Economists are constantly inventing new weighing mechanisms to evaluate the overall health of the economy. Because the US economy is a massive, ever-changing, complex system comprised of independent and semidependent actors, no single number or equation has sufficed to gauge the heath of the economy.
I will not present a grand unifying economic theory.
Economists track a number of economic indicators to determine the health of the economy. Some indicators are leading, meaning they predict changes in the greater economy. Others are trailing, meaning they measure factors of the economy that already occurred. Given the complexity and velocity of the macro-economy, it operates with a sort of Heisenberg uncertainty principle that prevents a truly current understanding of economic health.
One of the most important leading economic indicators that policy makers use is the Consumer Confidence Index (CCI). The Consumer Confidence Index tracks responses to a monthly survey sent to consumers about their perceptions for business, employment, and income for the next six-months. Currently, the model indicates that the US is at lower-than-average confidence; however, I have reason to doubt the results.
Allow me to propose one more model for consideration. The percentage of “_________ as a Service” sales compared to total sales for the following industries:
- Tech (enterprise, personal, and public sector)
- Food
- Automotive (leases)
- Consumer non-durables
“_______ as a Service” or XaaS describes a model where consumers purchase a subscription for a product, rather than the product itself. In these agreements, the consumer pays a regular payment in exchange for usage of the product and the necessary support to maintain the product. At the end of the agreement, the consumer has no right to the product and must purchase a new subscription to continue use. Automotive leases are an example of cars as a service: consumers pay a lease to use the car each month and for the dealership to handle maintenance through the lease period.
Purchasing anything as a service requires confidence in an ability to pay for the product through and after the subscription term. If I anticipate a huge pay cut in three years, I will not start a lease. Instead, I’ll purchase a less expensive vehicle (finance if needed) that I will retain after my payments are through. Similarly, I’d purchase Microsoft Office (perpetual license), over Microsoft 365 for my personal or business use, if I had concerns about future cash flow.
Providing products as a service requires confidence from suppliers as well. If I anticipate high inflation I wouldn’t sell any subscription that locks consumers into today’s prices. In a period of high inflation, I either want to make one-time sales today or To continue the car lease example:
A dealership anticipates a 10% inflation rate over the next year. In real terms, that means that a $200/month lease today is worth $180 monthly in one year*. As a result, the dealership will encourage its sales staff to push sales over leases, or to encourage customers to wait and purchase the vehicle at a later time (because the car will sell for more nominal dollars). The lease option will lock the dealership into lower revenue for an inflationary period.
If the average consumer does not believe that she will be able to afford a subscription in the future, demand for subscriptions will fall. When producers anticipate that their products will be worth more in the future, they will not sell contracts at today’s prices. However, when both producers and consumers have confidence in the economy and their future income, the as a service model makes a lot of sense for both parties.
The “as a Service” model can cut costs and reduce time from purchasing to use for consumers. Reducing time to value is most applicable in a business-to-business context where new software deployments can take months, but holds true in the business-to-consumer landscape as well. Learning to cook and stocking a kitchen takes time and expense, consumers are increasingly shifting to Food-as-a-Service providers such as HelloFresh to manage the recipe creation and ingredient sourcing. HelloFresh allows consumers to have a “homecooked” meal much faster, and with less hassle, than the traditional grocery store process would have required. In the IT space, the as a service model reduces the physical overhead and resources that a consumer requires to support the product–the producer covers those costs with the subscription fee. Producers benefit from guaranteeing future recurring revenue and can reduce overhead through an economy of scale (by supporting all consumers). The “as a Service” model is so attractive to producers that Microsoft intentionally steers their consumers to the 365 subscriptions, rather than promote the purchase and subscription options.
The “as a Service model” is certainly booming. In 2018, Gartner predicted that “by 2020, all new entrants and 80% of haptoral vendors will offer subscription-based business models [in IT].” I could not find statistics to verify the accuracy of the claim, but it was directionally correct, at minimum. The growth rate of Microsoft 365 supports the claim.
Although the Consumer Confidence Index remains lower than historical average, the rise in XaaS agreements tells a contrary story. When confidence in both the economy and individual future purchasing power are high, XaaS arrangements are mutually beneficial. I anticipate that a reduction in the Xaas industry will be a leading indicator of falling economic confidence or a rise in inflation–both important economic indicators.
*I acknowledge the relationship between inflation and future payments isn’t as simple as stated. Financing, Net Present Value, and disparate effects of inflation create a more nuanced interaction of monthly lease payment and real value.
Polly Wanna Math 