West Monroe recently released a survey on The State of Subscription Services Spending. That report showed some significant and consistent trends in the world of consumer subscription services spending. Customers continue to rapidly expand their subscription service consumption while simultaneously underestimating what they spend on it. It also found that the subscriptions that are top of mind are regularly changing. All of this speaks to an ever-expanding and changing market landscape for consumer subscription services.
Many of our clients, however, don’t sell to consumers but are instead commercial software and service providers. These clients are undoubtedly saying, “Interesting findings, but how much of this applies to my business?” The answer is quite a bit! The research and answered we uncovered have plenty to do with the consumerization of commercial technology.
The “consumerization” of IT, or commercial technology, is an acknowledgement that the boundaries between consumer tech and business tech have blurred. The shift of main buyers of tech solutions going from IT to the business users and leaders, plus the general shift to a SaaS/Subscription models, have introduced customer engagement dynamics more akin to consumer technology into the business technology setting.
Enhancing the ease of user interface, maintaining ongoing customer support strategies, and driving adoption in a scaled fashion are key strategies in both consumer and business IT. In addition, many players in the B2B software industry are seeing tremendous growth in providing near ready-to-use solutions to the SMB space, whose needs look indistinguishable at times from providing consumer technology use cases at scale.
Given that context, we see three main lessons from our consumer subscription services research that are immediately applicable to B2B SaaS providers looking to engage and grow their customer base.
Our research showed an overall 15% growth in subscription spending since 2018, as well as a boom in the use cases for subscription services—from social engagement and dating to pet subscription services. The ubiquity of these subscription services is now a standard part of our consumer lifestyles.
B2B subscription services spending is no different. In fact, overall SaaS spending is projected to grow around 20% per year according to Gartner Research. Similar to the consumer space, the expansion of corporate and business use cases that can be delivered through a SaaS solution continues to expand. It expands horizontally across all business functions—sales and marketing tools; services and support software, and even BPOaaS—and increasingly so among verticals and industry segments comfortable expanding their SaaS and cloud services usage—healthcare being a notable example.
As a result of this, we’re seeing significant acquisition and development activity in the market, with B2B players looking to expand their functionality and capabilities into adjacent markets to capture this significant growth in spend; 2021 will likely set a record in SaaS M&A volume. The volume of M&A activity is also expanding the volume of merger of equals, roll-up, and tuck in strategies, which can be an ordeal to manage from a customer experience and operational perspective.
As a result of this growth, we believe the high-tech and software industry will be challenged to work through their product and services offering portfolio strategy to deliver a cohesive and valuable set of solutions to their customers to avoid a hodgepodge of offerings. Cohesion of experience and use cases will be critical to customer expansion and retention.
One of the more interesting findings of our research was just how off the mark consumers are when they estimated their subscription spending (340% underestimated, to be exact). This information is particularly interesting when considering which services are top of mind for customers and which are not: Consumers are aware of their media subscriptions, enjoy them, and couldn’t be any more hooked if they tried. But other services fade into the background and the customer barely notices the cost or factors it into their spending calculus (like a cell phone bill).
The net result is that providers have multiple strategies to choose from to ensure retention: Do you choose to be top of mind and drive adoption directly? Do you try to be ubiquitous and inescapably sticky, and fade into the background?
These questions remain top of mind in the B2B SaaS market. Adoption and expansion are the key goals for all SaaS businesses, with the fundamental question being, “How do I grow our recurring revenue effectively at scale?” Some customer segments and verticals in the B2B space certainly lend themselves to a higher touch, forward-leaning engagement model to increase mindshare.
Other segments (especially the SMB space) don’t have the time, skills, capacity, or average contract dollars to justify substantial adoption engagement, meaning companies must leverage either a digital enabled one-to-many engagement model, or consider investing in killer app/features to ensure overall stickiness. These strategies will vary segment by segment and use case by use case, just like in the consumer tech space.
This gets even more complicated during a merger or roll-up situation. What degree of cohesive customer experience can you build if you merge a portfolio of products and customers with different use cases and engagement models? It’s not always easy to simply “pick the best of both worlds” from each of the legacy product platforms, especially when they were optimized for their current customer use cases. It takes planning and consideration to build an expansion and stickiness strategy around the parts of the business that will drive the most growth.
Both B2C and B2B subscription service providers will face significant pressure to drive ARR growth at scale. Given the expanding market use cases in both consumer technology and B2B technology, as well as the M&A activity at play, we anticipate both B2C and B2B subscription services providers will also need to manage a substantial volume of transformational initiatives as they optimize their businesses for the next level of maturity.
We are already encountering this level of transformation and change management in the market. B2B SaaS providers have largely built out the fundamentals of the recurring revenue model (e.g., they know how to handle revenue recognition, have customer success resources and playbooks in operation, etc.). Now, however, the main goal is optimization and efficiency. To drive this SaaS engagement evolution, we are seeing the market:
These transformational activities aren’t being managed piecemeal, either. These represent a multi-year journey for providers with initiatives being run in parallel, given how interconnected and dependent each team and function are towards each other.
West Monroe is an industry leader in SaaS business transformation advisory and customer services and success innovation. We help our clients achieve the growth at scale necessary to capture all of the potential indicated in our research.