All companies have to acquire new customers, make products and price them attractively without leaving money on the table. Also, once a product is purchased, a company needs to get the cash in house as quickly as possible. If you think of this as the order to cash process, you’d be pretty close depending on how far up the sales trail your definition of acquisition goes. But while these ideas seem familiar there are major differences between how they are implemented and supported conventionally and in a subscription environment.
Order to cash in a conventional company is relatively simple. A conventional company makes products, its sales team sells them and operations produces an invoice that finance tracks all the way to collection. A subscription company is just like a conventional company in that respect but it is different because the subscription company needs to reacquire its subscribers all the time. For a subscription company the sale is never complete because there’s always next week, next month, next year — you get the idea.
Subscription companies are always in acquisition mode, which means much more than always be selling or always be closing. Subscribers want a bit of rest from the acquisition process and they need to get on with life with the new solution they bought. So maintaining their interest moves down stream to things like being successful using a product and resolving issues — whether support or billing — efficiently.
So a subscription vendor, even in acquisition mode, needs to keep a weather eye for forming productive bonds with customers. Customers that bond well are more likely to tell others about their experience thus becoming an unpaid sales team for the vendor. Customers that don’t bond don’t advocate and may be more likely to churn, a subject for another discussion.
The difference between conventional companies pricing products and subscription companies couldn’t be more different. A conventional company has to sweat all the details — what’s included, how much does it cost, what are the terms and conditions, on and on. They have to because they rely on research, surveys, focus groups and more and even with all that they might not get it right. If they fail it’s a big investment wasted.
On the other hand, a subscription company can harness the power of the social crowd to accomplish the same thing and it can do all this proactively. By the time a conventional company gets a product to market, its information is weeks or even months old but look what happens with a subscription vendor.
Say the vendor analyzes aggregate customer purchases and discovers that customers that buy one service are likely to buy another. Why not offer a package containing both? The same analysis can also tell what the customers pay for the combination and from there the vendor might wish to make a price adjustment to promote the combination. With this approach the probability of success is much higher and if, for some reason, the idea doesn’t work so what? The cost of the effort is practically zero and you can always try something else rapidly. Try that in a conventional company. If you are a subscription vendor already doing this, give yourself a touchdown, you deserve it.
They have a word for billing in the subscription world — heartburn. Nothing generates more of it that trying to get the bills right in a highly fluid subscription business where customers can change their configurations as frequently as they need to. The heartburn comes from trying to process bills with a billing system that’s designed to support a conventional one and done invoicing and payments process because that’s not how subscriptions work.
Just as acquisition is a never-ending process, so is billing. As a matter of fact, it’s also ever changing. The secret to successful subscription billing is, like most things in business, having a system that supports the process you have and not the process some vendor wishes you did.
The other similarity between billing and acquisition is that it is another spot where customers subconsciously evaluate a vendor and make a subliminal decision about bonding with the vendor. Was the process easy, precise, and accurate, or did I spend half an hour on the phone again? These are the things that add up to customer bonding.
This is only the order to cash process; there are lots of other processes in which subscription companies engage with customers differently than their conventional peers. More than ever, these processes are governed by analysis of the data crumbs that become part of the customer record. It’s imperative that subscription vendors fully understand the differences between their chosen path and convention. Doing so will enable them to choose the right systems they need to support business on this new frontier.
There is a long simmering issue coming back to the front burner these days. It’s the question of best of breed software vs. a single system. I’ve been giving it a lot of thought and realized something.
The old discussion says that best of breed opens up application areas to greater competition from more vendors. This competition drives normalization so that everyone can build to the same open standards rather than proprietary architectures. This approach worked for the relational database and SQL, PCs and servers, and standardized programming languages just to name a few things.
Alternatively, those supporting the solo idea say that for complex processing having a single throat to choke is a valuable asset. Who is right? Can the answer depend on a tiebreaker of sorts? I think the answer is beyond this question and ultimately comes down to a question of granularity.
In the software business we’ve seen the industry veer from one extreme to another. Early in a lifecycle, it seems, vendors merge and integrate systems to produce that single solution but it may be highly proprietary. Those proprietary systems are an emerging vendor’s best defense against a copy cat coming in and taking over.
Often best of breed solutions pop up when developers see opportunities to improve a process or even a sub-process to optimize it. The best of breed approach basically says that the monolithic solution can’t be great at everything and that customers deserve great. That’s true but the idea has a half-life because the longer a suite is in market the better it gets and at some point a critical mass of customers won’t even consider the alternative.
Today we see vendors like Oracle leading the charge for the single vendor idea saying that its products are engineered to work together. That would be the argument for the sole source. NetSuite argues from the same premise. But we also see companies like Salesforce with a massive ecosystem of partner applications that offer specialized apps that the company does not provide. Salesforce does deliver a very good development platform in Force.com and API that its partners use to develop their solutions. In this case I’d say that the Salesforce solutions involve such new processes that they are functioning like the early market vendor with a high walled garden while still offering aspects of best of breed.
This is a bit different from conventional best of breed in that the Salesforce partners more or less pre-integrate their solutions via the platform so that the only difference between a Salesforce application and a partner application is often whose fingers did the work. That’s why I would suggest that Salesforce’s approach is more like the single provider than the best of breed approach from just a few years ago.
So to me the question is not one of single vendor vs. best of breed. I think that’s a false dichotomy. Whether or not we realize it we’re all in a best of breed era and the only question is at what level of granularity? I don’t know anyone who seriously thinks that some level of best of breed is NOT a requirement today — there are simply too many demands and options to expect a single provider to do it all unless all the software companies of the planet merge.
The best of the best of breed solutions will arrive at an appropriate level of granularity that optimizes internal lines of communication within the system while incorporating external best of breed solutions at the periphery.
That dichotomy will be different from system to system. For example, CRM has done a good job of integrating several generations of applications including whole systems like call center and social media as well as specialized hardware like IVR gear to produce good solutions.
ERP seems to be different because the back office is a bigger thing that needs to coordinate many more moving parts. Frankly, I think the critical mass of application solutions is just bigger in the back office than in the front office. So the discussion of best of breed has to be qualified by which part of the business we’re referencing.
In ERP I don’t think you gain anything if you suddenly offer best of breed GL and AR distinct from accounts payable or some of the manufacturing systems like supply chain, product lifecycle management and similar things that need to be tightly integrated. On the other hand, HR was never that tightly integrated with the back office and it was more of a traditional offering that went with the back office because it paid people and the back office was where the money is. But these days with a proliferation of human capital management systems, training, hiring and things like them, the ties are less strong which has opened HR up to best of breed offerings for these newer functions.
Billing and payments is another area that has recently come up for best of breed renovation. When those functions were associated exclusively with manufacturing it all made sense. But today the proliferation of the subscription model has placed new demands on back office billing that it was not designed to handle. Subscription billing and payments has become a satellite of conventional ERP and truth be told companies like Zuora, Aria and all the others in this niche, do a better job of managing subscriptions than old style ERP can. So, again, we are seeing an area open up to best of breed approaches.
For me, you need to ask about the level of granularity at which you are viewing the business problem in order to determine the answer to the bigger question. Then, too, we haven’t even looked at the new business processes that are being glued onto the front office through social techniques. It seems like the majority of new business processes are going to the front office and the back office is largely settled business. Even subscription billing is looking more like a branch of customer service than part of ERP. So, the issue isn’t best of breed vs. an integrated solution, it’s more about how much best of breed can you handle before you have too many balls in the air. I think the answer is it depends.
A subscription service provider’s offering has three parts — the actual service-product, an infrastructure for delivering it and, for lack of a better word, value-add. A provider may deliver all three as a single service but that’s not necessary.
A common form of subscription is a car lease in which a customer buys the use of a car measured in miles per year for a fixed term such as three years. The infrastructure and service are the actual car, which remains in the possession of the lessee as long as the monthly payment stream is maintained. Finally, the value add can be rather minimal ranging from nothing more than the standard warranty to scheduled maintenance at no additional charge.
More commonly, many subscriptions today are in the form of a pure service. You could argue that a car lease is really a service. But the fact that a tangible product changes hands, at least temporarily for the duration of the lease, places a car lease in a different category than software as a service for example or a subscription to content — delivered increasingly in digital form.
In a service subscription, the service-product is the actual content or use of an application and it can change frequently. The value added is often substantial and may include telephone support and the right to modify the subscription as needed. SaaS software vendors tout their ability and willingness to modify customer usage profiles almost at will up to and including terminating coverage at any time, hence support for the value add needs to be as encompassing and robust as the service-product itself.
In a subscription service the infrastructure is the smallest part of the delivered whole product and while the service-product cannot be delivered without infrastructure, it is a relative commodity in comparison to the content and the value-add.
This presents an interesting situation for the subscription industry because it shows concretely that subscription services have evolved to a point of differentiation, a point where all subscription providers are not the same, if indeed they ever were. This also brings into sharp relief the situation that Apple finds itself in with an App Store selling software and songs plus content — fundamentally different products — that has only one way of selling.
Many of the applications that Apple sells through its store are uniquely tuned to its products and operating environments. Moreover, the companies that develop the applications have little or no other access to the market — they have skeleton sales and marketing — and the price points for their applications are so low that they could not market their applications any other way.
An iPhone application, for example, that sells for two dollars could not make money for its developers in the open market and might possibly never exist if not for the App Store’s power to aggregate demand. This is especially true if you consider that no transaction takes place between the vendor/developer and Apple until a customer buys the application. This model frees the software developer from bearing the cost of a non-sale, the cost of general sales and marketing operations.
In the above situation Apple’s policy of taking thirty percent of the revenue from the sale makes reasonable sense. The developer avoids the ruinously high costs normally associated with sales and marketing and has a reasonably secure path to market. In this scenario, Apple participates in all three tiers of subscription services — infrastructure, content (owned by the developer) and value add in the form of marketing, sales and service associated with delivery. The developer may still wish to offer additional support services, but that’s an individual call.
A content publisher — specifically of newspapers or magazines — will present a very different profile as an App Store partner by virtue of its product type and legacy business. Like the software company, the publisher comes to market with unique content, in this case journalism. The publisher has an established brand and a customer base and the publisher already participates in activities that build the brand and service customers (through a circulation department).
The part of the App Store of greatest interest to the publisher is the infrastructure which supplies delivery and billing from which Apple takes its thirty percent. The question is whether the publisher receives enough value from the association given that the primary use of the store is the infrastructure component. Opinions will vary and this is a contentious issue in some quarters today but capturing thirty percent of the transaction, while worthwhile for the software developer, might be a bad deal for the content publisher.
Software is a product, regardless of how it is delivered, that is made once and improved sporadically over time. Content is ephemeral and a publication, by definition, needs to be rebuilt as often as it is published, typically daily for a newspaper and perhaps monthly for a periodical.
So, for at least two reasons including lower demands — primarily infrastructure (and specifically NOT branding or customer outreach) — and higher overhead to produce a product, the one size fits all approach to subscriptions appears to be doomed if Apple continues down its path of charging thirty percent.
Rather than a simple reconstruction of the publishing model through a digital store, Apple might be better off considering how it can expand readership and innovate around product and truly add value. Since all of the content is in digital form, it would be trivial to reconfigure it by branding the components and then selling new combinations.
Sports, Op-Ed, National and Business sections of various papers can all be branded. Suppose a transplanted New Yorker living in San Francisco wishes to follow the Yankees in the New York Times through the baseball season. That same person might prefer the front section of the Wall Street Journal and the Op-Ed section of the Washington Post. Today that consumer would need to buy or subscribe to three papers plus the San Francisco Chronicle if s/he wanted local coverage. But with a little innovation a consolidator like Apple could provide the value add of bundling the discrete elements into a single deliverable expanding the papers market reach in the process.
Bundling like this requires a very flexible billing system that can slice and dice products and support the whims of subscribers who want to take up and cancel content subscriptions at any time. Such a billing system is not usually found in an organization that sells products in one-time transactions such as for software licenses and songs.
Apple’s approach to the content subscription market may be dictated by its approach to billing and not any other business concern. The company may be selling content as if it were software simply because its billing system won’t let it do anything else.
The alternatives are to partner with emerging companies like Aria or Zuora or to build a new billing system from scratch. But it’s late in the game to be building something. Some publishers have already embarked on projects of their own and the billing vendors are very active at this point. So Apple’s options appear to be limited, team up with or buy a subscription billing provider or continue stumbling through this new market — a very un-Apple thing to do.
Well, this is interesting. Today NetSuite announced a Renewal Management offering for its Software Company Edition. The module is aimed at supporting recurring revenue management, a heretofore ignored need for the growing legion of software as a service companies.
The product appears to be NetSuite’s answer to solutions from players like Zuora and Aria who specialize in billing and related processes. When billing was a relatively rare thing — the annual maintenance bill or the one-time license fee, conventional billing software was fine. Billing for software was just like billing for a piece of hardware.
But then software turned to on-demand and suddenly customers had the ability to change the constellation of products and services they consume between billing cycles. When that happened billing complexity increased twelve-fold. The general-purpose vendors like Zuora handle all that nuance and more. Anything that can be subscribed to for a fee is fair game for a subscription billing system. So my bet is that NetSuite is dipping a toe into the water and will have other subscription goals in the future.
On a related note, maybe I am seeing things but this is another piece in a puzzle that looks like a new emphasis on revenue. Typically, when revenue’s importance rises vendors try to handle it through sales tools. This is different, it’s more about collecting than net new business and what I am seeing relates to billing, as here, but also revenue performance management (RPM).
This is just my guess because there’s no centralized group calling signals but it looks like the industry is renewing its emphasis on cash, perhaps in a response to the recent recession. The precipitating event of the recession, or one of them, was the lack of credit to enable mundane transactions to go on. Having or developing systems and processes that let an organization be more in control of its finances says to me that conventional bankers might find it less easy to do business with their best corporate customers in the future.
In fact, a niche that’s gone dormant that I have written about before —vendor financing — could be coming back to life. It makes sense too. Before there were general-purpose credit cards and other bank related forms of unsecure credit, there was vendor financing. It took many forms like a revolving account that you were invoiced on monthly or perhaps a less sophisticated layaway plan. Regardless, the vendor did the financing and collected the interest and the banker didn’t get much of that business.
Eventually, the convenience of bank financing won the day but then the bankers proved unreliable in a big way. They opted to gamble their assets in Wall Street rather than participate in conventional lending. It worked for awhile — not even a long time, really — and now the practices have been exposed. A market opportunity exists in vendor financing. It will not be satisfied by subscriptions or by individual vendor solutions overnight. But a gradual accretion of such solutions could spell a surprise down the road for bankers. Of course, I am not a finance guy, so what do I know. I just watch the marketplace.