The Subscription Economy: Unlocking the Power of User Research to Drive Growth and Retention in SaaS

If you are not yet familiar with the term “subscription economy,” then it’s certainly time to learn more about it. In fact, there’s a high likelihood that you and your colleagues are already contributing to rapid growth of this enormous industry, whether professionally or personally. As of March of 2021, it was reported that a whopping 78% of adults currently have subscription services.(1) That’s pretty substantial! Though if that percentage seems high at first glance, consider that Amazon Prime, Spotify, Apple Music, Netflix, Disney+, Audible, Magazines (Time, Vogue, NY Times), Zoom, Intuit (Quickbooks, Turbotax) are all providers in this space, yet they are only a small fraction of the companies that now offer subscription-based services.

Not only is this model thriving, it is also growing – and fast. The growth of the Software-as-a-Service (SaaS) sector alone has been particularly significant. The global software as a service market size is expected to grow from USD 167.53 billion in 2022 to USD 462.94 billion by 2028; it is anticipated to grow at a CAGR of 18.5% from 2022 to 2028 (2). What these statistics don’t tell you is the vital roles that positive User Experience and design played in ensuring customer retention, loyalty, and satisfaction within these businesses. These areas are essential to the long-term success of any SaaS business in the modern world, as they are all directly tied to profitability. However, without UX research, how could a business truly know if their customers are enjoying, supporting or remaining dedicated to their brand? Quite frankly, they can’t!

To better understand the value of UXR in subscription-based services, this whitepaper will dive into various facets of subscription-based services within the context of Software-as-a-Service (SaaS) companies. It will then cover the drivers of the SaaS industry, before honing in on how businesses in this space can unlock the power of user research to drive growth and retention.

The Subscription Economy refers to the business model where customers pay a recurring fee to access a product or service. This can be seen in industries such as media, software, and retail, where companies offer subscription-based services instead of one-time purchases. Subscription services can include access to streaming platforms, software-as-a-service (SaaS) products, and even physical goods such as clothing and food. Sock Box, for example, delivers new socks to your home on a monthly basis! While HelloFresh is a weekly food delivery service with pre-packaged meals.

In this model, customers pay a regular fee, usually on a monthly or annual basis, to access the product or service. This gives businesses a predictable revenue stream and allows them to better forecast their income. Additionally, the recurring nature of the revenue allows businesses to invest in improving their product or service, which in turn can lead to increased customer satisfaction and retention. This creates a mutually beneficial relationship between the company and its customers. The company is incentivized to continuously improve its products and services through UX research, providing ongoing value to the customer.

Subscription economy offerings allow companies to gather data on their customers’ behavior and preferences, which can be used to improve the product or service and offer personalized experiences. Thus, businesses build stronger relationships with their customers and increase customer loyalty, creating a cycle of growth and satisfaction. Many companies also offer different levels of service, such as basic, standard, and premium, which allows customers to choose the service that best fits their needs and budget. This creates a user-friendly experience and enables users to pay only for what they use or may use, making it more accessible to a wider audience. In summary, the subscription model can help reduce the upfront costs associated with purchasing software, making it more accessible for businesses of all sizes as well as individuals.

In terms of customer adoption, it was reported that SaaS applications make up 70% of total company software use. Last year, the average number of SaaS apps used per organization stood at 80. It is projected that 85% of software that organizations use will be SaaS by 2025 (3).

The growth of the subscription economy in the Software as a Service (SaaS) industry is driven by several key factors:

1. Increasing demand for cloud-based solutions
2. Cost-effectiveness of SaaS solutions
3. Reliance on the internet and mobile devices

1

Increasing demand for cloud-based solutions

One of the main drivers is the increasing demand for cloud-based solutions. With more businesses adopting cloud technology, the need for SaaS solutions that can be accessed and used from anywhere with an internet connection has grown.

2

Cost-effectiveness of SaaS solutions

Another driver is the cost-effectiveness of SaaS solutions. Rather than incurring large upfront costs for software licenses and hardware, businesses can subscribe to SaaS services on a monthly or annual basis, reducing the burden on their finances. This makes SaaS solutions more accessible for small and medium-sized businesses that may not have the resources to make large investments.

3

Reliance on the internet and mobile devices

The growth of reliance on mobile devices and the internet has also been a key driver of the SaaS subscription economy. With more people accessing the internet and using mobile devices, the demand for software that can be used on the go has grown. This has created new opportunities for SaaS companies to reach a wider customer base and offer solutions that can be used in a variety of settings.

It’s important to reiterate that the subscription model incentivizes SaaS companies to continuously improve their products and services. This is because they rely on recurring revenue streams and customer satisfaction is key to maintain their growth. As a result, SaaS companies are motivated to keep their products up to date and offer new features to their customers. Thus, the subscription economy is built on data and the need for businesses to make informed decisions.

SaaS companies can collect data on customer usage and preferences, which has helped to increase customer retention and improve the overall value of SaaS solutions. This brings us to the intersection of where Subscription models and UX research meet. For example, within a SaaS model, key indicators such as Net Retention Rate (NRR) will reflect the positive or negative user experience for customers, as it helps identify if a business is retaining, as well as upselling customers. A low NRR, for example, could serve as an indicator that more UX testing is needed. Doing so would reveal why customers are leaving, where they are having trouble with the service/product they purchased, and how it can be improved!

Other indicators such as Gross Retention Rate (revenue retained from existing users), or Logo Retention Rate (percentage of users who renew their subscription) can also exemplify a need for UX design changes. Notably, out of these three metrics, NRR is perhaps the most valuable when discussing the intersection of UX and SaaS, as it measures the percentage of revenue obtained from existing customers, accounting for revenue changes due to upgrades, downgrades and churn. Essentially, it paints a more complete picture, as it encompasses revenue, loyalty, profitability and the overall health of the existing customer base.

These examples and metrics, however, are just the tip of the iceberg! It’s now time for us to dig a little deeper and uncover exactly why user research is the unsung hero of the subscription economy.

To be blunt, subscription-based offerings succeed only because they serve the needs of users, on a continual basis! The value of a product must continue to grow to serve the diverse needs of users. The more users, the more diverse the demands and expectations. Thus, the more important it is for your product and offering to be in a perpetual state of growth. This is especially true if we are expecting users to go from let’s say a freemium plan (access to a platform for free) to a paid subscription. Going from free to paid requires you to know your user behaviors and needs extraordinarily well, if we expect users to part with their money in order to GAIN more value from your products.

Ultimately, knowing your customers’ needs, behaviors and preferences is foundational to success for any subscription based model. Do you know where your customers are having trouble using your product? Is your product offering aligned with evolving industry norms? Do your users fully understand how to use your product? These, amongst many other questions, can be answered only when we use UX research.

So, how does a company leverage the value of UXR to help serve customers? Let’s look at a few examples:

1. Identifying customer pain points:
2. Gathering feedback on features and pricing:
3. Improving onboarding and user education:
4. Optimizing user interface and user experience:
5. Understanding user behavior:

UX research can help businesses identify the pain points that customers experience with their subscription service. This can include difficulty with sign-up or cancellation, lack of clarity on pricing, or technical issues. By understanding these pain points, businesses can make targeted improvements to their service that can reduce churn and improve customer satisfaction.

Uncovering exactly which pain points your customers have can be as simple as running 15-minute unmoderated sessions, or running secondary research to understand customer personas, and then leveraging usability testing to help craft a Customer Journey Map. Journey Mapping and Personas play a vital, foundational role for any product, because they help define the primary touchpoints for any user who engages with your product. It is critical that these touchpoints are error-free, especially at the beginning of the journey! In fact, a study by PwC revealed that 32% of customers will stop doing business with a brand after just one bad experience (4).

In today’s rapidly changing business landscape, it’s more important than ever to stay agile and to adapt to the evolving needs and preferences of customers. Listening to your users in regards to pricing is absolutely essential in order to stay competitive. It’s important to find a balance between affordability and profitability.

By testing different pricing models, businesses can find the sweet spot that maximizes revenue for their targeted segments, while remaining attractive to customers in those segments. This can help businesses avoid pricing changes that customers find unaffordable, and also allow businesses to remain competitive with similar services. A study by ProfitWell found that optimizing pricing can increase revenue by 34%.

Similarly, testing features can help businesses identify what customers value most in their subscription service. By testing different features and gathering feedback, businesses can gain insight into which features are most important to customers, and which features are less important. This can help businesses prioritize development efforts and focus on the features that will have the greatest impact on customer satisfaction and retention.

Prioritizing user needs is the foundation of any user-centric business. In fact, in a study by the Aberdeen Group, companies that prioritize customer experience have 1.6 times higher customer satisfaction rates and are 2.4 times more likely to achieve revenue growth. By extension, adapting pricing and features over time is also critical to success in the subscription-based business model. Customer needs and preferences are constantly evolving, and businesses must be willing to adapt to stay relevant. By regularly testing and adapting pricing and features, businesses can stay ahead of the curve and continue to provide value to their customers..

Conducting unmoderated sessions or simple surveys are some of the most common and effective ways to help determine where customers may require the most support. Metrics such as time on task, and task completion rates also play a vital role in developing a well-rounded understanding of your customers’ experience.

UX research can help businesses improve the user interface and user experience of their subscription service. This can include conducting usability tests, heuristic analysis, and user testing to identify areas where the user experience can be improved, or using heat maps and analytics to identify areas of the website or app where users may be experiencing frustration or confusion. In the realm of SaaS and user experience, simplicity is of the utmost importance. To improve user productivity, it’s important to simplify the user flows and interface of digital platforms. If the process is too complex, requiring too many steps or causing too much friction, users may become frustrated and repeatedly struggle to use the platform or product effectively. The only way to ensure that an interface is effective, efficient and simplified is to gather data directly from the consumer or user. Running a heuristic analysis, which is relatively low cost, or conducting unmoderated testing, or moderated interviews, which allow for quick iterative feedback, are essential approaches to maintaining a simplified UX and interface design.

UX research can help businesses understand how users are interacting with their subscription service, including which features are being used most frequently and which features are being ignored. Even more so, conducting user research will allow you to understand the personas, habits and preferences of your users well before they actually engage with your product or service. This comes in the way of user personas or customer journey mapping, and can be further verified by simple surveys or in-depth interviews. If done right, this research can actually be harnessed in outreach and marketing efforts, by appealing to the nature of your users.

Churn is the percentage of customers who cease to use your product or service during a specific time period. As it relates to subscription models, when users are unhappy with your product, they are more likely to abandon it, resulting in a high churn rate. Ultimately, user research can assist you in reducing churn by streamlining processes, identifying bugs early on, improving customer support, amongst many other benefits. The cleaner the user experience is, the more likely uses are to stay. In fact, a study found that 67% of customers claim unpleasant experiences as the main reason for churn (5). Most importantly, a report by Bain and Company found that companies that prioritize the customer experience and invest in user research have a 4x lower churn rate than those that don’t prioritize the customer experience (6).

Another important benefit of user research in a subscription-based SaaS model is the potential for upselling. Upselling refers to the process of encouraging customers to upgrade to a more expensive or advanced product or service. User research can help you identify areas where users may be interested in additional features or functionality, allowing you to create targeted upsell opportunities. For example, if you find that users are frequently asking for a specific feature that is not currently offered, you could develop and offer that feature as part of a premium subscription package. This can not only increase revenue, but also improve customer satisfaction by meeting their needs and expectations.

Take Youtube for example: YouTube Premium is a subscription-based service that provides ad-free access to YouTube videos, as well as access to exclusive content and features. Youtube harnessed surveys and testing, and identified that a major pain point for users was when an ad would suddenly interrupt a video for a viewer. This research helped YouTube identify the features that users valued the most, such as ad-free viewing and offline playback, and allowed them to improve the service to meet those needs – thus, users pay for this subscription upsell.

User research can also impact gross and net retention, which refer to the percentage of customers that renew their subscriptions during a given period (Gross Retention) and the amount of revenue a set of customers deliver after a given period, in other words the net impact of Churn, a decrease, and Upsell, an increase (Net Retention). User research is an essential element in maintaining positive (> 100%) net retention, by reducing churn and fostering upsell. UX research thus allows you to garner the understanding of what will either reduce churn, or promote upsell, or, in an ideal scenario, achieve both, ultimately allowing an organization to develop features and improvements that keep users engaged and invested in your product.

An example of this would be using user research to identify why users are unable to achieve a goal on a specific user journey, or receiving feedback that users would like a certain capability or UX improvement added on to a particular product. To increase net retention, organizations should capture and iterate on user insights to better serve their users, preventing them from switching to competitors as well as fostering increased usage and thus upsell.

Another important benefit of user research is the potential for ecosystem involvement. Ecosystem involvement refers to users buying into more products or offerings within your organization. By extension, this could also cover integration of your product with other tools, services, and platforms that your customers use. By understanding how your product fits into your customers’ workflows and how they use it alongside other tools, you can identify opportunities for ecosystem involvement that can improve customer satisfaction and convert users into “Fans.”The Apple ecosystem is a great example of ecosystem engagement. Many users who purchase an Iphone, will then purchase the Beats wireless headphones, because of how seamlessly they work together. They then may find themselves purchasing an apple watch to quickly access phone calls or their contact lists. Research has also found that customers who engage with a company’s ecosystem of products or services are 50% more likely to be loyal and spend 33% more than customers who only use one product or service (7).

One of the most important elements of conducting user research is diversifying the approach to testing. Simply put, do not just rely on one specific test type. Try to deploy various methods to ensure that there are no gaps in your data. There are some insights you may find in an unmoderated usability test that you simply could not derive from a card sort, for example. Bear in mind also that you should leverage both qualitative and quantitative insights when running your tests. By utilizing both qualitative and quantitative approaches, you can validate your findings, and in some cases, even garner some insights you were not expecting!

Testing can sometimes seem overwhelming, regardless of whether you are running a test for the first time, or whether you’re well-versed in the vocation. There are several tools on the market that actually simplify the testing process from beginning to end, and also simplify the process of sharing the platform across the entire organization. Userlyics, for example, is a one-stop-shop platform, allowing you to recruit, analyze, record and script your studies with ease, and to offer multiple creator accounts and seats at no additional cost. If you are in fact a SaaS based company, then you probably realize how important quick, effective iterations, within multiple departments are to the success of your brand. Tech platforms that specialize in this space allow you to access those powerful insights through a multi-department, unlimited account/seat process. Thus, allowing you to focus on what really matters – serving your users.

Recruitment tends to be one of the key stages in organizing a study. The wrong sample group can lead you down a dark road of bad design designs, and thus, financial blunders. When recruiting participants for your user research studies, it’s important to ensure that they are representative of your user base, from new users to old users. Of course, this also includes recruiting users of different ages, genders, locations, and skill levels. However, the type of users are equally as important. It wouldn’t make sense to test the long-term benefits of a certain feature if your user just joined your ecosystem. If you are keen to continue growing as a SaaS provider, which is undoubtedly quite competitive in most industries, recruitment is one area that you don’t want to overlook. Mix in new users ,old users, loyalists, free trial users, amongst all others, all the time and whenever applicable. Ensure that whichever provider you work with can do B2B recruitment, if that is your focus. Or multi-country studies around the world,if international sales are important for you.

The first contact users have with your product sets the tone for their entire user experience, and when using a subscription-model, it is especially important that users access your product effortlessly. With the right approach to UX testing, an organization can understand how to drive users toward key actions immediately after signing up. Testing helps identify the effectiveness of welcome messages, product tours, tool tips and other forms of education that instantly engage users with your product. Slack, Duolingo, and Zoom, for example, have been praised for their onboarding processes; this is because they take into consideration the types of questions users may have about their product use case, and which pain points their users may have experienced in the past.

Overlooking the importance of onboarding testing will undoubtedly cause users to look to competitors. 74% of potential customers will switch to other solutions if the onboarding process is complicated (8). By prioritizing this critical step in the user journey, you can ensure that your product demonstrates value immediately, while also communicating that customer education and support are a priority for your brand.

Any business that is operating in the modern-world undoubtedly benefits from UX research. However, it is quite clear that the success of subscription-based models is predicated on the application and prioritization of UX insight. Without user perceptions and needs at the forefront of these models, there is complete stagnancy in the product offerings. Even if the initial offering or minimum viable product is appealing, net retention rates will drop if the product doesn’t adapt. Moreover, if the wrong iterations are made due to lack of user feedback, organizations can quickly find themselves in a perpetual downward motion, simply because the changes are not being made to align with what users truly need. A subscription based model and UX research are almost synonymous – especially for SaaS providers.

The fact of the matter is, if an organization is not yet utilizing a UX strategy to guide their SaaS products, then there are gaps in their decision-making processes. Organizations that currently leverage UX research and strategies quite likely still have gaps in their decision-making process, though they are certainly much closer to solving user problems and aligning with their user’s needs than those who don’t. Work with a UX Research platform and Panel provider that is equipped to help organizations regardless if they are experienced in UX, or just starting their journey. Though ultimately the most important take away is this: If you are not testing, start. If you are testing, test early, often and test everything!