P 5001.

Asia Pacific has taken note.

To better understand how companies are embracing the subscription economy, Citi surveyed 580 senior business executives in the region. It also conducted in-depth interviews with senior leaders who are leading subscription revenue initiatives in their organisations.

The insights reveal a sense of urgency among finance and digital leaders alike:

Subscribing to a new way of doing businessNearly half the surveyed executives believe the subscription-based model will be widespread in their industries within three years, and some even think it will be the industry standard by then. They are nevertheless finding that building the model is slow going.

Three quarters say the shift to subscription is a board-level priority Most have made progress in developing a strategy to guide it. However, very few have a clearly defined subscription strategy that is aligned across the organisation.

Revenue + loyalty = long-term growthMost expect subscription to have a significant impact on long-term revenue growth, but even more expect the biggest gain to be better customer retention and stronger customer relationships. And the vast majority see an opportunity to become a lead disruptor in their industry.

Fear of failing… and missing outThe chief barriers are fear of a short-term decline in revenue, and low awareness within the business of subscription’s long-term potential. Such concerns contribute to a lack of alignment on subscription objectives and strategy between key functions, especially finance and digital, which impedes progress.

Signing up to the subscription economyThe 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

The respondents work predominantly in large organisations: 54% in firms earning annual revenue of US$2 billion or more, and the remainder between $500 million and $1.99 billion.

All the surveyed executives work in businesses that are at various stages of implementing a subscription-based revenue model. (Those where there are no plans for subscription were not included.)

1. www.zuora.com/press-release/subscription-economy-grows-300-last-seven-years

Signing up to the subscription economy | The race for recurring revenue in Asia Pacific

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Businesses in North America and EMEA were early adopters of the subscription model, but Asia Pacific organisations are also now running with the challenge: Zuora’s index shows 16% revenue growth of subscription economy businesses in the region in 20182.

According to Anna Choi, Head of Digitalization, Asia Pacific, at Schindler Group, a manufacturer of elevators and escalators, customers were not used to subscription pricing until fairly recently. ‘In 2019, however, they are starting to see the value and are willing to pay [on a recurring basis],’ she says. ‘Demand for subscription in Asia is growing strong and becoming more sophisticated.’

Companies in the region building a subscription model are finding that success takes time. More than four in ten respondents (44%) to our survey say implementation of the model has been slower than anticipated, and 41% report little or no progress at all to date.

Nevertheless, the survey provides a clear indication of subscription’s appeal. Nearly half (46%) of respondents see adoption growing within their industry today. Fast

Section 1

Asia embraces the engagement age

forward three years and 46% predict that subscription will be widespread in their industry, and 12% even believe it will be the industry standard.

Respondents in TMT and consumer and healthcare are the most upbeat about subscription growth, which is reflected in recent subscription initiatives in these sectors. Examples include China’s Xiaomi, a consumer electronics firm that in 2017 began offering a monthly subscription to its mobile services3. In 2018 Grab, Singapore’s popular ride-hailing service, began offering a subscription plan for customers looking to obtain discounts on rides and food deliveries4.

12%

12%

46%

46%

18%

18%

24%

23%Currently

In three years' time

Figure 1. Prevalence of subscription-based models within your industry

They are considered industry standard Adoption is widespread

Adoption is growing There are a few There are none

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

Industrial manufacturers are also now testing the subscription waters. One example is Geely, a Chinese auto producer that plans to launch a car-sharing service in autumn 20195.

‘Adopting a subscription model is an evolutionary journey,’ says Saurabh R Gupta, Director, Asia Pacific Sales Sector Head for Consumer & Healthcare, Treasury & Trade Solutions, Citi. ‘Industries will evolve at different inflection points. In the consumer industry, the inflection point has already come. In an industrial context, some sectors are capital intensive and there are bigger barriers to entry.’

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Base: N=580

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.


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49% agree that most

customers lack the long-term commitment

necessary for subscription models

to succeed.

64% of CFOs agree that

customer expectations are driving pressure to

improve experience faster than their organisation can

deliver.

63% agree that subscription models only appeal to a younger demographic

(e.g.18-35).

Why the subscription model sellsWhat’s driving companies in the region to develop a subscription model? One factor is, simply, intense competition. Almost half of respondents cite pressure to keep pace with market rivals. But the vast majority (82%) also see an opportunity to become a lead disruptor in their industry.

At another level, most respondents expect subscription to have a positive impact on long-term revenue growth, but even more expect the biggest gain to be better customer retention and stronger customer relationships. Increased cross-selling to the subscriber base is one way that greater retention will contribute to overall revenue growth.

One of the most effective ways to unlock these benefits is by mining the huge amount of data that recurring transactions with customers brings in comparison with one-off product sales. ‘Once you build a subscription relationship with a customer, you gather usage data from them regularly and you get to know them better,’ says Michael Mansard, Principal – Business Transformation & Innovation at Zuora. ‘As they pay for this relationship, they accept the mutual sharing of insights. That creates the ultimate competitive moat.’

Such mining and analysis of data can clearly work to mutual advantage, further cementing relationships. According to Ms Choi, Schindler’s customers use its data to better understand and serve their own customers.

This points to another motivation for subscription adoption: demand. ‘In our avionics business, we’re selling to companies that are very advanced in their own transformation,’ says Stephan Liozu, who is Chief Value Officer with the Thales Group, a technology company. ‘They tell us that they need the subscription option, so we have to adjust and be ready to respond.’

Four in ten respondents (41%)—and 64% of CFOs— say that customer expectations are driving pressure to improve experience faster than their organisation can deliver it. This pressure is most in evidence in the consumer/healthcare, insurance, and energy and power sectors.

Juliana Chua, Head of Digital Transformation at NTUC Income (Income), a Singapore-based insurer, says that digital natives are seeking more pricing flexibility and transparency in insurance products. ‘So, the challenge for us is to personalise insurance into right-sized products that customers can subscribe to.’

‘Insurance has a long-established business model,’ adds Ms Chua. ‘We want to disrupt ourselves before disruption finds us, deliver an excellent customer experience, and immerse ourselves in a digital ecosystem play with a variety of partners.’ Income has recently taken a step in that direction by launching a partnership with ZhongAn Tech, a Chinese insurance technology provider. Income’s aim is, with its partner’s collaboration, to reach digitally savvy and previously inaccessible customer segments with new products6.

Eric Cheung, Group Transformation Director of Tricor Group, a leading business expansion specialist, highlights another big advantage that C-suite executives see in the model: cash-flow predictability. ‘In the traditional model,’ he says, ‘one-off revenue can occur at any time during the year. But, with subscription, we get regular cash flow and can predict what the customer lifetime value will be. Annual budgeting is a bit complicated at first, but then it gets easier.’

As we will see, by highlighting such advantages, the internal champions of subscription pricing can help to gain vital buy-in to the model from the CFO and finance function.

Figure 2. Drivers of subscription adoption and anticipated areas of impact

82%

Opportunity to become a lead disruptor in my sector/industry

49%

Pressure to keep pace with industry competitors

46%

Opportunity to capture new market or customer base

42%

Potential for long-term revenue growth

18%

Growing competition from B2C marketplaces (e.g. Amazon, eBay)

76%

Customer retention and long-term customer relationships

71%

Long-term revenue growth

69%

Increased cross-selling to subscriber base

67%

Long-term sustainability of the business

62%

Improved margins

Base: Q5 N=580; Q8A N=252

Q. Which of the following, if any, has influenced your organisation’s decision to invest in a subscription-based revenue model?; Q. To what degree do you anticipate subscription-based models will impact the following areas of your organisation?

6. www.businesstimes.com.sg/banking-finance/ntuc-income-chinas-za-tech-join-hands-to-develop-innovative-digital-insurance

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there is a strong likelihood of customer acceptance. Ms Choi tells us, for example, that understanding of the model is well developed in Australia, Singapore, and Hong Kong, and growing in India, while it will take more time to grow elsewhere in the region.

The vast majority of survey respondents expect subscription pricing to have a significant impact on their business at regional or local level, more so than at global level.

Sharing the weight of implementationWhatever the strategy, the initiative must be owned and managed within the executive suite. Jim Woods, CDO of PwC China and Hong Kong, sees the introduction of subscription pricing as an integral part of the digital transformation agenda. Therefore, he believes, the entire C-suite should be held accountable for the success of subscription. On a day-to-day basis, however, he observes that the project’s champion is typically the CDO.

Section 2

Converting ambition to reality

Regardless of their degree of progress to date, at the vast majority of surveyed firms (75%) the shift to subscription is a board-level priority. More than 80% of C-level respondents confirm this, as do nine in 10 CDOs, who are often leading the charge for subscription (see below).

At Schindler, according to Ms Choi, support for subscription is very strong from the CEO, Group Executive Committee, and right down to country management. ‘With this level of support, there is no argument that it is a strategic priority for the company,’ she says.

Developing a strategy comes next. Although most AP businesses have made a start, only 4% claim a clearly defined, enterprise-wide subscription strategy. Rather, the majority (53%) are testing the water with a number of pilot strategies for different business units or regions.

Digital native companies with multiple business lines may find this easier to do than rivals born in the pre-internet era. An example is China’s e-commerce giant, Alibaba. In 2018 it introduced a premium subscription plan for members that offers discounts and other rewards across its different businesses, including video and music streaming, food delivery and its core retail shopping platform7.

It also reflects the possibility that companies will introduce subscription pricing only in country markets where

At Thales, its champion is Chief Value Officer, Stephan Liozu, who describes himself as ‘an agent of disruption’: ‘I’m giving tough love, telling [everyone else] to wake up. I’m constantly raising the sense of urgency with other functions about what they need to do to be ready for new business models.’

Primary among those functions is finance and its leader, the CFO. ‘A CDO may be driving the initiative, but the CFO has to become the business architect,’ say Mr Liozu. ‘He has to be the one standing next to the CEO and providing the insights about how to steer the subscription business and how to integrate it in the overall P&L.’

However, bringing the CFO and finance on board is not always a straightforward matter.

7. www.businessinsider.com/alibaba-introduces-88vip-subscription-service-2018-8?r=US&IR=T 8. www.theinvestor.co.kr/view.php?ud=20170829000849

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.

Figure 3. Current and future subscription implementation plans

14%

14%1%

45%

44%

17%

17%

24%

24%Current progress

Anticipated progress in three

years' time

Subscription is an intrinsic revenue stream Implementation is ongoing, recurring revenues are increasing

No progress to date

Implementation has begun, but progress is slower than anticipated Little progress, although we have a plan

9

10

61%

58%

31%

31%

31%

Potential short-term decline in revenues

Low awareness of long-term potential for recurring revenue models

Outdated accounting systems and/or valuation models

Cultural factors (e.g. lack of growth mindset, silo mentality, outdated company values)

No strategy to support business model change

More than two-thirds (67%) of respondents say stronger alignment between business and finance is needed to make subscription models successful. Within the C-suite, 78% of CTOs support this view, compared with 66% of CFOs, suggesting that weak finance-technology interaction is a particular risk to the model’s success.

Section 3

Subscription culture shock

Whichever member of the leadership team is the champion of the subscription revenue model, their biggest challenge is convincing the rest of the business to focus on it long-term.

The greatest barrier to implementing the model, respondents report, is fear of a short-term decline in revenue. A closely related hurdle, and cited nearly as often, is a low level of awareness within the company of the long-term potential of a recurring revenue model.

Figure 4. Top barriers to implementing subscription-based models

More consumer and healthcare firms, and also manufacturers, struggle with these factors than others.

Such concerns are naturally ever-present within finance. In established businesses with entrenched revenue models, the challenges posed by a shift towards subscription can be daunting. According to PwC’s Jim Woods, CFOs in traditional organisations follow tried and tested methods of monitoring investment and setting up accountability structures, and usually expect a quick ROI on both the top and bottom lines. ‘In subscription-based models,’ he says, ‘revenue flow is much more protracted and back-end-loaded, and profit generation even more so. That requires a very different mindset.’

‘Subscription is a whole different business,’ says Stephan Liozu of Thales. ‘We have to disrupt our legacy processes in finance, in cost modelling and controlling. Imagine a traditional legacy business that’s been around for a hundred years, with finance people that go through the same long-established training, and now we’re telling them to do something different.’

Getting the business up-to-speedThe finance challenge is not just about changing trusted methods of revenue recognition and cash flow. Once on board with the introduction of a subscription-based model, the CFO and finance team are the ones responsible for communicating its impact to the rest of the business. But, at many companies, a lack of alignment and dialogue between finance and other business functions means that the latter can remain unconvinced of the need for change.

The CFO and finance function are also responsible for communicating the virtue of adopting the model to customers, investors and other external stakeholders.

Nearly 70% of survey respondents confirm that the finance function is empowered to communicate business model change to investors and customers. But Anna Gong, CEO and Founder of Singapore-based Perx Technologies, a software provider,


believes not all CFOs find this easy. ‘I have seldom seen large enterprise CFOs in meetings where revenue and growth are discussed. CFOs should be involved in digital transformation discussions with solution providers and understand the complexity around the overall journey. As CIOs are evolving, CFOs should equally be accountable for growth and transformation journeys, not just maintaining governance, risks, and cost control.’

‘Once the model grows beyond a small pilot, there is a need to communicate consistently to the markets,’ says Michael Mansard of Zuora. ‘It requires, among other things, defining the metrics you want to be judged on.’ The CFO must also demonstrate that the company has a plan to counter the short-term cannibalisation of revenue that may result from subscription: ‘The CFO needs to demonstrate the company’s ability to take that initial hit, for the long-term gain that the subscription-model can provide,’ he says.

‘Someone who is thinking about the overarching strategy and direction of the business accepts that a short-term failure to meet margin projections could lead to consistency and stability of the top line in the medium term.’ says Saurabh R Gupta of Citi. ‘They might even embrace it and promote it.’

At Schindler, according to Anna Choi, finance has been behind the subscription model from early on. ‘The key issue is: “How do we change the existing IT infrastructure or accounting platform to ensure that the billing and tracking will be much easier to do?”’.

This is where open dialogue with finance and IT is critically needed.

Figure 5. The role of finance and treasury

20%7%73%

It is the remit of finance and treasury to communicate the impact of a subscription-based revenue model to the rest of the business

26%4%70%

The finance function has a high-degree of autonomy to manage external relationships (e.g. with investors and banks)

5% 26%68%

The finance function is empowered to communicate business model change to investors and customers

Base: N=580

Q. To what extent would you agree or disagree with the following statements regarding the remit of your organisation’s finance/treasury department?; Q. To what extent do you agree or disagree with the following statements about accountability for delivering a subscription-based model.

Agree Neither agree nor disagree Disagree

Base: N=580

Q. In your view, which of the following are, or have been, the biggest barriers to implementing a subscription-based revenue model in your organisation? Q. Does your organisation have a clearly defined strategy to support the growth and innovation of subscription model revenue streams over the coming three years?

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Section 4

Skilling up for the subscription age

Better customer retention and cross-selling are the ultimate prizes for many subscription converts, but they will be hard won.

The majority (55%) of survey respondents state that gaining a better understanding of customer expectations and experience will do more to ensure the success of their subscription model than any other improvement.

Developing such understanding will require considerable data mining and advanced analytics capabilities. Customer relationship management (CRM) tools are also high on the list of technologies that respondents (particularly in the consumer and healthcare sectors) believe their firms will need to invest in to ensure the success of the model.

New financial capabilities are integral to building an infrastructure that can support a subscription revenue model. These include technologies that enable instant payment and collection methods from banks, as well as open banking services provided by financial services providers.

Interestingly, many more Asia Pacific CDOs than CFOs in the survey emphasise the importance of such capabilities – further evidence of potential misalignment on the subscription model between these two executives and their functions.

‘The subscription model is about moving from a direct economy to an engagement economy,’ says Saurabh R Gupta of Citi. ‘And that places greater emphasis on the flexibility of banking and technology infrastructure. It needs to be digital, from back to front.’

Figure 6. Top five tools to maximise subscription success

60%

50%

44%41%

34%

40% 40%38%37%

29%

34%34%31%

48%

33%

Access to new and instant payment/

collection methods from banks

Open banking services from

financial services providers

CRM tools Partnerships with FinTech

platforms

Marketing automation

tools

Do companies in the region have the skills, including data analytics and customer experience specialists, needed to support the subscription model?

According to Stephan Liozu of Thales, gathering such people in the right place is a more difficult challenge than many executives realise. ‘You can’t take people from the core business with no marketing background and put them in digital, thinking that they’re going to be able to design beautiful, subscription-based models out of the blue.… Companies often underestimate the amount of re-skilling and up-skilling of existing teams that is needed, as well as the need to hire people from outside with totally different skills and a service mindset.’

‘Once you go down this journey you are changing a hundred-year-old tradition of distribution in most of these companies,’ says Saurabh R Gupta. ‘With subscription-based models, you are selling a repeat engagement. The mindset of the traditional salesperson in most of these companies, however disruptive they are, has to change.’

OverallCFOCDO

Base: Q14 N=580

Q. Which, if any, of the following technologies/tools does your organisation need to invest in, in order to maximize the success of its subscription-based model?


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15


Figure 7. Measuring subscription model success

64%68%

87%

We have the right tools in place to measure the success of

subscription-based revenues

43%35%

27%

My organization lacks a clearly defined set of metrics to accurately assess the

success of its subscription model

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

“

Measuring subscription successOne of the first challenges that finance will face in a shift to subscription is devising metrics to track the new revenue streams. ‘The CFO cannot monitor the subscription business in the same way as they have the classic business,’ says Zuora’s Michael Mansard. ‘They will need to set up a new operating model with an entirely new set of KPIs.’

Some of the metrics to be set up are annual recurring revenue, customer lifetime value and customer acquisition cost.

A number of Asia Pacific CFOs in the survey understand the degree of difficulty this presents. More than 40% say they lack a clearly defined set of metrics to accurately assess the success of its subscription-based model.

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?

Base: N=328 (Those that have begun implementing a /have an established subscription-based revenue model)

Q. To what extent do you agree or disagree with the following statements about measuring the success of your organisation’s subscription-based model?

CDOCFOOverall

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Disclaimer

Statements and opinions expressed are those of the author. This communication is intended for reference only and is neither an offer to sell nor the solicitation of an offer to enter into a transaction with Citi. Nothing contained herein constitutes Citi’s opinion. Although the information contained herein is believed to be reliable, Citi makes no representation as to the accuracy or completeness of any information contained herein or provided otherwise. The ultimate decision to proceed with any related transaction rests solely with you. Citi is not acting as your advisor or agent.

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