Forbes has an interesting post by Tien Tzuo, CEO of Zuora and one of the leaders of the subscription revolution in which he discusses the coming of age of the subscription economy. Coming of age might sound like a contradiction to say the least—where has everyone been for the last couple of decades? Subscriptions are down and in a curious way, this is the point.
You ought to read the post almost as an echo of Mark Twain’s “Innocents Abroad” because it discusses Tzuo’s first encounter with international governmental organizations through his recent participation in the G20 meeting. To be very brief, the G20 is the group of the largest countries by economic output and its finance and political leaders gather annually to discuss where this planet and its economy are going. You might have also heard of the G7 or G8 (depending on whether or not Russia is misbehaving), which is an even more exclusive group.
So Tzuo was invited to participate in some sub-group meetings for business and technology in Antalya, Turkey, site of the recent confab. Now you have context. Tzuo is happy to report that the word “Internet” broke into the collective consciousness in the form of a communiqué from the recent meeting with an assist from him. That’s how long it can take for an idea that we have regarded as foundational for over two decades to become so mainstream that it gets included in the thinking of the G20.
This should surprise no one. When you are dealing with the planet’s economy and the 20 largest players in it, then it’s reasonable that only the biggest ideas bubble up and the Internet (specifically subscriptions) is finally breaking the surface. But the fact of this emergence suggests that the Internet and even subscriptions are no longer the disruptive innovation we’ve nurtured for much of our working lives.
The technology revolution ushered in a world of data driven business processes, information sharing, social media, big data, analytics, tiny computers now called devices, and use of the word “online” as a prefix as in online shopping. It is now so integral to what we do that it is its own paradigm, rapidly replacing older structures and business models like face-to-face commerce, print media, and (gulp!) customer loyalty. Online everything is having enormous impacts on how we live and travel and it is now safe to say that the revolution is over.
To be clear, we will not retreat into some dark age and technology will continue to drive the global economy for quite some time. But when you think of the power that you can hold in your hand in the form of a device today, you can see that it’s getting rather hard to make a technology product at a profit and there is an important lesson. Technology and information are commoditizing the way that everything else from textiles, to cars, to TV did. They are all important parts of the global economy today but none drives it.
We shouldn’t mourn information technology’s passing and as I said, technology is with us now for better or worse. Interestingly another disruption that’s been on the horizon for decades got a major boost over the weekend when the global community ratified an agreement summarizing individual nations’ efforts to stem carbon pollution and save the planet from overheating.
From here on the technologies that will have venture capitalists’ greatest attention will be those that reduce emissions, generate clean electricity, and even take carbon out of the atmosphere. This new paradigm will be the work of a generation and people in the job market today will increasingly feel the gravitational pull of energy and environment in information, finance, product development, sales and marketing, and much, much more.
The new paradigm will be heavily dependent on the information management structures and tools that the current generation—all of us—have wrought. It is a worthy legacy.
There is a business problem that comes up in the life of every company and these days, it seems that a lot of companies face it at once. It’s the question of how to transition from one business model to another without clobbering your current revenue flow. Even if a company’s executives really want to change their model the reality is that the current model, as clunky and outdated as it might seem, is still generating revenues and profits so there is always a faction that says, not yet.
You know where this goes. It’s the story of the boiled frog. It starts with the animal sitting in a pot of tepid water when the heat gets turned on and the frog slowly fades into drowsiness rather than realizing the danger and hopping out. Or so it goes. I have never run the experiment.
We pride ourselves on our large brains and all that they have created. In the last several millennia we’ve built tools and intellectual constructs that give us ways to think about all sorts of things. We’ve been so successful that according to some scientists by some point in 2014 human knowledge will be doubling about once every eleven hours.
Regardless, we still have a challenge when it comes to shifting business models and there’s nothing more trying today than figuring out how to shift from a model that makes and delivers things for a price, to a model that makes things but delivers them incrementally over time, a.k.a. the subscription model. That’s because collecting the money in the second transaction looks nothing like collecting it in the first. Along with the basic act of collecting goes a long list of other important issues like continuously nurturing customers so that they continue to consume what you are delivering.
There’s also accounting for the revenue flow. And then there’s the kicker — most businesses in this situation have decided to branch out into subscriptions while still maintaining their tried and true accounting systems. But the finance and accounting systems in place don’t “do” subscriptions very well, and that might be an overstatement.
But according to a recent study by The Economist magazine’s Intelligence Unit, the issue of collecting the money involved in subscription transactions was only the fourth biggest worry for executives surveyed. Number one was lack of internal co-ordination and second was the technical aspect as in how do we integrate these seemingly disparate ideas so that we can have a single, integrated, and accurate view of the business?
Well, the simple answer is that you need a system for that. Sometimes our big brains, inventiveness, and the sheer joy of tinkering prevent us from taking on solutions right in front of us. I am of course talking about the all to human propensity for using spreadsheets to plug all kinds of business problems instead of biting the bullet and getting a real system.
Many years ago companies used spreadsheets in lieu of CRM systems because they were readily at hand and enabled smart people to model sales processes within them. Alas, a model is not the thing itself and too often a model won’t stand up to volume, which is what happened with spreadsheets in CRM. Among their many shortcomings, spreadsheets don’t have databases and the models they represent are ill equipped for high volume operations.
Fast forward to the subscription economy and you can see the same trouble. Companies getting involved with the subscription model sometimes use spreadsheets as their sub-ledgers feeding into the company’s general purpose ERP system. This tends to work well enough for the company’s first few subscription customers but if the subscription model becomes successful, the spreadsheets can represent a not so happy, happy problem. At least the auditors aren’t happy.
This is preventable. The initial impulse to use spreadsheets as a sub-ledger perfectly models the situation many businesses find themselves in when they adopt subscriptions and they should be applauded for this. But no business can stay in spreadsheets for very long because it turns out that the subscription model is not simply a new way to bill customers.
Subscriptions, really are a business model meaning they have to be accounted for throughout the customer lifecycle including first discovery of a business problem, evaluation, the sale, product use, customer nurturing and bonding, and, most importantly, customer advocacy. It does no company any good whatsoever to do the early stages of the lifecycle well only to fall down on bonding — which too many companies do.
Subscribers expect their vendors to be with them in their moments of truth throughout their lifecycle journeys. The penalty for not being present is attrition and churn but the benefit for doing things right is renewal and advocacy. Luckily, subscriptions throw off a great deal of data that subscription vendors can analyze so that they can meet their customers within those moments of truth. But a spreadsheet won’t catch that data. A spreadsheet can contain today’s data but without a database it can’t tell you about yesterday so that you can predict tomorrow and successful subscriptions are all about predicting demand and meeting it.
This is where lifecycle subscription management systems come in. These systems started out as simple billing and payments solutions but the gap is widening between them and more advanced systems that provide a range of financial, accounting, and database services that make them appropriate for enterprises beginning the transition from conventional models to subscriptions. A system like Zuora, for example, provides the technical integration with popular ERP to enable an organization to co-ordinate its subscription business with its conventional model. That’s why I am advising my clients to evaluate solutions like Zuora as they take their first steps into the subscription economy.
Two numbers to keep in mind: $4.8208 billion and $5.25 billion. The first number is the 2013 revenue reported by Nash-Finch. According to Wikipedia and Fortune magazine, the company is based in Edina, Minnesota, near Minneapolis. It is involved in “Food distribution to private companies, primarily independent supermarkets, and military commissaries; and the operation of retail stores,” according to its Wikipedia page. According to Fortune, the company was number 498 on its list of 500 largest American companies in 2012. In 2013, it ranked number 500.
The second number is the low end of the fiscal year 2015 guidance just offered up by Salesforce.com in a conference call with analysts and a press release from earlier this week. If you can do a little math and draw a straight line or two, this data would suggest that a year from now Salesforce will occupy at least the number 500 position in Fortune’s vaunted list. But keep in mind that there are other companies out there with similar stories.
So this is no time to estimate chicks by counting eggs in the incubator, if you know what I mean. But for armchair prognosticators, it strongly suggests that absent a major stumble, well, you know. One thing that bolsters the company’s chances even more than my simple assumptions is the amount of uncounted (but NOT unaccounted) cash on the books. According to the press release, the company has:
- Deferred Revenue of $2.52 Billion, up 35% Year-Over-Year
- Unbilled Deferred Revenue of Approximately $4.50 Billion, up 29% Year-Over-Year
These measures are a testament to the power of the subscription model and one reason I have been such a fan of it. Subscription revenues get recognized as they are billed or, if the revenue is deferred, each month when the bills go out, the customer’s balance is dinged (that’s a technical term). Deferred revenue refers to cash on the books and in the bank that will be dinged. Unbilled deferred revenue refers to cash under contract that has not been either billed or collected because it is accounted for in a future fiscal year. Think of it as ding-able in the future.
No matter how you slice it, Salesforce has a lot of momentum with most recent Quarterly Revenue of $1.15 Billion, up 37% Year-Over-Year, a forecast that is amazing, and lots of cash in the bank. These results and the forecast show what a good job the company has done in building a repeatable business and the power of the subscription model when done right. I don’t think there will be any escaping the speculation about the Fortune 500 this year, which might put a little pressure on everyone at One Market Street in San Francisco. But by now, they’re used to it.
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.