In my last piece, I discussed with Tien Tzuo, CEO of Zuora, the vagaries of the subscription services market and how Wall Street analysts have a tough time dealing with subscription metrics. But already I feel a need to go beyond the original piece to add some depth to the piece.
The nub of the story, and it is not the first time I write about Wall Street and subscription metrics, is that many of the analysts use metrics that value conventional manufacturing era companies rather than subscription companies. The businesses are different and the ways you measure them need to be different too.
Just to boil it down a little, when you sell one thing one time and collect all the money then and there instead of repeatedly selling access to a company’s products or services, the money comes in slower and it has to be accounted for differently. If you value a subscription company for what it brings in this quarter only, as you would a conventional manufacturing company, you are only looking at a small fraction of the value that the subscription company generates. So, your analysis will be flawed as a result and the advice you give from that analysis won’t be worth much.
For many years we’ve agonized over the fixation on quarterly results which the analysts pore over to get a sense of how to advise investors. The problem with this is, of course, that no matter how small the time slice you analyze this way, it is rearward looking and it cannot tell you much about the future. It’s like steering a boat by only observing its wake.
But over the weekend I ran across this article in the New York Times by a Harvard Business School professor, Nancy F. Koehn. “Lincoln’s School of Management” is part of a flood of all things Lincoln this year in which we celebrate the 150th anniversary of the Emancipation Proclamation and it’s worth reading as a buttress to Tzuo’s analysis.
Tzuo is right in claiming that the analysts have the wrong toolset for the job of analyzing subscription companies, but the issue goes deeper — all the way to asking why we measure what we measure. One of his points, which the Lincoln article seems to back up is that doing business, not turning somersaults for Wall Street, should be the main emphasis of any business. It seems like common sense and when you put it this way you wonder why so few people appreciate it.
Companies that focus on their knitting rather than the analysts in the grandstands do better for customers, employees and shareholders over the long run. That’s what the Lincoln piece is about and it’s what Tzuo has been telling anyone who would listen as he has extolled the virtues of subscriptions.