Re-imagining Business Processes Drives First Mover Advantage
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.
The Subscription Culture
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.
Zuora Takes Cash
Subscription billing and payments pioneer, Zuora, today announced its series E funding. The tranche of $50 million brings the company’s total capital investments to $132.5 million, much of it spent on sales and marketing. This convinces me that the hardest thing about being a disruptive technology is the cost of getting the idea into people’s heads. Salesforce spent a similar amount on sales and marketing while getting going and it’s reasonable to say that this is now the formula.
The really good news is that all of the company’s original investors have ponied up repeatedly to buttress the company and that includes individuals like Dave Duffield founder and co-CEO of Workday and Marc Benioff, co-founder and CEO of Salesforce.com as well as conventional venture companies like Benchmark Capital, Greylock Partners, Redpoint Ventures, Shasta Ventures, Tenaya Capital. You could say the smart money is on Zuora in anticipation of an IPO at some undisclosed point in the future.
All the cash gives the company a cushion that translates as an IPO someday but on its terms, there’s no rush. And the financial news and prognostications are nice but the underlying fundamentals say even more. They say that Zuora got it right in 2007 when the company identified the back office of subscription companies as the place most in need of help to make the model work. Co-founder and CEO Tien Tzuo had an intuitive understanding of the back office having seen first hand what a fast growing subscription company had to deal with each month getting its billing done right.
At Salesforce, Tzuo was chief strategy officer and, when he recognized the need, he built a sort of version one of what would become Zuora but he didn’t stop with billing at Zuora. The company now offers solutions for payments, or commerce, and finance but even more than this, it is innovating around the idea that the subscription business model is fundamentally different from the conventional product or service models we’ve lived with since the Medici invented double entry bookkeeping. Keeping an eye on the business model means the company will be able to innovate around the core idea for a long time and that’s a good thing.
Zuora makes its mark taking the broad view, which is in part why I like them. The response from the market and the venture community tells me they’ve struck a nerve and the fact that there are many other companies plying the same waters tells me this is important.
So, good on you Zuora. I am looking forward to speaking at their user conference in a couple weeks in San Francisco. It should be quite a party.
Microsoft Buys Nokia, Gets Elop Back
With a nod and a wink Microsoft announced it was buying most of Nokia today getting its own mobile phone platform to further its ambitions in that space. It also got ex-Microsoft executive, Stephen Elop back into the fold. Elop had left Microsoft to head up Nokia and when current CEO Steven Ballmer announced recently that he would retire, Elop was among the people cited as possible successors. At the time though, Elop’s tenure at Nokia looked to be a significant barrier. It’s amazing how many hurdles $7.2 billion can clear away.
So the question immediately becomes, does Elop want the job? Does the board want Elop or was the acquisition just more business as usual? Well, with or without Elop as the future Microsoft CEO, the deal makes sense. Microsoft’s Windows Mobile has not seen great adoption despite its really attractive and intuitive interface. Google’s Android leads the parade (it’s hard to argue with free) and Apple’s iOS is the defacto standard in the industry which makes it difficult for Microsoft to play catch-up, a game that’s not second nature to it to begin with.
So what’s the net?
Assume Elop is the future face of Microsoft keynotes. A blind horse knows the future of computing is in wireless, handheld devices and the cloud. But too much has been made in recent years of the device and not much consideration has been given to the huge changes ahead in the data center to make the magic in the device really work.
The device is the new 3270, smarter for sure and much smaller, but it’s a relatively dumb terminal at the end of an extensive network of satellites, storage, and brute force processing. Given this, success in the cloud will be governed by more than whose OS is in your hand. It will be about the back end. Larry Ellison understands this and his team is working overtime to build the plumbing for the new edifice. And there are loads of vendors like the Benioff Company that are staking a lot on the front office and the device while doing a fair bit in the back of the house too.
But Salesforce may be to the cloud what Apple was for a long time to the desktop. Elegant, forward thinking, entrepreneurial — pick a half dozen more nice adjectives here. This doesn’t mean Salesforce is destined to have a measly five percent share of the market, Benioff is too smart for that. But it does mean there is still an open niche in the cloud for a Microsoft-like competitor that understands the front and the back end of the transaction and that wears the mantle of trust so assiduously cultivated by IBM in the business world. It might as well be Microsoft.
So, given all that, I look at the Elop acquisition, er, I mean Nokia actually, and I think this could work. Elop’s understanding of Microsoft and his recent baptism in mobile might be a good combo in the new Microsoft chief.
There are other issues well beyond those, however. The new CEO at Microsoft will need to be a consensus maker and someone who can break down the fiefdoms that long time Microsoft executives have constructed. The company has to get lean and to check its multiple egos before it is ready to take on the changed market — from somewhere that’s not the bottom but certainly is not the top either. Also, it’s no guarantee that you can take the once great phone maker, Nokia, and the one time titan of the desktop and get anything more than mush when you put them together. Elop, or whoever gets the nod will need to be a leader of Bill Clinton proportions.
