Why the subscription economy is the future of business

Zuora CEO Tien Tzuo says subscription-based companies are growing nine times faster than product companies and explains why ‘subscription relationship management’ platforms will replace existing ERP and CRM systems.

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Zuora aims to win the next IT stack war – but it’s probably not the stack war that’s comes most readily to your mind. Tien Tzuo, CEO and co-founder of Zuora, wants to own the application stack that drives your subscription business and he believes that virtually every company will be a subscription business before long.

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Zuora CEO Tien Tzuo

Speaking with Chief Content Officer John Gallant in this installment of the IDG CEO Interview Series, Tzuo describes Zuora’s “subscription relationship management” platform and talks about why this software stack is better suited to disrupt new business models than existing ERP and CRM systems.

[ Related: Zuora Launches App Suite for Subscription Businesses ]

Don’t believe your company could be a player in the emerging subscription economy? You might want to rethink that after learning from Tzuo about how traditional economy giants like Caterpillar are changing their industries with subscription-based offerings. According to Tzuo, who was steeped in this new model of business as one of the earliest executives at salesforce.com, subscription-based companies are growing nine times faster than product companies. And Zuora aims to be the platform that drives that growth for the future.

CIO.com: Talk about the origin of Zuora. Why did you start the company and what were you setting out to do?

Tzuo: In 2007, when the shift of the software industry to subscriptions was still a couple years away, we could see the handwriting on the wall. This is when I was at Salesforce.com and my co-founders were at WebEx, two of the biggest SaaS companies at the time. Most people thought of the shift to the cloud as a technology shift in how software would be delivered. Just as important, and people talked less about it, was the business model shift.

Marc Benioff [founder of Salesforce.com] talks about two new models. One is the technology model, but he goes right into this subscription-based business model, the pay-as-you-go business model, and how profound that was in enabling Salesforce to disrupt the enterprise software industry. Now, in 2017, all software is delivered like this. Oracle talks about their cloud revenues, SAP talks about their cloud revenues, Microsoft talks about their cloud revenues. Adobe did a 100 percent shift. PTC stock is up 2x because their shift to subscriptions is accelerating. That’s just the way the world works today.

What we asked was, is this shift from a traditional way of selling to a subscription model of selling only limited to the technology industry or is it something more universal? We found it was universal. We saw examples like Zipcar where we envisioned that one day you won’t have to own a car, you can simply walk up to a car service, punch in your ID and get transportation services. There was no Uber at the time, there was no Lyft, there was no city bike share. The whole idea of transportation as a service wasn’t there yet but we could see it in the early days of Zipcar.

We saw it in Netflix. In 2007, Netflix was mailing out DVDs but we could see there’s no reason you should buy movies if you could subscribe to a service to get any movie you want. Then streaming came along and Apple Music and Spotify and this is how the world has evolved. We saw early on there was going to be a world where people wouldn’t have to buy stuff, they would subscribe to things, and this new generation of companies would need an infrastructure stack to launch, grow and manage these new subscription-based businesses – a stack similar to what we had built at Salesforce, similar to what Netflix had to build themselves. That’s what inspired us to start our company.

[ Related: Building businesses for the subscription generation ]

CIO.com: I think people get this at a high level but can you drill into what you really mean by the subscription economy?

Tzuo: We think the model of selling people products is actually a broken model. This is not the natural way of things. Does it really work for companies to say their fundamental purpose is to ship and sell more cars, more pens, more laptops, conspicuous consumption, planned obsolescence, all this stuff just sits in the landfill? People don’t want that. People just want an outcome. People want a service. People want to know the vendor, the brand, the person on the other end that’s providing that service in a trusted relationship. This is what we discovered when we launched Salesforce.com, that it was about this trusted relationship that we had with our customers.

The business model caused us to care about that relationship because we needed that relationship to continue in order grow and make money. That is just a much better way of building businesses today and that’s what the subscription economy is about. As consumers, we’re freed from the shackles of having to worry about product ownership. I don’t have to worry about the day-to-day, the hardware, all that stuff that sounds common sense now.

If I have Uber I don’t have to worry about whether my car has gas, where it’s parked, when is the garage going to close, do I have my insurance card. The whole idea is not having to worry about the assets and just having the trusted vendor provide this service -- and knowing that if you don’t like the service there’s a different service down the street you can go to. That creates a much better environment for doing business and for the economy at large.

CIO.com: When you use examples like Salesforce, Netflix or Uber, people get that, but then they say: Well, we’re not that kind of company. I’m, let’s say, a manufacturer or consumer packaged goods company. How is this applicable to my company?

Tzuo: If you look at our customer base today, we have companies like General Motors, Ford, Caterpillar. Why is that? Because technology is driving this. Today, every manufacturing company can put sensors on their products, connected to the internet. These are all becoming smart devices. They’re still physical products but if the car drives itself, why do I want to buy it? Why don’t I just use it as a service?

Schneider Electric sells energy management equipment. This is industrial stuff in commercial buildings and they’re realizing: All our devices have sensors, they’re all connected to the internet. We can manage this stuff in a remote location. We can do a better job providing energy management. We can turn up the thermostat, turn down the thermostat, turn up the light, turn down the light based on historical patterns of where people are. They all go to the cafeteria at lunch so let’s dial down this temperature. They’re all coming back from lunch, let’s dial up the temperature. We could do a better job of it and we could even price this service in a way that’s win/win. We’ll price the service based on how much energy we save you so you don’t have to think about it. Manufacturing companies are all going this way.

You talk about CPG [consumer packaged goods], Unilever just bought Dollar Shave Club for a billion dollars. Why? Because Dollar Shave Club didn’t think of themselves as simply selling shavers. They have subscribers and their goal was to own the bathroom, if you will. We’ll start with the shaver, we’ll move to wipes, etc., but we see what we do as a service for our customers.

The last example I’ll throw out there in the retail space is Stitch Fix. They’re fundamentally transforming retail. The retail model as it stands is broken. In the product economy, you had to go to the store to pick up a product but now companies like Stitch Fix will just ship things to you. They’ll know what you want based on their relationship with you, based on historical data, based on what other people like you have done in the past. We’ll ship you these articles of clothing, you pick what you want and you ship the rest back. That completely transforms the whole retail CPG experience. That’s where the world is going.

[ Related: 10 tips for running a profitable subscription-based business ]

CIO.com: As companies make that transition, what kinds of issues or challenges do they run into and how do you help them overcome those issues?

Tzuo: In conversations with our customers, we often show a picture where on the left is a traditional business. You come up with a product; you feed it into multiple channels. A channel could be a store, your salespeople, partners, it could be an app on an iPhone or a song on iTunes. You know there are customers on the other side and sometimes you don’t even know who they are because it’s the distribution channel that engages with them. All you know is you shipped a product. Then you flip.

On the right side is a picture that starts with the customer. The customer is spending time in all these different places -- on their phone, in the store, talking to your customer service reps, in their offices talking to your salespeople, with your partners and resellers - and you want to make sure wherever they are there are innovations in experience tied to your brand that give them the outcomes that they want. You have to start with the customer and then build things around the customer, and you have to have a direct relationship with the customer. That doesn’t mean that you can’t use resellers. You certainly can. But you need an ID. Amazon has an Amazon ID for all their customers. You have an Amazon ID and all your interactions with Amazon go back to that Amazon ID and the history of the relationship is built against that ID. One hundred million people walk into Walmart every two weeks -- in the U.S., that’s a third of the population -- but there’s no relationship. You pick stuff off the shelves, you check out and you leave. There’s no history, there’s no relationship, there’s no foundation for that relationship to get better and there’s no foundation for that relationship to grow into streaming movies or home delivery or little devices with AI in-room like Amazon has. You will have a whole set of relationships with vendors that provide services that give you the outcomes that you want for your life.

The second thing is around the systems. There’s a war coming. The last war was about this whole idea of on-premise vs. cloud. That’s pretty much over. People get it. It’s all going to go in the cloud. Infrastructure is going in the cloud, applications are going in the cloud. But there’s another war brewing that’s tied to the business model shift. These old ERP systems from Oracle, from SAP, work great when the fundamental goal of your company is to ship a product. Those systems don’t work when you have a subscription-based business model, when you’re trying to wrap your whole business model around your customer and turn your customers into subscribers.

There’s a whole new stack of applications that has to happen. We recognized this back in 2007. We said: It’s going to take a long time to build this stack but let’s get going. We built the world’s first subscription relationship management hub, if you will, that sits alongside of CRM and alongside the financials to run these types of businesses. This is the system that gives them all the access to subscriber information, all the pricing and packaging flexibility, all the financial metrics -- these new recurring financial metrics that they need -- and it drives operational efficiencies as companies scale these businesses. Today, we have the world’s largest set of subscription-based companies -- diversified, international, across multiple industries -- on the system. We’ve been gearing up for the war and the war is coming.

CIO.com: Who within the organization is driving this transition to a subscription-based model? Who do you sell to?

Tzuo: The short answer is we sell to the CEO and we sell to everyone. Why is that? What the CEOs are struggling with is that in the old product world these functional departmental siloes worked. You go figure out what it is that the market wants, you manufacture the stuff, sell this stuff, provide aftermarket services, support, maintenance, whatever. You over there in finance, just make sure it’s all accounted for.

But now these organizations are wrapped around the customer. Everyone has to be wrapped around the customer. Everyone has to know everything about the customer, so you go from these siloed organizations with handoffs between every silo to everybody cross-functionally wrapped around the customer. The customer is interacting with your finance department from a collections or billing standpoint. The customer is interacting with your sales department. The customer is interacting with engineering service. We help break down those siloes into an integrated system that wraps the whole customer around. The finance guys are plugged into our hub to send out invoices, track collections, close the books. The salespeople are plugged into our systems to do quotes and orders and so forth. The engineers and the manufacturing guys are plugged into the system because they need to know what I need to provision, to fulfill. Here’s all the usage information about how the customer is consuming the service so you can go build for it.

We wrap the whole company around this brand-new infrastructure, the subscription relationship management hub, if you will, to help you build these true customer-centric businesses. We sell to the CFO, we sell to the CIO, we sell to the head of engineering or product innovation but ultimately the CEO gets involved in every one of our engagements.

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