Subscriptions to compensate for inflation

Subscriptions to compensate for inflation
Subscriptions to compensate for inflation

Why businesses are turning to subscriptions to navigate an unprecedented inflationary environment.

The current global economic landscape is rife with concerns about “stubborn” inflation and its impact on businesses and consumers. Higher prices coupled with interest rates reaching levels not seen in years or even decades are reducing the financing capacity of businesses and their appetite for new capital expenditures (CapEx). Companies using the so-called “traditional” sales model, based on one-off sales of goods and services, are then faced with the additional challenge of shrinking demand and consequently margins that are also under pressure.

However, in this challenging environment, there is a silver lining in the form of modern business models that offer a solution to these challenges. By shifting from CapEx to customer-centric recurring operational expenditure (OpEx) through subscription-based business models, companies can navigate the uncertain economic landscape, align with customer needs, and achieve profitable growth, even in the face of stubborn inflationary pressures.

OpEx has a positive correlation with inflation

Economic data and correlations over the last 20 years show that OpEx is significantly more resilient, and positively correlated to inflation. This indicates that increased inflation can lead to higher OpEx and therefore higher revenues for resellers of the services related to these expenses. Conversely, Capex expenses are more cyclical and not necessarily positively correlated to inflation. A vendor who makes his revenue based on his customers’ Capex expenses will be more impacted by the current inflationary situation.

Indeed, the rise of subscription-based services, particularly in the form of “Everything as a Service” models, has demonstrated remarkable growth and resilience in recent years. Subscription-based services have experienced exponential growth, fueled by factors such as the preference for usage over ownership, digitalization and sustainability trends.

Adobe, Costco, RELX have benefited greatly from their subscription models

Success stories in the business-to-consumer (B2C) and business-to-business (B2B) spaces highlight the benefits of subscription models. Companies such as Adobe, Costco, and RELX have seen substantial growth and profitability through their subscription models. The success of these models is attributed to their ability to scale and improve their value over time, using customer data to deliver personalized experiences, and focusing on building long-term customer relationships.

As more companies move toward modern OpEx services with physical products as a service, this doesn’t mean that CapEx spending will disappear. On the contrary, it could mean that a handful of companies will acquire expensive infrastructure and monetize access through usage, as is already the case for cloud service providers today.

A growing number of companies are joining the subscription economy

Subscriptions are increasingly seen as a win-win situation for consumers and businesses. Consumers benefit from flexible, continually updated, and often more profitable products and services, while businesses benefit from recurring revenue, stable cash flow, and greater predictability of earnings. Add to that the power of subscriptions to help businesses navigate economic downturns as well as inflationary environments, and it’s no wonder more and more businesses are joining the subscription economy.

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