The PDMA Handbook of Innovation and New Product Development, 4th Edition

CHAPTER TWENTY-SIX HOW TO BUILD SUBSCRIPTION BUSINESS MODELS

Charley Qianlei Chen, William C. Zhou and Sunny Li Sun

26.1 The Rise of Subscription Business Models

The rise of subscription business models is significantly changing business practices related to product design, marketing, and consumer behavior (Aral and Dhillon 2021; Tzuo 2017). According to the Subscription Economy Index (SEI) published by Zuora, the SEI level has grown 4.6 times faster during 2021 than the S&P 500 index – a market index that represents traditional, product transaction-based businesses. More specifically, the 10-year compound annual growth rate (CAGR) of SEI is 17.5%; significantly higher than the 3.8% CAGR of the S&P 500 and the 4.1% CAGR of the retail sales sector.¹ In particular, subscription business models are gaining popularity in the software-as-a-service (SaaS) industry, which is the fastest developing sector of all industries in the SEI.²

Adobe is generally recognized as the first company in the software industry to make the complete transition from a product transaction-based to a subscription-based model (Tzuo 2017) with its Adobe Creative Cloud Membership Plans. In 2018, Gartner estimated that all startup software companies and 80% of incumbent software providers would shift to subscription-based models before 2020 (Tzuo 2017). Currently, many prominent software providers including ...