Zuora and the Subscription Economy

Every now and then a vendor does something that genuinely surprises and even delights me. They come up with a new feature at the least but at the most, they define a concept, which while it certainly pushes the vendor's agenda, it also adds a new way of thinking to the overall discussion and even has a practical merit. The latter is something that comes once in a great while, not frequently, but when it comes, there is something of a "hmmm, that's very interesting...very, very interesting."

Last week, Zuora released its Z-Commerce for the Cloud service, an upgrade to its billing and payment service that is built for, guess who, cloud providers. What makes it interesting as a service is that its the first external service (SaaS) that actually understands the complex billing models of the cloud providers which account for not only monthly subscription fees, but also have to think about automated metering, pricing and billing for products, bundles, and highly individualized/specific configurations. So for example, storage as a service - one of the components of cloud platforms - is able to charge for terabytes of storage used, or IP address usage, or data transfer charges.  Or, cloud providers can structure a per CPU instance charge or per application use charge. It can take complexities like peak usage into account.  In other words, Zuora as they always do, figured it out. In fact, they've provided 20 pre-configured templates for the billing and payment models that cloud providers use - which tells you how confusing a market this can be.  Not to Zuora though.

But honestly, what makes this as well as other aspects of the Zuora business model so interesting is what Zuora is using for the underlying rationale for their success (125 customers, 75 employees, profitable, etc.).  They call it the "subscription economy" and while normally, I think that ideas like that are just vendor self-justification - in this case, though of course there is certainly an element of that, they might just well be onto something.

The Subscription Economy

"The business model of the 21st century is a fundamentally different business model.

The 21st century world needs a whole new set of operational systems -- ones that match the customer centric business model that is now necessary to succeed.

The business model of the 20th century was built around manufacturing.  You built products at the lowest possible cost, and you find buyers for that product.

They key metrics were all around inventory, cost of goods sold, product life cycles, etc. But over the last 30 years, we've been moving away from a manufacturing economy to a services economy. Away from an economy based on tangible goods, to an economy based on intangible ideas and experiences.

What is important now is the customer -- of understanding customer needs, and building services & experiences that fulfill those customer needs.  Hence the rise of CRM.

But our financial and operational systems have not yet evolved!  What we need today are operational systems built around the customer, and around the services you offer to your customers.

You need systems that allow you to design different services, offered under different price plans that customers can choose from based on their specific needs.  So the phone companies have 450 minute plans, prepaid plans, unlimited plans, family plans, and more.  Salesforce has Professional Edition, and Enterprise Edition, and Group Edition, and PRM Edition, and more.  Amazon has Amazon Prime.  ZipCar has their Occasional Driving Plan and their Extra Value Plans.

You need systems that track customer lifecycles -- things such as monthly customer value, customer lifetime value, customer churn, customer share of wallet, conversion rates, up sell rates, adoption levels.

You need systems that measure how much of your service your customers are consuming.  By the minute?  By the gigabyte?  By the mile?  By the user?  By the view?  And you need to establish an ongoing, recurring billing relationship with your customers, that maps to your ongoing service relationship, that allows you to monetize your customer interactions based on the relationship that the customer opted into.

The 21st century world needs a whole new set of operational systems -- ones that match the customer centric business model that is now necessary to succeed."

Let's translate this. What he is saying is that the model for future business is not the purchase of goods and services, but a price provided to a customer for an ongoing relationship to the company. The customer gets to structure the relationship in a way that provides that customer with what they need to accomplish the job(s) that the company can help them with. That can be an array of services, products, tools and even structured experiences.

What also makes this interesting is that your business is measuring the customer's commitments to you and vice versa in operational terms even though the business model is shifting to more interactions than ever before. So you're looking at some traditional CRM metrics like CLV, churn, share of wallet, adoption rates, etc. as they apply to a business model that has been evolving away from pure transactions for awhile now. What Tien is saying is that payment/billing etc. to him is the financial infrastructure for this new customer centered economic model - a subscription economy.

Denis Pombriant, as usual, wrote a great piece on this on his blog last week. He points out that just because a business uses a subscription model is no guarantee of success. How well the business manages it or has it managed (Zuora to the rescue here) has significant bearing on the success or failure of that business.

The same can be said for the subscription economy. Zuora is recognizing what they've seen coming - more and more companies are moving their business models to subscription based pricing.  This is the same model that supports free software and hardware - give them the box, charge them by the month for it. How it gets managed is a whole other thing but for now, Zuora has done a service by recognizing that the customer-driven companies are realizing that the customers are willing to pay for the aggregate capabilities of the company in an ongoing way as long as the company continues to support what that customer needs to solve whatever it is they need to solve.

And that's a good thing.