The Subscription Economy
There are multiple ideas about the shape of the future competing for primacy in the electronic village. I am pushing on sustainability but another idea that I really like is called the subscription economy championed most vociferously by Tien Tzuo, CEO of Zuora. Subscriptions fit well into Tzuo’s company plan since his company has a billing and payments system for subscription purchases. But there’s more to it than a self-serving motto and I think the subscription idea feeds nicely into the idea of sustainability.
When we talk about the subscription economy it means that an increasing number of products and services are available today through subscription rather than outright purchase. It’s easy to see through examples like car leasing and cell phone use. When you lease a car you are actually subscribing to a certain use level for a time. At the end of the lease you return the car and either get another lease or possibly purchase a car outright.
With a cell phone you buy a package that leaves you with ownership of the phone but a mandatory period of subscription to the service. Go over your subscription rate and you pay more. At the end of the agreement most carriers let you continue month to month, until you want or need another phone and the process starts again.
Car leases look just like a car purchase in that you get a monthly bill though that bill is lower than it would be if you had bought the car. And we’ve been accustomed to buying phone service for over a century so there’s no drama in the cell bill except for the itemization, if you read it.
Finally as a third example, there’s SaaS computing and we all know how that works. But what we don’t see in any of these cases is the significant back office processing that comes with a subscription economy. With cars and cell phones it’s no big deal because even though these are subscriptions, they are so tightly controlled that the subscription functions just like a purchase. That’s true in billing for a car lease and, except for overages on your cell bill, it holds there too.
SaaS is a different kettle of fish for several reasons. First the usage costs are low and here’s the key — customers have broad latitude in changing their subscriptions which is very unlike the car and cell examples. A hallmark of SaaS is that customers can change their configuration almost at will, which has direct impact on billing. The overhead involved in billing can be substantial especially if a bill is incorrect because expensive human labor is needed to make corrections.
Unfortunately, the billing systems that work well for relatively static business processes that include purchases and even leases, work poorly in the subscription economy. The economic challenge is that if the overhead involved in making billing correct exceeds the cost of the good sold (or subscribed to) then you can’t have a thriving or even sustainable business. That means the billing system is potentially an inhibitor of innovation. If you ask yourself what’s preventing wide scale subscription for more products and services that we use every day, part of the answer is likely the cost of billing.
Take newspapers and periodicals for instance. You might think of newspapers giving away their content on the Internet as silly and you might be right. But content is one of those things whose demand is so variable that charging for it might cost more than the product itself. In a way, when a paper gives you its content gratis, it is acknowledging that it would lose money selling it to you.
Until recently, giving content away on web sites was OK because a large portion of print media revenue comes not from subscriptions but from advertisers. But advertisers have been deserting print so the issue of charging for content has taken on new urgency.
Of course content is just one example. Other examples are waiting in the wings for a business model that enables them to become real and profitable. Some of those examples can even be found in conventional areas like SaaS. For instance, a SaaS company may be able to offer more permutations of its products to fit more market niches but because those niches may be rather thin and because the SaaS company may still be using a conventional billing system, the SaaS company cannot profitably exploit the niche.
Then there’s the green issue. Take a company like Brighter Place the group started by Shai Agassi to build networks of charging stations for electric cars. The idea is that you can subscribe to car battery services, which include battery charging or outright swaps the same way you subscribe to cell phone service. That’s a major part of an emerging subscription economy. So far entire countries including Israel and Denmark, the state of Hawaii and the city of San Francisco have enlisted in this new idea. But the idea will need a very scalable billing system to make everything work.
Maybe that’s a bit complicated but the net of this discussion is that subscriptions can play a greater role in our economy if only we can get the business model right and that starts with back office overhead. In case you are wondering why that’s important, consider this: as the cost of a product declines more people can afford it and the potential market size grows. That was the beauty of SaaS when it debuted and it’s still true. In fact, in a down economy, a price drop caused by subscriptions is equivalent to a big stimulus.
So, Zuora introduced Z-Commerce for the Cloud last week. It’s a solution designed to address many of the issues that so far hinder broader acceptance of things delivered as subscriptions. The product is delivered as a SaaS solution — no surprise there — and there is good reason in my mind to believe that the subscription economy is one of those things that will contribute greatly to more sustainable business processes. And that’s something we’ll all need down the road.
CloudForce San Jose
Tell them what you are going to say, say it and then tell them what you told them. The rule of three, that’s the Salesforce.com approach to its market outreach and it has served them well over the last decade. Tuesday was part three of the Chatter cycle in which the company culminated nearly a year of activity by announcing general availability of the product. Today they’ll start working on what to say at Dreamforce something they’ll be talking about for 2011. I can summarize the importance of the announcement, which was held at the San Jose Convention Center, can in several points.
First, the timeline of Chatter’s development is an important proof point for Force.com. In only eight months, Salesforce went from concept to general availability. There may be other companies that have delivered a product in eight months or less but the importance here is that Salesforce was not building a common database application and they were not simply deploying something that was already built.
They were iterating and, in part, inventing a new style of application so I expect there was a lot of iterative prototyping going on. That’s a bit more overhead and speaks well to the platform’s robustness. I am surprised no one made a big deal about the platform during this announcement. Maybe it was a missed opportunity or maybe something had to be left unsaid or we’d still be there.
Second, while Salesforce had other social applications to cull ideas from such as Facebook, Chatter is different because it is focused on the business organization as opposed to personal relationships. Chatter enables a higher degree of collaboration than earlier purpose built tools or earlier product categories like email. At lunch press members asked CEO Marc Benioff if he had hard numbers and we were told that numbers would be forthcoming.
That’s not surprising given that Tuesday was the first day of general availability. But the company said it was eating its own dog food and that six thousand companies were now Chatter enabled so I would expect some data soon. Caveat: like they say about mileage, yours may vary.
The interesting thing to me and the real power of Chatter is that as a collaboration tool it integrates — no intercalates — itself with a business application. Rather than asking you to use a separate piece of software for the purpose of collaboration, Chatter is built into the application and thus brings collaboration to the user. The impact is clear. Collaboration can now be something that’s an accepted part of business practice rather than something you formally do with a separate tool at a prescribed time. The result should be the savings we asked about at lunch.
I think collaboration has a strong role to play in sustainability — not for green reasons but because better communication leads to better understanding and if you can drive understanding through software it makes other forms of communication less necessary. Ever since humans domesticated the horse the preferred mode of communication and collaboration — which literally means working together — was to be face to face or in the same room. With collaboration tools it’s now possible to work together apart, if you follow my drift.
The benefit this provides to modern business is huge, of course. But it also means a renewed emphasis on mobility which Salesforce was only too happy to promote. Salesforce has done a lot to ensure its applications — including Chatter — run on popular mobile platforms including BlackBerry devices, iPhones and now the iPad. Not content to simply run in a browser on the iPad, Benioff announced and showed an iPad native application to be available later this year.
Of course, with mobility and collaboration workers can be anywhere as long as they have Internet access and they can participate and be relevant to any internal business process and that will be increasingly important if and when we see fuel prices head north again.
So forgive me if this seems like it’s rambling but if you’ve been here before you know the themes. There are a lot of ideas to sum up. Chatter is released, it represents the start of the collaboration era, not because Salesforce was the first to bring a product to market but because it was very early to figure out how to embed it in real business processes. Collaboration is essential to making our business processes more sustainable and that’s a theme we’ll be living with for the rest of our lives.
Noteworthy: Zuora and the Subscription Economy
Zuora is touting a new idea called the subscription economy. It’s not radical and others might have had the idea before but I was not aware of it. The subscription economy is just what it sounds like and it reiterates the reality we see all around us. Today, the company announced the release of its flagship product, Z-Commerce for the Cloud, at GigaOM’s Structure 2010 event in San Francisco.
Z-Commerce for the Cloud targets the growing market for all things delivered by subscription rather than through the common ownership model. For decades we’ve been moving to a subscription economy starting at least with leasing cars and getting our cell phones and services in monthly increments. The trend accelerated ten years ago with on-demand and later SaaS and Cloud Computing.
When you lease a car the overhead incurred by the vendor in setting up the lease and billing you monthly is not great and hardly differs from a conventional loan. But as subscriptions penetrate the market and support smaller and smaller transactions, it becomes difficult to justify the cost of billing and the reality that customers can change their minds regarding the subscription. Often. Get a monthly bill wrong and the best you can hope for is losing money, the worst is having an unhappy customer.
SaaS seems to be the tipping point for conventional billing. In other words, a SaaS company can afford to bill conventionally but the balance sheet would be better if it didn’t. Smaller transactions can’t even be considered with conventional billing. You might say that newspapers and magazines run on a conventional subscription and billing model but that would be a bad example. Publishers are losing their shirts these days largely because ad revenues are eroding and those revenues once supported the conventional back office. No more.
The billing tipping point should mean that there are as yet unexploited niches for small dollar subscriptions that could not be contemplated according to the old billing model. What they are is a mystery at this point but I am sure the marketplace will take advantage of this new capability.
So, long story short, clean transactions and fast and efficient maintenance are necessary to push the subscription economy ahead and that’s the significance of Zuora’s announcement today. If you want to confine subscriptions to the tech sector, that’s $3.4 trillion and if you reasonably ask if it applies to the rest of the $16 or so trillion US economy you see the importance of getting the billing question answered before we proceed further into this century.
I am not going to reiterate the press release, you can find it easy enough, The analysis of this announcement’s significance is all I am after and I think you’d agree that it really is significant.
Kudos to Benioff
An important side note to the Chatter confab in San Jose. Today we learned that Marc Benioff and his wife have donated one hundred million dollars to the University of California San Francisco Medical Center. UCSF is building a children’s hospital which will bear Benioff’s name and the hospital will be integrated with a one million square foot research center, a women’s hospital and a cancer hospital. Good on you Marc. What a nice gesture.
Now, let’s see, if he’s keeping to form he donated one per cent of his wealth and if you do the math you get, oh what difference does it make?