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.

1 2 3 Page 2
Page 2 of 3

CIO.com: Let’s talk specifically about the IT organization. If the decision is made to go ahead and implement this, what kind of work is involved there? What has to be integrated? What has to be set up? What’s the end-to-end process here?

Tzuo: IT has invested tens of millions, hundreds of millions of dollars building an architecture and infrastructure that worked in the old world. It helped them scale these product-based businesses. There’s a general sense that monolithic ERP applications have outlasted their lives. They’re slowing things down, they’re not agile.

People are breaking up ERP systems and there’s a movement into the cloud. There are two choices for IT; one is to say: My company is launching these new innovations so let me build an innovation platform built around a subscription management hub and we’ll put all our new innovations on there -- our new connected car services, our new home automation services and new services launched in a cloud offering where I have a recurring revenue model tied to that product. That works well. A company like General Motors or Caterpillar will likely do that because they’re still going to sell lots of tractors or cars in the short term even though all the research says future revenue growth is going to come from these new services.

The second model, if you’re a software company, this shift to subscriptions is going to happen much faster in the next two or three years. I’m going to go from 10 percent of my business being subscriptions to 90 percent subscriptions. These companies are coming in saying: We’re going to do an entire quote-to-cash transformation. We’re going to build a brand-new platform, migrate all our customers onto it and start ripping out Oracle, ripping out SAP.

The cost savings we get from ripping out Oracle or SAP will more than fund the build-out of this new cloud-based subscription relationship management platform. In fact, we’ll save money in many cases, both in technology and in head count. It all depends on how fast your industry is moving to this world and whether you’re launching these new things on the side or going through a massive transformation because of your industry and your company.

CIO.com: One of the things that comes up in a lot of my conversations around digital transformation, specifically about using analytics or big data, is inconsistency in data across systems and not having that single view of the customer that you talked about earlier. Is that something you do for the customer of your product or is that work that they’re required to do to take advantage of your product?

Tzuo: We will massively simplify that. Look at where the product record sits. Some of our customers say: We standardized our financials on an ERP system, we’ve put in Salesforce or another CRM application so for the first time we have a single list of our customers. We did the data cleanup process in our CRM, but [what about] that stuff in between CRM and ERP, these quote-to-cash systems, including quoting, ordering, fulfillment, collections, ecommerce.

Some of these guys have 42 of these quote-to-cash systems. I saw one architecture diagram from a software company that had JDE, Siebel, an old version of Oracle, because these things got cobbled together over time as they launched new products, acquired companies, went into new geographies. This is what’s holding up their agility. When you put a subscription relationship management hub in, it winds up being a central record. We want to be the system of record for pricing, sometimes for product as well but sometimes there’s another system that has the building materials and all the physical aspects of the product. We typically hold the pricing of how people buy the product.

We’ve become what I’ll call the subscription record, which didn’t exist before.   Think about your Verizon plan. You have a subscription record that defines which plan you’re on. Are you on the 20 GB plan, the 10 GB plan, did you add text messaging, where does your monthly bill cycle start, and all the history associated with that. When you log into Salesforce, they know you’re on professional edition, you have 60 seats. This is the subscription record. We’re the system of record for that. We’re the system of record for everything that’s generated out of that; the invoices, the questions, the revenue recognition schedules, all the financial transactions that basically document your relationship with your customers. Then you start wrapping everything around your hub. You plug in your quoting system, your revenue recognition system, your collection system, dunning system, provisioning system. It’s a much more rational way to do it.

There is one industry that operates like this today, which is the telecom industry. This is the architecture that they use. They have these big systems that they call BSS/OSS [business support system/operations support system] that serve as their subscription relationship management hub. This is the architecture that all companies are going to move to as they shift their business models to the subscription economy.

CIO.com: You’ve talked a little bit about the product but let’s go into that in a little bit more depth. Can you give us a quick overview of what’s at the heart of it and what are the capabilities you wrap around that?

Tzuo: There is a dynamic pricing engine. In this new world, there are all sorts of ways of pricing. You want to price by the user, by the gigabyte, by the month. You have peak pricing like Uber does or the telephone companies sometimes do. Do you want to price it by the month? Do you want to price it by the year? There is a dynamic, event-based rating engine. What’s that? In the old world invoices are based on units. I buy 5,000 units, each unit was a dollar, here’s an invoice for that. This new world has to be an event-based model because invoicing, or how much they owe you, is based on a whole bunch of events. Did the customer sign up? Did they suspend their service? Did two days pass? Did they just consume ten units of service? These things all have impact and so we have an event-based model where ERP systems have an order-based model. That’s the second big differentiator.

The third big differentiator is metrics. We calculate things like churn and renewal rates and customer lifetime value, all these things, because our data model supports it. Again, in a traditional ERP system there’s no sense of that. The fourth thing is we are a sub ledger in accounting terms but our subledgers are time based. You understand a dollar that recurs and a dollar that doesn’t recur. Again, you have to have this in these types of systems but traditional accounting-based ERP systems don’t have that capability. The fifth thing is this whole subscription record. We track the whole subscriber lifecycle. It’s a core piece of what’s driving everything else in the system and a really important piece of the system. These are the core differentiators that you have to have in this engine.

Then what we have is modules around it. We have a quoting module that’s plugged into it but it supports the most important third-party quoting modules, [Salesforce] SteelBrick, [Oracle] Big Machines, PROS, whatever it happens to be. We have a collections module, but we’ll support third-party collections modules. We have a tax system but we’ll support third-party tax systems from Avalara or Vertex. The key thing is the hub. The hub has six core engines and the application modules that people use are wrapped around the hub. That’s the architecture that will win the war, the IT stack war, if you will, in this subscription economy.

CIO.com: In November, you launched a set of capabilities called Insights. Can you talk a little bit about what Insights does for customers?

Tzuo: Reporting and analytics is a space that’s going to be completely reinvented and we want to make sure we are ahead. We do all the standard stuff: Billings, bookings, churn, the collections schedule, all your standard financial reports. But today’s world is about predictive [analytics] so we built our entire product on a big data stack. Our customers are now starting to give us all their usage data, customer behavior data, how many times they log in, how many reports they run, how many drives they take, how many phone calls they make, how much storage they use, what features of the application are they using on a day-to-day basis? We can take all that big data and we can correlate it to what we already see in our financials.

Now, for example, we can see that this customer has an 80 percent probability of churning in the next year. This customer has a 20 percent probability of churning. This customer should be targeted with these types of upsells. You can now sort customers by potentiality to buy this add-on product and then target your marketing campaigns or your sales team on those opportunities. If they needed to predict churn rate, most companies will say: Historically, our customers churn 10 percent a year, just plug in 10 percent. We don’t have to do that. We can bring a predicted churn rate down to the specific customer and we plug that into a customer lifetime value.

You can book a deal where you can know the predicted lifetime value of the customer and incorporate that into your decision of how you want to discount and what types of deals you want to offer. Modern day reporting in 2017, with all the stuff that you hear around predictive and AI, must have these capabilities. We’ve been working on that for the last 15-18 months or so and that’s what we launched back in November.

CIO.com: Since you’re on a cloud platform, do customers benefit from the learnings that you glean from other customers? Do they get better at subscriptions because you can look at trends and patterns across the entire customer base?

Tzuo: That’s exactly right. After seven or eight years, we’ve amassed the world’s biggest list of subscription economy companies and so our customers are starting to ask these questions. Obviously, their data is their data and so we have to make sure things are anonymized and they’re opted in. As an example, we just published our first report just to give people a sense of things. We asked: How fast are these subscription revenue businesses growing? We went back for about four or five years and we tracked the quarter-to-quarter growth of these businesses normalizing for outlier behavior. We ignore the first year because oftentimes there’s a data migration ramp and we ignore the top five percent and the bottom five percent outliers.

What we found was that subscription businesses are growing at nine times the rate of the S&P 500. That was really exciting for us. Just looking at our own industry, the software industry, subscription-based software, SaaS, is growing at 30-40 percent a year and traditional perpetual software licenses, what’s left of them, are growing at three to four percent. You’ve seen a 10x difference already just in our own sector but we see this across all sectors; transportation, publishing, media, music, all these different things.

Then we can drill in to the next level. How much of that growth on a quarter-to-quarter basis is coming from acquiring more customers and how much is coming from growing your value for a customer? We’ll be able to graph those things over time. We’ll be releasing more and more of these insights. Our goal is to provide more of the insights so people can ask ‘how am I doing against companies like me and where are the areas I should be optimizing in my business’?

CIO.com: Would you give us an example of a more traditional company -- one that most people wouldn’t think of as being subscription oriented in its business -- that is a customer of yours? I’m looking for a great example of a more traditional company making this transition.

Tzuo: I’ll give you two examples. One is Surf Air. We all know how the airline industry works. You buy your ticket, you go to the airport, you pass the TSA security and it’s not a very pleasant process. Surf Air’s CEO was the head of Frontier Airlines way back and then he managed a membership organization like a vacation club. He said: What if I marry these two things? With Surf Air, you pay a monthly fee and you can fly anywhere they fly. You take out your phone, you find the next few flights, you grab a seat. It’s a private terminal so there’s no TSA and, because you’re prescreened, because you’re a member, you just walk onto the plane. You can take as many rides as you want. It completely transforms the transportation experience. For people in my company who go up and down California all the time, it’s been transformational for them.

The other story I’ll share is the Caterpillar story because it really raises eyebrows. It’s an internet of things (IoT) story. We’ve put sensors in so many of our assets. These could be tractors, these could be engines. They’ve been collecting all this data for years and now they’re realizing that they can build all these additional applications. They can go from a simple one where they know, based on sound waves and vibrations, that you should be servicing this asset. These things are in situations in companies where if the engine stops running for two hours, it’s worth millions of dollars. Then imagine self-managed farms with self-driving tractors? When you hear these stories, you can just see the world is about to change yet again with these smart, connected devices driven by IoT.

CIO.com: Where do you take things from here? What’s ahead for the company?

1 2 3 Page 2
Page 2 of 3
The 10 most powerful companies in enterprise networking 2022