Top story: What is the Subscription Economy?

10. April 2024

Using instead of owning. This is an apt description of the subscription economy. Is it really that new? The basic principle was already used in publishing in the 17th century. Mozart and Beethoven also performed commercial symphony concerts on a subscription basis. Other applications include share issues and wine trading. So “old wine in new bottles”? In principle, yes, but at a new speed. Digitalization, IoT and cloud computing have led to an explosion of subscription models.

Microsoft introduced the first subscription model in 2011 with Office 365, and Adobe launched its Creative Cloud subscription model in 2012.  The growth since then has been impressive. The global SaaS software market is estimated to be worth over USD 270 billion in 2023, EUR 320 billion is predicted for 2024 and with annual growth of 18.4%, SaaS software sales are expected to exceed USD 1.2 trillion in 2032. In 2023, one third of global software revenue was generated with SaaS models.

In terms of numbers, US companies dominate the SaaS market.

Leading software as a service (SaaS) countries worldwide in 2024, by number of companies

5 reasons that make the SaaS business model so attractive:

1. Recurring revenue: Companies generate continuous revenue through regular subscriptions. This enables better predictability and stability compared to one-off sales revenue.

2. Customer loyalty: With subscriptions, companies build long-term relationships with their customers. Regular interaction promotes customer loyalty and can lead to a longer customer lifetime.

3. Personalization: Many subscription models offer personalized services or products that are tailored to customers’ individual preferences and needs. This can increase customer satisfaction and loyalty.

4. Flexibility and scalability: Customers can often choose from different subscription options that offer flexibility in terms of pricing and scope. Companies can quickly adapt their offering to market changes or customer requirements.

5. Sustainability and efficiency: Subscription models can help to reduce waste as products and services are used more efficiently. This aspect is becoming increasingly important, especially in areas such as mobility or the consumer goods sector.

Who are the most active SaaS software investors since 2018

InvestorWebsiteNumber of investmentsAverage investment ticket (mUSD)
Tiger Globalwww.tigerglobal.com35850,0
Alumni Ventureswww.av.vc35611,5
Accelwww.accel.com30922,7
Sequoiawww.sequoiacap.com28229,5
Andreessen Horowitza16z.com25223,0
FJ Labswww.fjlabs.com24312,5
Salesforce Venturessalesforceventures.com23533,6
Bessemer Venture Partnerswww.bvp.com22730,0
Global Founders Capitalwww.globalfounderscapital.com2047,9
General Catalystwww.generalcatalyst.com19235,0

Source: Pitchbook

Subscription Economy – Evaluation Logics

Measurability & predictability! This attracts investors. Companies in the subscription economy are evaluated according to these key performance indicators (KPIs):

MRR / ARR: the overall monthly or annual recurring revenue

CAC: the Customer Acquisition Cost reflects the costs to win customers

ARPU: quantifies the Average Revenue Per User during a defined period

CLTV: the Customer Lifetime Value measures the longterm profitability of a customer

NPS: the Net Promoter Score measures customer satisfaction and is an indicator of loyalty and referrals

DAU: the Daily Active User parameter is used to determine a user’s engagement with a product

Churn Rate: the churn rate indicates how many customers cancel their subscription in a defined period of time

Payback period: this value measures how long it takes for a provider to offset the CAC with the margin of its product.

Tip 1: The ARR multiple has established itself as a practical method for a quick assessment. If you want to know how SaaS companies are currently valued, we recommend the SaaS Capital Index.

Tip 2: You can find out which KPIs are effective for subscription-based mobile apps in the very detailed report from RevenueCat from 2024.

Outlook

Subscription models will dominate the software market. For software vendors, this means significant investments in cloud applications, new software architectures, and other go-to-market strategies. This is often the time to open up to investors with capital and expertise.

The subscription economy is penetrating more and more sectors (e.g. car, food, health and media subscriptions). In an upcoming newsletter, we will look at data-driven business models, which are also mostly based on subscription models.

The subscription economy is expected to grow to USD 1.5 trillion, or USD 1,500 billion, by 2025. Tip: How do you keep track of all your subscription contracts? Privately with another SaaS company: Finance Guru.  As a company using contract management tools like Juro or Precisely.

About atares

atares is the digital M&A boutique for technology-driven midcap companies in Germany and sees itself as a pioneer for the digitalization of the M&A industry. Founded in 2001, atares has advised more than 200 transactions in more than 20 years. The focus is on transaction volumes between EUR 10 and 100 million of mostly owner-managed companies. Since November 2023, the company formerly known as Proventis Partners, Munich, has been operating under the new company name atares GmbH. Atares has long-standing personal contacts with corporate and Private Equity investors and M&A advisors in Europe, North and South America and Asia. Highly specialized expertise for the market, empathy for people and passion make atares a sought-after M&A partner for the tech champions of tomorrow. More than 20 employees at atares in Munich and Düsseldorf manage their projects via the in-house developed digital M&A dealfloor (dealfloor.co) – for value-adding, efficient transactions with the best user experience.

Press Contact

Julia Alpert
alpert@borgmeier.de
+49 157 738 493 07