Thought Leader Interview
Tien Tzuo co-founded Zuora with K.V. Rao and Cheng Zou in 2008. The three men saw a great opportunity in the SaaS market for providing billing and payment systems that uniquely attended to the needs of SaaS vendors and eventually to others who sell their products and services on a recurring basis.
Billing and payments had been a traditional backwater of the technology industry. They were among the earliest applications to be computerized and over the years improvements tended to mean keeping up with national and local tax regimes and moving billing systems to the latest hardware platforms.
With the introduction of SaaS computing and its immediate predecessors (on-demand, hosted etc.), vendors became aware of glaring shortcomings in their billing systems. SaaS meant that customers could change their configurations as often as they wanted and the number of products and services ballooned so that providing an accurate invoice each month was suddenly not as simple.
Early SaaS vendors often built or customized their own billing systems with the result that the home grown systems were inflexible and their maintenance was a drag on more productive efforts for the whole staff. The opportunity that Tzuo, Rao and Zou uncovered was not simply a need for a new kind of billing system but the advent of what Tzuo, Zuora’s CEO, calls the subscription economy. Since we’re analysts, we wanted a clear definition and Tzou was gracious enough to provide it.
Denis Pombriant: Welcome, Tien.
Tien Tzuo: Nice to be here, Denis.
DP: The subscription economy is becoming a term in our world. I’ve been writing about it and using it with clients and you use it throughout your business but can you define it and what makes it different from the regular economy?
TT: We’ve been talking more broadly of a shift from a manufacturing /industrial age to a services age where it’s now more about the services you receive than about just the product. Even common products that we all enjoy like the iPad come with a set of services. You buy the iPad not for the product itself but for the services that it can provide such as a music service, a content service or a go to meeting service and what not. So we’ve observed it’s less about the products that you own and more about the services that you subscribe to. That’s what we mean by the subscription economy.
DP: It’s also about turning a durable good sale into a service sale to lower the cost of a product’s use.
TT: True. One of our favorite examples is ZipCar. More and more people who live in metropolitan areas are asking why do I have to buy a car and spend tens of thousands of dollars and deal with all the hassles of car ownership — having to change the oil, get gas or pay for insurance. Why not subscribe to a service like ZipCar and get access to any shape of car I want. If today I need a pickup I get one, tomorrow I might want to be eco-friendly and I’ll get a Prius. If I want to take clients out maybe I’ll get a Volvo or a BMW. But you get access to a much better value proposition and you get it on economic terms that fit your needs and simply give you a pay as you go model that lets you pay only for what you consume. Some times by committing to a certain level of service you even get discounted rates.
DP: What do you call the market you serve? Micro-payments? Micro-billing?
TT: We do all of the above but it’s not about billing. People think this is a billing company and we certainly are. But when customers come to us — like a Box.net, one of the leading SaaS companies in the Valley, or OpenRange, one of the new telcos deploying a new service on top of new technologies like WiMax out in the Mid-west, or Ning, one of the most popular consumer Internet services that allow you to build your own social network. When they come to us certainly they’re looking to automate some of their billing processes but what they’re really saying is different. They’re saying, success in the subscription economy is very different than success in the manufacturing world.
Success in the manufacturing world is about managing costs. How do I drive cost out of the equation? How do I manage my supply chain? How do I keep low inventory levels? How do I reduce my gross costs? How do I increase my gross margins? That’s what the classic manufacturing problem set is about. When you’re in the service economy, it’s about the service and the customer’s experience. It’s about being able to provide packaging and pricing to align with what the customer’s looking for.
So you’ve got different customers with different needs. Ning for example has a $2.99 product, a $19.99 product and a $49.99 product—these are all per month prices. Why? Because they have different customers with different needs. Some are just dipping a toe in, building their own social network for $2.99 a month. They have other customers with heavy usage with networks that are vast and wide and they’re willing to pay $49.99 (per month) and perhaps they actually consume more bandwidth so they get additional fees for usage based pricing. Some customers just trying it out might go with a month to month plan while others know they’re always going to use the service who sign up for a one or two or three year plan and receive a discount.
So it’s about the concept of pricing and packaging, the ability to architect the service to deliver a quality customer experience. Think about the entire set of interactions with the customer—not just how they use your product but how they engage with you, the choices that you put in front of them, the bill you give them on a regular basis, is it accurate? Does it have the information they need? Are you giving them the maximum number of choices they need such as PayPal, debit cards, whatever they want. Meeting the customer where they are is part and parcel of delivering a service in the subscription economy.
DP: So in a way you’re giving the vendor the ability to differentiate through horizontal segmentation without doing a lot of work in packaging. It’s not like they’re making spaghetti sauce and they want to go from one type to five or six with extra garlic or chunky or mushrooms or whatever.
TT: That’s exactly right. What we find is that companies build their own billing infrastructure but you never know what you will need you only know what you need at a moment in time. Then all of a sudden that set of rules, processes and policies that you built into your billing system actually hardens because it’s not a customizable system, it’s a point in time system and it’s almost like it freezes you. It’s like Medusa, you take one look at your billing system and your business turns to stone it becomes inflexible, locked into the way you did business at one point in time.
But then your business changes or your customers’ needs change or the competitive dynamics in the market change. Or maybe you want to chase after new customer segments, maybe you were going after Fortune 500 customers and now you want to launch an SMB offering or perhaps you had a consumer offering and now you want to have a corporate offering for small teams and groups. So your needs change and you find that you can’t accommodate the change in your billing system—that’s been the problem. People don’t realize that the billing system is at the core of companies that live in the subscription economy.
People know that I was at Salesforce.com for nine years in the middle of the CRM revolution helping companies understand how to put customers at the center of their business—driving customer relationships, driving customer experiences. But billing, and the whole ordering, billing and provisioning payments and collection process are all as important a part of the customer experience as your sales process. Without the right back end infrastructure that enables you to provide a differentiated customer experience you can’t operationalize some of the things that you are trying to do in your business
DP: From a business process perspective, what are some of the differences between the business processes that we know and those that will operate the subscription economy?
TT: The business process in a subscription economy is very different it’s all anchored by the concept of recurring.
DP: Of what?
TT: Recurring. Think about the traditional manufacturing mindset where you’re looking to sell product—say you manufacture widgets. A customer buys five thousand widgets. You sell them, deliver them and the customer pays you. That transaction is done and you move on to the next transaction. For example, Apple shipped three million iPads in the third quarter, or what ever, that’s a very transaction oriented approach. But because you’re chasing transactions, when one transaction is done you have to go chase the next order.
But the subscription economy is very different. In the subscription economy when you close a new customer it’s is just the beginning of a relationship. The way a subscription company thinks is: At the start of the quarter I might have a million customers, I might lose fifty thousand customers because they decide not to use my product any more, but I gained two hundred thousand customers so now I’m sitting here with 1.15 million customers.
So you have to look at how many customers do I have in any given period, how many am I acquiring, what are their usage levels, what is my average revenue per customer, how do I focus on managing churn, how do I focus on managing usage and because of that, the business process is very different. You’re not spending all your energies chasing after that order, you’re looking for customers to drive usage, up-sells and renewals, you look for them to add additional products or to upgrade from your occasional use edition to your extra value edition as they become more committed to your product.
It’s the concept of gaining customers and then working with them drive up-sells, renewals and upgrades and also having pricing and packaging in different editions to enable that long term customer relationship. It’s also about managing churn and renewal rates—those are the most important business processes in a subscription economy.
DP: I get it. So, can you think of any limitations or situations where subscriptions may not work well or be an improvement on current practice? With subscriptions there is the expectation that if a payment stream stops so will a person’s use of a product or service. While this may be fair, there are situations where owning a paid off car, for example, can insulate a person from losing transportation if that person loses a job.
TT: That’s another process you have to deal with in a subscription economy. How do you manage the interaction? I would say that’s not true, there are always hidden costs to owning a car in this case—you have to have garage space, insurance.
If you are going through a period in your life when funds are questionable, something like ZipCar might make more sense. You buy just the portion of the car that you actually use and that makes more sense than buying a 20 year-old junker that breaks down in the middle of the highway and next thing you know you have a five thousand dollar repair bill.
DP: So, what does Zuora do that other billing systems can’t do? Why is that important?
TT: Other billing systems focus on automating what you do and it creates the same Medusa situation I mentioned, where you buy a billing system, you automate what your needs are at a moment in time and the situation becomes rock hard, it can’t change as the business changes. We focus on providing a flexible system to drive business strategy today. Your business strategy might be I want to launch a product in 60 days with these three price plans; or my business has done well up to this point but now I need innovation; I need new things, new customer segments, new products and my way of billing needs to change because of this. Or maybe I’m in a growth phase and I’m managing off a spreadsheet and I need to find a way to scale. So whatever it is, we focus on delivering a system that can power our customers’ business strategies. Business model innovation is at the heart of a subscription economy company.
DP: Zuora just closed its C-round of financing by raising $20 million. This brings the total investment to just over $40 million. What will you do with the cash? How much does it take to launch a cloud computing company these days?
TT: Well it takes a lot less. We announced we were cash flow positive at the start of the year so we were able to build a sustainable operation in just about two and a half years which is faster than any SaaS company I know of. So it takes much less than it used to. So the question becomes why did we raise the additional money? I think there’s a great opportunity, there’s a hunger for the kinds of services that we offer and what we’re looking for is to bring this offering to as many markets as possible.
You’ll see us using this money to expand internationally, to build up our service and support organization. We’ll also build new products, our customers have told us about ten or so new ideas they’d like to see in the next eighteen months and we’re going to implement as many as we can. So we’re going to use this money to increase the value we provide to the marketplace.
DP: Well good luck with all of that, it seems like your plate is full in more ways than one.
TT: Thanks.
