After the markets closed on Friday, Zuora announced it had filed paperwork for an initial public offering (IPO) with the Securities and Exchange Commission (SEC). Although the quantity and price of the class A common shares has not been set, the company intends to trade on the New York Stock Exchange with the symbol ZUO. According to a press release from the company,
Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC are acting as the joint lead bookrunners for the proposed offering. Allen & Company LLC and Jefferies LLC are acting as bookrunners. Canaccord Genuity LLC and Needham & Company, LLC are acting as co-managers.
Zuora is one of many companies to spin out of Salesforce.com. Although the product, a billing and financial system tailored to the needs of businesses that sell subscriptions instead of conventional products and services, is home grown, CEO Tien Tzuo is a former CMO at Salesforce. Tzuo was one of the earliest employees at Salesforce and in one of his many jobs there oversaw development of an in-house billing system for subscriptions. In the early 2000s, subscription businesses were gaining a foothold and scoring their first successes, but the problem of billing dogged the whole industry.
Briefly, in the early days just as today, subscribers paid a monthly fee for each user and the headcount could fluctuate each month along with other variables. So, unlike product companies, the billing for subscription vendors could vary from month to month, a condition that conventional billing systems could not accommodate, at least not easily. A lot of manual effort went into monthly billing.
Zuora made its reputation as a vendor that could turn an end-of-month billing problem into a routine process. That enabled emerging subscription companies to focus their resources on building products and serving customers. It also made revenues more predictable, something that CEOs and their boards valued.
For more than a decade Zuora has grown as a private company raising well over $100 million from investors. The company has been valued at over one billion dollars making it one of a select group of companies known as Unicorns in Silicon Valley and the investment world. Unicorns get their name because they are start-ups having valuations over one billion dollars and because such companies are as rare as, well, unicorns.
Zuora’s valuation was helped by its understanding of subscription business tactics such as identifying and aggressively addressing potential customer churn and managing billings for future services. Customers might sign long term contracts and pay up front with an understanding that the payment would be drawn down over the term of a contract.
Having this unrecognized money in the bank or at least on the books made Zuora and other subscription companies’ future revenues easier to evaluate and predict and thus establish them as unicorns.
The market for subscriptions has grown with Zuora. Subscriptions are essentially a way to commoditize products enabling vendors to sell them in more bite-sized quantities. This in turn enables vendors to enlarge their markets without slashing core pricing. For example, earth moving equipment producers have started subscription businesses by providing a service of earth moving without requiring the purchase of heavy equipment. Depending on the job they might bill for cubic yards of material moved per day or tonnage. Regardless, the customer signs up for moved earth not bulldozers and the cost difference is considerable.
The subscription business model has been the wind in Zuora’s sails and there is little sign that the breeze is slacking. In fact, it is just beginning in many industries. Many vendors now find they have multiple channels to market that include traditional sales as well as subscription services. At the same time, they learn that the way that subscription billing, collections, and fiscal management occur differ. Zuora has become one of a few companies that can do the subscription billing work up front and then contribute financial information to the company’s traditional financial systems in ways that are intelligible to legacy accounting systems. It can thus function as the business’ system of record for subscriptions making it indispensable for many of them.
Look for the IPO to occur in the second quarter, most likely. There will be a quiet period before the event which is standard procedure. We’ll have to wait for the underwriters and the market to set the market value to understand how this unicorn’s billion-dollar valuation fares.
There is no better company to look at to get a sense of the future of technology in business and society than Zuora. This might surprise many people because companies like Oracle, Microsoft, and Salesforce might come to mind more readily. To one degree or another those companies feature their products and services, which are very important but Zuora talks about business models, and today that’s even more important.
It’s the business model that will determine the products and services companies will be able to provide and its behaviors around them. It is the frame for everything else the company does and what it considers important. Consider the dominant business model of the last century: manufacture millions of identical products and sell them through mass advertising.
We took pride in the standardization and uniformity of so many products able to provide the identical user experience. That was a good thing too because it made interchangeable parts a reality. If you manufacture anything that’s a big deal, but it also leads to thinking that all customers are interchangeable too and that’s not so good.
The old model was simple and direct but utterly without any meaning to the customer. Indeed we came to think of the customer as a mere consumer, one that takes from a huge but not unlimited supply and gives nothing back. A business model with consumers is unsustainable for the simple reason that sustainability demands that my spending is your revenue and vice versa. It is a round trip and it is what keeps economies strong. It is also the basis of Keynesian macro economic theory, which neo-conservatives often pooh-pooh but never seem to refute.
But Zuora’s messaging at Subscribed 2015, its user meeting held in San Francisco last week, is that business models are changing. We knew this but perhaps we had a less clear understanding of its implications. If you take personalization and customer experience, add to it my idea of Customer Science, and think of what the world’s business models might look like if you move from mass production to personalized subscription, you get a sense of the vision Tien Tzuo, Zuora’s CEO, was offering.
Tzuo’s keynote was smooth and well organized but relatively quotidian for its first half winding through nearly a decade’s worth of increasing progress in the subscription market. In the second half he wound up and delivered his big news, a 100 mile an hour fastball down the middle of the plate, a new product, Z-Insights. To simply call Z-Insights a new product though is to miss its importance. It extends the company’s idea of Relationship Business Management (RBM), brings more definition to the subscription economy, and extends the future of ERP squarely into the front office. Let me briefly unpack this.
The idea behind RBM is that to successfully transition from making millions of identical products to personalizing vendor-customer interactions, it helps a lot if you can provide your wares through subscriptions. Subscriptions provide the framework for capturing customer use and uptake data so that you can act authentically when involved in moments of truth with your customer. Prior to Subscribed 2015, I felt that RBM was more aspirational because it depended on vendors understanding (often guessing) what data to collect in order to act on its information content. There was a quality of dealing with known unknowns to borrow a Rumsfeld phrase. With Z-Insights there’s now a framework for all this and the software will do a good deal of the heavy lifting when it debuts later this year.
Much as I believe we’re in a subscription economy, I also know that the economy has successfully spawned a culture. Customers behave in the market and act towards vendors like subscribers—not because all vendors offer subscriptions but because nearly all customers have been exposed to subscriptions, to the ways that are superior to traditional relationships and they prefer the new culture for its greater intimacy and empowerment.
Z-Insights aims to provide vendors with the information they need to understand customers better so that the two can meet in moments of truth. By collecting and managing customer use and uptake data vendors will have solid understandings of what drives demand. Understanding demand is the first step to providing adequate supply in a world that now requires greater personalization. It’s not enough to know that a customer might have a need for a solution unless one also knows how that solution will affect the user.
Much has been written (by me and many others) about the demise of ERP but the context is important. I don’t see how to get away from ERP since it supports so many vital back office functions. But the ERP we inherited from the last century is evaporating in the sense that pieces that were once thought to be foundational are being supported in best of breed situations and connecting with front office systems. Take, for example, Xactly, which also had a user meeting this week at the other end of Market Street. Xactly focuses on incentive compensation, which was once thought to be a part of ERP through HR or HCM, but all of these functions are breaking off and aligning with the front office.
In a similar way, Zuora as a part of ERP that handles subscription billing, payments, and finance, is connecting more directly with front office CRM when it begins offering insights into customer behavior from essentially ERP data, which can drive alignment of the sales, marketing, and even support groups in the front office.
So, who owns the customer?
Many good questions on the minds at Subscribe could be reduced to who owns the customer in such a situation? We seem to default to existing answers like sales or marketing or possibly customer service in these circumstances. But really, it’s a jump ball, if we’re changing the vendor-customer paradigm is it necessarily true that the old structures will support the new framework? I suggest they won’t.
I believe Z-Insights is possibly the opening salvo in a process that may evolve a new department at least in larger enterprises. I am calling it the customer science department because it will be the place where all customer data consolidates and vendors identify customer needs. In essence it will be the place where the business practices sociology on its customers, understanding the structures that keep them engaged with the group (and the business or brand) and looking out for the indicators of disenchantment that lead to attrition as well as opportunities for cross-sells and up-sells. This will drive specific directions for sales, marketing and service groups.
This framework will enable everyone to take responsibility for coordinating aspects of the customer journey while a specific and neutral group has responsibility for customer knowledge. Note that ownership devolves into responsibility; its synonyms include bond, duty, accountability. As it should be.
Tzuo’s company Zuora, started the subscription billing market back when billing was a big and the only deal that SaaS and other subscription companies had to think about. But over the last few years Zuora has built out a product line that supports a vision of a changed marketplace dedicated to the values of what futurist Jeremy Rifkin calls the “collaborative commons.” In the commons it is more blessed to borrow, share, rent, and, yes, subscribe, than it is to buy, own, and hold.
Tzuo has been the leading proponent of an economy based on subscriptions and today’s speech will be seen as a turning point that took the subscription economy to the mainstream. If anything it was a victory speech, a time when Tzuo and his band of brothers and sisters could say, “See it worked.” But it was also a time that rededicated Zuora and its people to a greater vision of a subscription culture. Tzuo acknowledged as much even if he hasn’t used the words yet when he announced three new directions and offerings that will enable subscriptions’ glide into the mainstream.
The three major initiatives which will be detailed in tomorrow’s keynote include a Subscription Academy to teach the basics of subscription business to anyone who wants to engage including huge enterprises and startups as well as their people; subscription business blueprints which will help conventional businesses the clear the sizeable hump that all existing companies face in getting their conventional models into subscriptions; and finally, a community of subscription ninjas who will help to do what communities do best — share ideas, how to information, and paths to success.
Tzuo also introduced a new term for our business, RBM or Relationship Business Management that unites back office subscriptions with front office customer centricity, which has been a long time in coming. We saw a glimpse of this in Zach Nelson’s keynote at SuiteWorld a few weeks ago. NetSuite, Nelson’s cloud ERP company, is now making moves to inject back office data into the customer centricity, customer engagement mix but for my money, NetSuite is still a bit more tethered to conventional ERP, and Zuora is all about new era accounting and finance. Both get to roughly the same place given enough time but in my view Zuora might have an edge that synchronizes with ERP, even NetSuite but is not ERP.
Regardless, juxtapose this with Microsoft and an article from yesterday’s online Wall Street Journal in which Christopher Mims offers five advice points to the Microsoft CEO under a headline of “Advice to Microsoft’s Satya Nadella: Be More Brave.” I can hear Sara Bareilles warming up right now.
Microsoft is a company squarely in the zone Tzuo spoke of in his keynote, old by contemporary standards and more important, old by business model. Dealing with products sun setting and customers migrating away to other vendors; a company with a diverse product line that has lost its theme.
For me the most dramatic part of Tzuo’s keynote came when he invited David Wadhwani, SVP and GM of Adobe on stage to talk about his company’s gut wrenching switch moving its wildly popular Adobe Creative Suite to a subscription model from a conventional software licensing model. Talk about being brave, Adobe isn’t even a Zuora customer that I know of, Tzuo was swinging for the fences looking for the best ideas he could find and it was a good move.
The drama came when it was disclosed that Wall Street had an instant allergic reaction to that particular bit of Adobe news and investors began voting with their feet. Actually the drama came just after that, when the markets had closed and NASDAQ called the CEO to ask if it should suspend trading in the stock next day. That was enough to make anyone do a rethink but the answer was not simply damn the torpedoes, that would have been too easy. The answer was transparency and communication with employees, customers, and the financial press to deliver a message and a vision of a greater Adobe, one that was focused on customers and a better value chain with solid roots in the subscription culture.
It was one of the best stories I’d heard at a keynote and I’ve been covering these things for a while. Heck, my career as an analyst goes back to the foundations of the subscription economy, come to think of it. At any rate, that’s the message Nadella and most conventional business leaders need to hear, internalize, and evangelize. It’s the message of a new economy, new ways to market, sell, and service but also, new and more collaborative approaches to dealing with customers. Every recovery is led by a new, new thing and I think the subscription culture provides that.
It’s easy to be blinded by the obvious. It happens in business all the time, something is right in front of you but you attribute its effect to a different cause. I see this most typically when observing a paradigm shift — the reason for the shift is not always the obvious causative agent.
For example, Dell became a great producer of PC’s (despite the company’s recent shortcomings, which mirror the entire industry) by mastering the logistics of just in time inventory, highly flexible manufacturing techniques, and great logistics. You can call them up or go to their Website and custom design a machine perfect for your need and it will arrive at your door in a few days. The impressive bit is not that your PC got delivered but that millions of others also did at the same time. So while Dell looks like the master of PC manufacturing, they got there by mastering a lot of arcane disciplines related to logistics and inventory management.
Another example is McDonalds. The company built a template for a successful fast food outlet but you could say its major strength has been in franchising and real estate management.
A third example might be Salesforce.com. They weren’t the first CRM company on the street but they were the first to figure out how to deliver a competent business application across the Internet and they excelled at marketing it.
The unifying idea in all of this is not simply having a good idea but in being first to market and executing better than others in your space. The first mover advantage has been the stuff of legend and lore for a long time and there’s a great deal of validity to it, which is why it’s legendary.
Today I am seeing more first movers than I can ever remember, at least since the dotcom boom. As usual it’s not the obvious thing that accounts for a company’s success; it’s something else. Today, the hottest idea in business seems to be subscriptions and all manner of companies are trying their hands at the business model. Everywhere you look you see new subscription companies springing up, and not just to peddle some new software app either. There is a growing cohort of companies that deliver goods as a subscription service — from the obvious like wine on a monthly basis to the utilitarian like shaving supplies and clothing.
The commonality for all of these companies is not the quality or quantity of goods sold, though they are important, but the back office operations that make the subscription model possible. These companies all know, or they should, how important it is to get the customer’s order right but they are also fanatics about three other things, what I call imperatives. First, they are good at managing churn, the propensity of customers to leave a service over time. They measure churn and attrition but they also understand the average customer’s lifetime value and can forecast value remaining.
Second, they know where their recurring revenue comes from. Whether it’s cash in the bank or cash promised in a contract they can calculate to a high degree of certainty what’s in the pipeline once things like churn are factored in. Finally, they also have a keen grasp on the cost of revenue. A wise man once told me you can’t eat revenue, you can only eat margin and that idea is on full display in a subscription company. New customers require some handholding, so do older customers though not as much. But subscription companies are adept at understanding how much their revenue costs them and what the margin really is.
Now, it would be nice if everyone understood all of this but they don’t. There are lots of subscription companies that are not fanatics about these three imperatives and they are the companies most likely to not succeed. Wherever you look whether it’s Dell, McDonalds, or Salesforce, each company had a raft of competitors when they got started and the winners were the ones who understood their paradigm better than the rest and executed within it.
The expansion of the subscription business model is likely to continue for many years as new niches open up to subscription vendors. But the niches are tiny. There might be a lot of fast food companies today but as you look at the modern business landscape, the ideal niche for a subscription company seems to have room for only one vendor. There’s only one Amazon, one Facebook, and the number of solo market niches is growing. The company that owns the niche has the most descriptive name of the niche. Unlike department stores, the subscription companies quickly iterate on a model and once set, there’s little room for a competitor regardless of how big the market is.
So if you intend to own a market in a subscription world you only have one shot at it. You need to manage the back end operations like your life depends on it, because it does.
This week kicks off the third annual Zuora user meeting, Subscribed. Zuora is one of many companies providing billing, finance and payment solutions for subscription companies. They’ve made a science of mastering the big three imperatives and that mastery will be on display at the Intercontinental Hotel in San Francisco. A couple of weeks ago the venture capital world signaled its approval with the company’s $50 million series E tranche of funding. Stay tuned for more.
I have been writing about the subscription economy for five years and I have enjoyed my ringside seat following this latest and most important disruption of our time. The subscription business model, and not CRM per se, is the disruption that got Salesforce going and changed the front office software industry entirely.
Today we’re well beyond software as a service (SaaS) because just about everything you can think about can be delivered as a service, though some things may be best left out. Commodities like sheet steel might be one of those things to leave alone except that if you look at the supply chain and the just in time inventory approach that commodities producers all subscribe (no pun) to today, you realize that manufacturers subscribed to sheet metal services long before the term was coined.
Give some credit here to the Japanese who pioneered just in time, which I think is the grand dad of subscriptions.
The subscription economy and the transformations it is causing in our society have important down stream effects. As subscriptions have reached critical mass they are changing the ways customers think about their relationships with vendors.
Consider critical mass for a moment. It’s an apt term borrowed from atomic energy and it refers to a mass of fissile material of sufficient purity that chain reactions, in which one atom splits and activates another, can become self-sustaining. Critical mass doesn’t mean that all the atoms are radioactive at once, just that there are enough to make the reaction go on without added input. It’s like riding without training wheels.
I think that’s where we are in the subscription economy. We’ve been successful enough at promoting the benefits that adoption is no longer in doubt. No, everyone is not a subscriber today and every company is not a subscription vendor either, but there’s critical mass — subscriptions are here to stay — and that’s why I think it’s time to introduce the idea of the subscription culture.
All of the subscription culture’s impacts are not known yet but let me focus on one that is or can be. It’s the effect on customer attitudes and behaviors. At critical mass, customers, i.e. you and I, are more or less trained to expect certain things like the ability to change or adjust an order with ease, a vendor with a call center and website tuned to taking care of our needs without a great deal of hassle. Good or even great customer service. We have also become accustomed to sharing our ideas and experiences with other subscribers — good and bad. Most important, we really like the ability to pay as we go and to go, as in leave, when we please.
You can do a quick mental comparison of the subscription culture’s values with a traditional transactional business model and while traditional relationships still have advantages and their loyal supporters, there is no arguing about the impact that subscriptions are having on business.
That’s why I think we’re at critical mass for subscriptions and why the next step in the evolution of the subscription economy is the subscription culture. Even if a company has no interest in offering subscriptions and even if a customer prefers to make purchases as he or she has always made them, the culture is changing, some might say liberalizing (in the best sense of the term). Cultural norms are shifting in favor of the customer and subscriptions and customers are acting more and more like subscribers regardless of the model. Subscriptions may be the most important thing to affect CRM since, well, subscriptions. All this suggests that if you are a vendor, the subscription model is something you can’t ignore.
Next week, in San Francisco, I’ll be attending Subscribed, the annual Zuora user group meeting. I am on two panels, moderating one of them and I expect to learn a lot. Zuora is riding high in the wake of a successful series E funding round that raised another $50 million for the company. If you are out there, please find me, I’d love to understand your perspective on subscriptions.