d2c engagement models becoming mainstream to …/media/informa-shop-window/tmt/...this has paved the...

Publication Date: 13 Dec 2016

Kedar Mohite

D2C Engagement Models Becoming Mainstream to Drive Subscription-Based Economic Value

Market dynamics, spending, and future trends for ANZ business


© 2016 Ovum. All rights reserved. Unauthorised reproduction prohibited.

Table of contents Summary ................................................................................................................................................ 3

Catalyst ................................................................................................................................................ 3

Ovum view ........................................................................................................................................... 3

Key messages ..................................................................................................................................... 4

Enterprises are aggressively pursuing D2C monetisation models ................................................. 4

Subscription and rental offerings have the highest adoption rates due to rising cost pressures and

technology advancements ................................................................................................................... 4

Hybrid engagement model is the way forward .................................................................................. 5

The hybrid monetisation model to account for an average of 6–10% of annual revenues for

enterprises in the next two to three years ........................................................................................... 5

New connected-life–based goods and services to increase average monthly user subscription

costs ....................................................................................................................................................... 7

Integrated, multifaceted goods and services portfolios to boost annual growth to more than 10% for

subscription model in the next two to three years ............................................................................... 7

Less than one-tenth of enterprises have a subscription billing solution ....................................... 8

Finance and marketing departments control the technology procurement decision cycle, with an

average five-year total budget of more than $0.5m ............................................................................ 8

Conclusions ......................................................................................................................................... 10

SMEs will be forerunners in ANZ's subscription economy ................................................................ 10

Scalable D2C engagement models demand robust data management and a highly integrated

technology roadmap .......................................................................................................................... 10

Managing the entire customer engagement lifecycle will be vital for enterprises as they cope with

increased monthly user subscription costs ........................................................................................ 11

A hybrid engagement model demands multiple payment methods, multiple goods and services, and

support for the user base................................................................................................................... 11

Embrace a digital-first strategy to remain relevant in the connected-life era .................................... 11

Appendix .............................................................................................................................................. 12

Methodology ...................................................................................................................................... 12

Author ................................................................................................................................................ 13

Ovum Consulting ............................................................................................................................... 13

Copyright notice and disclaimer ........................................................................................................ 13



Summary

Catalyst

Historically, the revenue model for enterprises offering goods or services followed a single-

transaction, service, or ad-supported approach. The Internet, and smartphones, slowly changed the

way consumers accessed goods and services. They now demand a highly personalised portfolio

anywhere and everywhere, across multiple segments, such as streaming TV and video on the

Internet, fitness, food and beverages, cloud storage (basic Hive version), clothing, and multiscreen

apps. However, the industry is slowly adopting direct to consumer (D2C) monetisation strategies to

lower dependencies on single-transaction and advertising revenue streams by launching goods and

services platforms that support subscriptions, rentals, exchange, and sharing. Although single

transaction and advertising are still prominent revenue streams, the global goods and services

market, including the market in Australia and New Zealand, is slowly migrating towards D2C (access

and one-time micro payment)-based cash flows on account of the growth in connected devices,

higher Internet penetration, and technology advancements, such as cloud computing and the Internet

of Things (IoT).

This has paved the way for Zuora to commission Ovum to survey enterprises across Australia and

New Zealand to gain a deeper insight into enterprises' changing strategies with regard to growth, go-

to-market strategies, pricing, delivery, and next-gen goods and services portfolios as they adapt to the

D2C monetisation model. Furthermore, the survey was conducted to enhance understanding of the

current penetration, future adoption, and spending patterns of Zuora's core addressable enterprise

customers (media, IoT, healthcare, B2B software, B2C, cloud storage and apps, education, and cloud

infrastructure) with regards to subscription billing solutions on a regional and local basis. The

enterprise customers surveyed for this study were predominantly segmented based on their annual

revenues: Tier I (more than $5bn in annual revenues), Tier II (between $1–$4.9bn), Tier III (between

$500–$999m), Tier IV (between $50–$499m), and Tier V (below $49m).

Ovum view

Digitalisation is rapidly lowering the barriers to entry across the goods and services market, resulting

in fierce competitive pressures that are forcing enterprises to rapidly differentiate themselves to

enhance their competitive advantage. Thus, enterprises need to establish unique market positioning

through a goods and services portfolio that is personalised, economic, and highly diversified (i.e.

offering more choice) in order to enhance their competitive advantage. Changing preferences and

perceptions among consumers require that enterprises adopt smarter approaches around customer

acquisition, monetisation, and lifetime engagement. As a result, a majority of enterprises are focused

on business and technology investments around D2C, especially subscription and rental offerings, to

engage with users on a long-term basis.

Ovum believes that D2C monetisation and engagement-specific technologies, such as subscription

billing solutions, will witness strong penetration as enterprises embark on subscription-centric,

connected-life strategies to enable digital users to take advantage of highly personalised goods and

services across multiple devices. This will not only enhance operating margins but also provide, over

the long run, highly integrated, data-driven recurring revenue streams for enterprises in competitive

and fragmented regional goods and services markets.



Key messages

More than two-thirds (70%) of enterprises perceive subscription and rental business

models as offering higher return on investment (ROI), resulting in a shift towards access-

based monetisation in 2016.

In the next two to three years, more than half (55%) of enterprises will adopt the hybrid

D2C engagement model, up from 33% in 2016.

As enterprises embark on the journey towards building a robust, connected-life goods

and services offering, almost half (47%) of them will change their pricing in the next two

to three years. This will yield annual growth of 25% on a year-on-year basis.

The adoption of subscription billing solutions is still at a nascent stage, but roughly two-

thirds (65%) of enterprises have an average five-year budget of more than $0.5m for

these technology projects. This is led by their finance and marketing departments.

Enterprises are aggressively pursuing D2C monetisation models

Subscription and rental offerings have the highest adoption rates due to rising cost pressures and technology advancements

The exponential rise in broadband, cloud, smartphones, tablets, wearables, and recently IoT have

resulted in the steady migration of enterprises offering goods and services towards D2C monetisation

and engagement journeys. Although enterprises have traditionally focused on single-transaction,

service or ad-supported models, the movement of goods and services markets worldwide, including

the market in ANZ, towards highly personalised offerings is pushing companies towards direct

customer monetisation modes, i.e., subscription, rentals, sharing, and barter (in order of high to low

penetration). Furthermore, ad blockers have also had an unprecedented negative effect on the goods

and services market. Enterprises are moving beyond traditional advertising and incorporating an

access-based customer monetisation portfolio to lessen cash flow risks (on average, 12% of

enterprises have indicated policy and regulation changes as the core driver).

As per the survey results shown in Figure 1, on average, 77% of enterprises, across the five revenue

tiers, believe that subscription and rentals will be the most prominent access-based goods and

services monetisation models in 2018. The results indicate that rentals are likely to be the fastest

emerging model in the next two to three years, while the sharing model will be the slowest in the ANZ

market. All five tiers of enterprises believe that the subscription model will dominate the access-based

goods and services market for the next two to three years. However, this will shift slightly, with Tier-I

(36%) and Tier-V (38%) enterprises highlighting that rentals will be more prominent than subscription

in the local and regional market in 2018.

Across the surveyed enterprises, on average, 16% highlight rising operating costs and technology

advancements as the two core drivers for access-based goods and services. This differs across the

enterprise segments, with changing policies and regulations, higher profitability, and a transforming



services landscape as the lead drivers for Tier II (20%), Tier III (23%), and Tier V (24%), respectively.

Technology advancement stood as the primary driver for enterprises in the media (17%), B2B

software (20%), and healthcare (25%) markets. However, the non-media B2C (50%) and cloud

infrastructure (30%) segments believe the changing services landscape is the pivotal driver for

access-based goods and services in the local market, while the cloud storage (40%) and education

(22%) segments believe that policy and regulations and profitability are the pivotal drivers,

respectively. However, all segments highlight that increasing cost of operations is a secondary factor

for migrating towards subscription and rentals. Finally, because IoT is still nascent, one-time payment

(100% of respondents) is still the dominant D2C monetisation model, with industry standards and

technology advancements as vital drivers for single transactions.

Figure 1: Prominent access-based goods and services models and core drivers

Source: Ovum (October 2016, n=174)

Hybrid engagement model is the way forward

The hybrid monetisation model to account for an average of 6–10% of annual revenues for enterprises in the next two to three years

In Ovum's ICT Enterprise Insights (ICTEI) survey for 2015/16, more than one-fourth (28%) of media

enterprises highlight that creating new revenue streams and lifetime D2C monetisation are the top

business priorities in 2016. Furthermore, the higher number of choices available to digital users has

resulted in increased churn rates and lower ARPUs for enterprises in the highly fragmented goods

and services market. To survive, these enterprises had to adopt robust, horizontally integrated

monetisation and engagement models. The ANZ market is witnessing a similar trend, with 55% of

enterprises surveyed indicating a shift towards a hybrid access engagement model (a combination of

subscription, rentals, shared, and exchange offerings). The hybrid approach, according to the survey



respondents, will provide new revenue opportunities (15%), improved customer lifetime loyalty rates

(18%), unique market positioning (15%), and a contribution of roughly 6–10% of annual revenues for

goods and services providers in the next two to three years.

Lack of data management (20%) capabilities and siloed infrastructure (20%) are the two core

challenges faced by enterprises in ANZ that are embracing hybrid monetisation models. These

challenges will result in slightly less than half (45%) of enterprises having a standalone access

delivery model in the next two to three years (2016–18). Although subscription (cloud storage and

infrastructure) and rentals (media, B2B software) will have the highest adoption rates across the

regional and local markets, the majority of healthcare- (50%) and education (60%)-based enterprises

will primarily focus on integrating shared and exchange offerings, respectively, into their legacy

access delivery ecosystem. This is predominantly attributed to the fact that healthcare and education

follow "value shop" frameworks, i.e. the organisation solves customer or client problems rather than

creating value by producing a product from raw materials. These frameworks demand extensive

sharing- and exchange-based workflows to enhance patient and student engagement, respectively.

Figure 2: Hybrid engagement model's value, challenges, and impact on cash flow margins

Source: Ovum (October 2016, n= 83; n= 54; n=15; n=35)



New connected-life–based goods and services to increase average monthly user subscription costs

Integrated, multifaceted goods and services portfolios to boost annual growth to more than 10% for subscription model in the next two to three years

Broadband, smartphones, cloud computing, and now IoT are not only enabling enterprises to

integrate multiple goods and services offerings but are also facilitating the creation of an end-to-end

connected-life offering. The subscription-led connected-life paradigm is slowly becoming a reality, but

it also brings unprecedented cost challenges. These include:

Higher investment in next-generation solutions and services, such as app management,

consulting, and system integration

Increased costs related to the acquisition of unique goods and services, and

Rising customer acquisition costs due to a fragmented digital user base.

Thus, the connected-life era will boost subscription revenues but also increase overhead operational

and business expenses in the short term due to the fact that the market is still nascent. As the market

matures, and enterprises streamline their operational overheads by investing in advanced

monetisation-based systems such as subscription billing, the profitability for goods and services

providers will grow as ARPU for digital users increases in the long term. In the short term, nearly half

(47%) of enterprises surveyed plan to change their pricing, either increasing or decreasing it, in the

next couple of years (2016–18). Although, as per the survey, rising operating expenditure (15%) was

one of the vital factors cited for this change, more than one-fifth (21%) of enterprises highlighted that

market regulations will be the core reason for the change in average user subscription costs (2016–

18).

Over the forecast period, close to half (46%) of subscription-led enterprises will be aggressively

investing in connected entertainment and professional services activities to improve ARPU and

operating margins. Furthermore, the idea that large enterprises (as measured by revenues and

number of employees) are the main driving force behind the connected-life ecosystem due to their

greater resources, both tangible and intangible, does not hold true in ANZ. In ANZ, Tier-IV enterprises

(those between $50–$499m in annual revenue) will lead investments and early adoption of the

connected-life approach, followed by Tier-II enterprises (between $1–$4.9bn in revenues). This is a

unique situation, because small to medium-sized enterprises (SMEs) have historically been perceived

to have limited resources compared to their larger peers in the ANZ market to embrace next-

generation D2C user monetisation and engagement. Ovum's 2015/16 ICTEI survey also highlights a

similar trend with almost one-fifth (18%) of Tier-IV ANZ enterprises increasing their spend on

connected-life technologies by more than 6% compared to no increase across the Tier-I, -II, and -III

segments. We believe that a flat organisation structure and limited customer acquisition opportunities

due to flat population growth rates are driving these investments in smarter living technologies and

innovations by SMEs in the ANZ market to improve sustainability and differentiation. Finally, almost

three-quarters (73%) of enterprises perceive that a highly integrated goods and services portfolio will

yield annual revenue growth of more than 10% in the next two to three years.



Figure 3: The impact of connected-life goods and services on user subscription costs and enterprise revenues (2016–18)

Source: Ovum (October 2016, n=39; n=100; n= 47; n=52)

Therefore, as subscription businesses re-engineer their goods and services portfolios to become

more central to the connected life of their users, they also need to focus on profitability (versus

revenue growth) and the increase in subscription costs (versus churn).

Less than one-tenth of enterprises have a subscription billing solution

Finance and marketing departments control the technology procurement decision cycle, with an average five-year total budget of more than $0.5m

As depicted in Figures 4 and 5, less than one-tenth (8%) of enterprises have a dedicated subscription

billing solution, with half (50%) of them deploying it in 2016, i.e. in less than a year. This might be

primarily attributed to subscription being the dominant and standalone access-based goods and

services offering for almost three-fourths (72%) of enterprises in the ANZ market. With local and

regional enterprises slowly but steadily migrating towards a hybrid access model, the adoption of



subscription billing solutions is expected to rise to 20% in the next 18–24 months (2018). Enterprises

with annual revenues of less than $1bn account for 100% of subscription billing solution deployments

in both the markets in 2016. Almost 40% of planned deployments will be by Tier-I and -II enterprises

(with revenues of more than $1bn) in 2017 and 2018. This is in line with Ovum's belief that SMEs will

be the first movers in the technology and services adoption curve in the ANZ market, encompassing

user engagement, monetisation, and internal and shared services.

Figure 4: Subscription billing solution adoption roadmap

Source: Ovum (October 2016, n=8; n=8)

Furthermore, as enterprises aggressively expand their premium goods and services portfolios, and

integrate hybrid access-based engagement models, they will eventually need to accelerate spend on

advanced subscription billing solutions that offer:

Flexible real-time integration of new pricing models

Comprehensive tracking of goods and services usage, and

Tight third-party integration with multiple payment options.

Therefore, almost two-thirds (65%) of enterprises will have a five-year budget of more than $0.5m for

deployment of subscription billing solutions. Ovum's 2015/16 ICTEI survey highlights that marketing

and financial departments have played a vital role in procuring the technologies and services that are

central to the monetisation workflow. The ANZ market follows a similar trend, with 42% of enterprises

highlighting that these two business units are primarily responsible for decisions regarding

procurement of subscription billing solutions.



Figure 5: Subscription billing solution adoption drivers, procurement strategy, and spending path

Source: Ovum (October 2016, n=100; n=8; n=100; n=20)

Conclusions

SMEs will be forerunners in ANZ's subscription economy

The survey findings reveal that Tier-V and Tier-IV enterprises, at approximately 87% of all

deployments, dominate subscription billing solution deployments across the ANZ connected goods

and services segment in 2016. Although close to half of planned deployments will be initiated by Tier-I

and Tier-II enterprises in the next two to three years, small to medium-sized goods and services

providers will be at the forefront of ANZ's subscription economy.

Scalable D2C engagement models demand robust data management and a highly integrated technology roadmap

Lack of compliance with data privacy and protection along with poor integration with legacy and next-

generation systems stood as the two core inhibitors to growth for the D2C engagement model in the

ANZ market. Therefore, enterprises in the digital transformation era, such as B2B software, B2C,

cloud storage, education, healthcare, media, and IoT, should leverage niche, industry-specific

solutions that facilitate data management and tightly integrate with the connected goods and services

ecosystem to accelerate enterprises' D2C monetisation and engagement activities.



Managing the entire customer engagement lifecycle will be vital for enterprises as they cope with increased monthly user subscription costs

As the connected-life paradigm slowly becomes reality and enterprises transfer the operating costs of

premium add-on goods and services to end users in the form of increased monthly fees, churn

becomes a greater risk. Thus, enterprises need to focus on the end-to-end customer engagement

lifecycle to improve ARPU and loyalty rates, rather than on a unique customer experience in the short

term. Providing a premium value proposition, such as personalised goods and services anywhere and

everywhere through the use of analytics across the digital user engagement lifecycle, will be an

essential differentiator for the next two years (2016–18).

A hybrid engagement model demands multiple payment methods, multiple goods and services, and support for the user base

As hybrid access engagement becomes the mainstream mode of delivery across the goods and

services market in ANZ, enterprises will face greater operational complexity in the long term.

Enterprises will need to manage multiple pricing models and goods and services for a large user

base, while enabling real-time micro and macro payments. To address these issues, enterprises

should embrace technologies that ease their multiple billing and subscription workflows in order to

improve their time to market and lessen business discontinuities.

Embrace a digital-first strategy to remain relevant in the connected-life era

The ANZ goods and services segment is steadily migrating away from physical goods to digital

offerings, driven by consumer preference and technology advancements (broadband, mobile, video,

cloud, etc.). Enterprises should aggressively shift towards a digital-first, omnichannel go-to-market

strategy to accelerate their profitability and sustainability in this highly fragmented, but thriving,

business environment. A cautionary tale is provided by traditional media enterprises that failed to

adapt to the changing digital media landscape and lost advertising and users to OTT providers, non-

linear TV and video, and content aggregators.

To avoid a similar fate, enterprises looking to improve their competitive edge in the goods and

services market in ANZ should strongly consider subscription billing systems that offer vertically

integrated management of the monetisation lifecycle.



Appendix

Methodology

In August 2016, Zuora commissioned Ovum to survey 100 enterprises across ANZ to assess their

perspective about:

market adoption for access (subscriptions, rentals, barter, and sharing), and one-time

payment-based goods and services offerings

current goods and services portfolio offered on regional and local basis

growth drivers for access and one-time payment-based D2C engagement

insights into customer delivery models and price movements

demand for subscription-based goods and services offerings

challenges and growth inhibitors

future outlook and dynamics for goods and services

adoption, spend, and growth roadmap for subscription billing solutions

procurement strategy for subscription billing technology.

The survey encompassed eight of Zuora's core target goods and services segments, as shown in

Table 1. Furthermore, enterprises were sampled on the basis of annual revenues and number of

employees to improve the reliability and validity of findings. Additional details about the enterprise

breakdown are provided in Figure 6.

Table 1: Enterprise segments addressed in the survey

Media IoT Education

Healthcare Cloud storage & apps Cloud infrastructure

B2B software B2C

Source: Ovum (September 2016)

Figure 6: Respondents by annual revenue and number of employees

Source: Ovum (September 2016)



Author

Kedar Mohite, Senior Analyst, Media & Broadcast Technology

[email protected]

Ovum Consulting

We hope that this analysis will help you make informed and imaginative business decisions. If you

have further requirements, Ovum's consulting team may be able to help you. For more information

about Ovum's consulting capabilities, please contact us directly at [email protected].

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