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.
Zuora held a successful user meeting just prior to Dreamforce that I attended and I was most impressed by its size and the new product introductions. The event, “Subscribed,” is a couple of years old in name but older than that in practice and the company packed a lot of enthusiastic customers and partners into the Ritz Carlton. The choice of location was smart, in the financial district at the other end of town from the Moscone Center, which gave some distinction from the larger event later in the week. But my greatest interest was in product messaging.
Zuora CEO, Tien Tzuo, filled the last slot (for now) in his product universe and deployed a nifty description to how the product line comes together and why it matters. The product focus was on Z-Finance, which joined Z-Billing and Z-Commerce in a holy trinity of back office applications aimed at subscription companies. The description is “Subscription Business Management,” which I like as it elevates the discussion from simply how do I do my subscription billing to how do I manage a subscription business which is much different from a product business — especially when the subscription business is inside of the conventional business.
Z-Finance gives financial executives the tools they need to examine their subscription data and manage their businesses accordingly while being able to dump the proceeds into the conventional GL in a way that makes sense to the traditional side of the house. It’s smart really and no simply feat. So now Zuora provides its customers with the ability to simply and quickly configure, administer, bill, collect, analyze and reconcile the subscription business.
The importance of Z-Finance is two fold. There is no doubt that pure subscription companies would need it sooner or later, but Z-Finance is also a key piece of technology that will help conventional companies exploring subscriptions to understand better how subscriptions fit into their business models. This expands Zuora’s market significantly, so bravo for Zuora.
Truth check — Zuora is a client and I recently published a small book, “The Subscription Economy—How Subscriptions Improve Business.” Fortunately, my messaging was congruent.
Oh bother. They’re at it again. I’m on the long flight from Boston to Dreamforce in San Francisco and I have a lot of time to think. First stop is the Zuora user group meeting “Subscribed” happening at the Ritz Carlton. It’s Zuora’s second bash like this and it’s nice to see them doing well with a great idea like subscription billing.
I am on a Virgin flight, which is my choice for these long hauls. The plane is full of Dreamforce attendees and the excitement is palpable.
It’s nice to have the option of WiFi and power for my computer so that I can work. Signing onto the go-go inflight wireless service is always something of a Gumpian box of chocolates, you never know what THEY’RE going to get and today is no exception.
Back in July I wrote a post on a similar Virgin flight titled, “Like a Virgin” that delved into the murky world of product pricing and it looks like this might become a thing for me because I am doing my own little inflation study on the price of WiFi. If you need to catch up on my musings, you can click the link but a synopsis of my study from the original post is here:
Thanks to go-go’s record keeping, I am able to access my account history. It seems in 2010, the first time I bought the service, I paid $12.95. The cost actually went down for several flights after that either because they were running a special to get people hooked or, and this is a dim memory, someone was giving free or discounted service to all passengers during the holidays.
At any rate, my point is that the price of WiFi has gone up dramatically over less than two years. Today I paid $17.95 for the same service I once paid $9.95 for. Off the base of $9.95 we’re looking at an 80% increase and divided over two years that produces a 40% inflation rate. Yikes! Looks like the increasing cost of Internet is tracking the plane’s altitude.
Ok, so back to today. Want to guess what WiFi costs today? Today I plunked down $34.95 for a month because I am going to do this a lot this month, but a single day has a cost of $24.95 and a single day is the benchmark. Going from $17.95 to $24.95 is a rise of a bit more than 33%. Presumably they were making money at $17.95 and now that the equipment is fully amortized the additional fee is pure profit.
I know, the fee indirectly includes the free electricity for my computer but I prefer to think of it as something they throw in for the cost of a ticket since I could use the plug for anything else like charging my phone. But if I am charging a phone and not using WiFi then am I technically freeloading on the WiFi users? It gets complicated.
At any rate I think I’d have to go back to 2010 when I started using WiFi on these flights. If you go back to the July post you see that I started paying $12.95 then it went to $9.95 before beginning its inexorable climb. So take your pick. I have to keep my socks on here so my math might be off but it looks like at least an inflation rate of 100% over two years. But more interestingly, I know I am not paying double the cost of a ticket that I did in 2010 even though jet fuel is up considerably in that time. Again some quick math with shoes on. The cost of WiFi is now roughly equal to 3.8% of the ticket, not bad at all or about six gallons of jet fuel.
Ok, but like an economist I know there is more than one way to calculate this inflation rate. Consider this: The cost of WiFi is so high now that they’ve come up with a new entry point, a ten dollar cost for one hour of service. So that’s ten bucks an hour but when this started in 2010 it was ten dollars for the whole six hour flight or about $1.50 per hour. If you use 12.95 as the basis then the cost per hour is more but no matter, this is back of the envelope stuff. But the change suggests an inflation rate of 600%. Six hundred percent! Oops! I really meant 300% per year over two years. Feel better? I do.
Well enough of this I am signing off from somewhere over Wisconsin traveling at 422 mph at an altitude of 36,199 feet. It’s -73 degrees outside and $24.95 inside.
It’s a slow week with lots of people on vacation. I am on a plane heading to San Francisco to shoot a video with Zuora but judging by the number of screaming children under five on the plane I would say that I am in the minority on this one. No matter, they’re cute and well behaved and remind me of a time when I burned a bunch of miles taking the family on a cross-country trip. As I recall, we sat in first class and one of my boys who was in the process of toilet training liked to stand on his head in his seat. Takeoffs and landings were an especially challenging part of the trip. I’ll spare you the fond memories of the other thing.
But I am flying and writing today and wondering about inflation of all things. You might find that odd given the state of the economy and the official numbers coming out of Washington and other world capitals but maybe it isn’t.
Inflation is measured as the cost of a market basket of goods and services measured and recorded on a monthly basis. Naturally, there are numerous games we can play with inflation by simply manipulating the market basket. One of the favorite tricks of pundits and prognosticators is the exclusion. That’s where someone says that for instance, energy and food are so volatile that we shouldn’t count them because their volatility skews the numbers.
But what’s the point of having the market basket if you aren’t going to compare apples? When they take the volatiles out they skew the picture just as sure as they do when they leave them in but with one critical difference. If energy prices rise or if food does the same, it does me no good to know that inflation is somehow supposedly under control if I don’t have any money left at the end of the month because I spent more on the staples of life than I did the month before.
A few years ago one administration, I forget who was president, started substituting things in the market basket a construct (and a data record) that went back to the New Deal. Here’s how they worked it. Say beef prices went up because Argentina was suddenly exporting less and the American beef industry moved to sell more product internationally leaving less for domestic demand. The inflation watchdogs would substitute chicken in the market basket thinking that this is what savvy consumers might do if beef prices rose too much too fast. The result was stable inflation rather than the reality that higher beef prices contributed to that penniless feeling you came home from the grocery store with.
Finally, the market basket is far from all encompassing so there are plenty of places where prices rise but their rise does not register. I remember reading about a guy who kept his own version of the market basket and based it on the things that were most important to him. One of those things was the cost of a milkshake at the local dairy bar. I don’t recall all the details but his results were at variance, as they say in economic speak, to the “real” inflation numbers.
In that spirit I would like to offer an item for the basket and, who knows, I may be starting my own basket. It’s the price of wireless internet service on a Virgin flight, which uses the go-go service. Thanks to go-go’s record keeping, I am able to access mu account history. It seems in 2010, the first time I bought the service I paid $12.95. The cost actually went down for several flights after that either because they were running a special to get people hooked or, and this is a dim memory, someone was giving free or discounted service to all passengers during the holidays.
At any rate, my point is that the price of WiFi has gone up dramatically over less than two years. Today I paid $17.95 for the same service I once paid $9.95 for. Off the base of $9.95 we’re looking at an 80% increase and divided over two years that produces a 40% inflation rate. Yikes! Looks like the increasing cost of internet is tracking the plane’s altitude.
Economists would probably just call this pricing the asset to its utility. You pay a small-ish price for connectivity and you get to have the illusion of being productive while flying 500 mph across the continent. But even as the price of connecting has increased, the service has deteriorated. More people on the router means slower connections and increasing frustration.
But more to the point there is the issue of the customer. Am I simply a consumer who the airline seeks to extract money from as quickly as possible or am I a customer with whom they expect to develop and nurture a long-term relationship?
To be fair much of Virgin’s messaging to me by the way they treat me suggests they think of me as a customer but that’s just the business model showing. The corporate urge to promote consumerism is strong and I would say not fully domesticated. So we have the market basket of services and they we have those special things they wouldn’t dream of including in the base package. Perhaps it’s my age and experience showing but I don’t trust corporations much any more.