subscription economy

  • April 17, 2013
  • Rodin_TheThinkerAbout ten years ago, I wrote a paper that predicted that analytics and social media would converge in CRM.  I believed this for two reasons.  First, I believed social media was inevitable though I had no idea what form it would take.  Facebook was not on my radar and might not have been invented yet, MySpace was something for kids, and Twitter had definitely not been invented yet.  But Plaxo and LinkedIn offered tantalizing glimpses of what was possible in business with social networking and I believed something of that ilk would eventually drive CRM.

    My second insight was that those social media applications would, of necessity, churn up a lot of data that would be useless unless we pushed it through an analyzer.  But if we did the pushing, like making sausage, out the other end would come valuable stuff.  What amazed me then and continues to amaze me is the rate at which knowledge is doubling thanks to all the data being churned up by social media.

    In 1982 Buckminster Fuller, the futurist, architect and some would say crank, published “Critical Path” a book in which he estimated knowledge doubling like this: Take all human knowledge up to the beginning of the Christian Era and call it one unit.  It took 1500 years for that knowledge to double.  Knowledge doubled again by 1750, the beginning of the Industrial Revolution, and again by 1900.

    Today, knowledge is doubling at a rate of between one and two years and IBM predicts doubling time will be down to 11 hours by 2014.

    All this doubling has many practical impacts the most important from my perspective is that those who don’t learn how to manage Big Data and the big information it generates in our own businesses will be toast.  Another of those impacts is that our ability to generate new knowledge is so prodigious that it will become increasingly difficult to generate knowledge that is unique to any person or business.

    We generate so much data today that it is possible by induction and other processes to infer knowledge that others might have and might think is proprietary.  On the other hand, though, failing at analysis will leave much information hidden in a morass of data.

    This all points to the need and even urgency attached to developing strategies for dealing with Big Data.  Last week at SugarCon 2013 in New York, I gave a talk on the subscription economy, one of my favorite topics.  In it I quoted some research from Gartner — by 2015 35% of the Fortune 2000 would derive some of their revenue from subscriptions.  And this from Aberdeen — only about twenty percent of companies studied had subscription businesses that appeared viable in that they had high customer satisfaction and renewals and their new contract value (NCV) was a positive number.

    So while Gartner might be right in its prognostication, it leaves much unsaid because revenue is not profit — even a bad subscription company can generate revenue while it’s going out of existence because it loses money on every transaction.

    So, how does a company become part of that top quintile?  Simple.  They develop metrics that they derive from customer data about use, payments and sentiment and relentlessly pursue them tying to optimize customer experience and involvement.  Needless to say, metrics are made possible by analytics — both the reporting kind and the predictive data modeling kind.

    There’s a boom happening in the analytics business these days with companies like GoodData, Totango and Gainsight among many others and I think smart companies — subscription or otherwise — ought to pay attention.

    That was my simple message at SugarCon but the not so simple reality is that most companies are not on the bandwagon yet.  They still don’t know what to do about Big Data and they aren’t exhibiting the needed curiosity to figure out that it’s time to get on track with subscriptions and analytics.

    Another finding that comes to me from long practical experience is that while knowledge might be doubling very quickly, our ability to apply it lags and I wonder and expect that a metric of new knowledge vs. applied knowledge would show a widening gap between what we know and what we do with it.

    Very shortly I’ll publish an ebook of interviews with five CMO’s of some fast growing companies.  What’s interesting about each of them is how these marketers have embraced Big Data and come up with strategies and metrics that better enable them to understand their businesses.  They know that the knowledge doubling that we are all caught up in isn’t some abstract concept, it affects them and it represents one of the great opportunities of this new century.

    Published: 7 years ago


    Believe it or not some things that happened in San Francisco last week had little to do with Dreamforce.  Amazing that I’m just getting to that now.  Some vendors in the Salesforce ecosystem used the proximity of mutual customers to hold their own user meetings and if they weren’t exactly meetings within meetings, they were meetings within the same week and location.

    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.

    Published: 8 years ago


    Recent economic news is lousy.  The Eurozone can’t seem to decide on the fundamental question the robber asked, “Your money or your life?” and indecision is cascading across the globe in the form of slow or no growth.  It’s as if we’re choosing slow death, boiling our own frog.  Unemployment rates are either high or higher and various policy and economic experts offer conflicting prescriptions that cause food fights among the proletariat.

    Hard to find credit and high debt loads are preventing most people and businesses from behaving as rational economic actors.  Rather than borrowing to start life and buying cars, housing, refrigerators and all the accoutrements of household formation, many recent graduates are moving back home.  They do this because the only jobs they can find might pay enough to enable them to pay off student loans but not enough to form households.

    The situation is much the same anywhere you look and the combined reluctance or inability to spend is a drag on recovery.  Your spending is my income while my spending is someone else’s and in an economy where upwards of 70 percent of spending is driven by consumers, this kind of slowdown is debilitating.

    I know what you are thinking.  Here’s comes a plea for more spending by government to perform what used to be called pump priming.  I won’t say that I am not thinking about it.  There was an article in the New York Times last week about the awful state of infrastructure in the U.S. and the need to repair it.  Those repairs would go a long way toward helping the economy recover.  The article suggested that we needed to spend about $2 trillion recommended by the American Society of Civil Engineers to do the job.

    But I am not going to go there because there is an alternative.  It’s not a perfect alternative but it might be good enough to get us off the dime and it’s one that most people reading this will understand.  It’s the subscription economy.

    We all know about subscriptions from things like software as a service.  You know the drill — pay a little each month for the use of a system rather than paying a lot up front for the right to own, house and feed a computer system.  We’re good with that and the success of cloud computing over the last dozen years is testament to the idea’s viability.

    But software is not the only thing to consider when you think about subscriptions.  We lease cars or participate in ZipCar systems, we have monthly contracts for cellular services that include the cost of our devices as well as the use of the network.  But there are many other kinds of subscription that are becoming fashionable, like fashion.  You can subscribe to your wardrobe or at least part of it and there’s almost no limit to the things you can get cheap through subscriptions.

    You might not think about it this way but if someone plows your driveway in the winter or cuts your lawn in the summer, you are subscribing to a service that keeps you from having to buy a snow blower or a lawn mower.

    Employing more subscriptions would function like an economic stimulus to the degree that they would stimulate demand among people who have a little money but not a lot and who can’t pull together the cash needed for an outright purchase.  That would increase demand and possibly drive employment.

    One of the big challenges in moving to a subscription economy is cultural.  Companies need to figure out how they can show positive results if the thing they once sold for a million bucks now only brings in $100,000 as an annual subscription.  The numbers are, of course, all over the map and this example is purely hypothetical.  But for sure, subscriptions will bring in less revenue regardless of whether that revenue represents profit or some other cost from a supplier.

    And shareholders are accustomed to getting their numbers a certain way and as many look at it, lower revenues mean lower profits and lower profits means a less valuable company on the stock market.  The tipping point comes when enough people realize that subscriptions are the new normal and that the higher margins of outright purchases may not be coming back.

    In spite of all this, subscriptions are making progress as an alternative business model.  Most frequently we see the subscription model used by startups but again, established companies are making progress bringing subscription products to market as well.

    So the infrastructure for a subscription is present from individual services to advanced billing and payments systems like Zuora.  Maybe in addition to cash mobs we should consider subscription mobs when we’re thinking globally and acting locally.  Just a thought.

    Published: 8 years ago


    You may remember the subscription economy from previous posts.  It’s one way to make sense of cloud computing and the many new and very different ways of doing business on the Internet.  We’re most familiar with software as a service and how different it is from conventional licenses; so familiar in fact that I don’t need to describe it for you here.

    But subscriptions as a way of doing business are just about everywhere; they’re not just in tech anymore.  For instance, if you want you can get your clothing as a subscription, and not only that but men (who as a group are notoriously lazy shoppers) have sites dedicated just to them.  You know the trend has arrived when something like men’s clothing is available as a subscription.

    Nonetheless, we’ve more or less glossed over everything below the waterline in this new approach to business.  It’s taken over ten years to get the idea of the subscription economy into our noggins but we’ve barely started internalizing what it takes to support it and report on it as a business.

    This all came into sharp focus for me last week when I reviewed Salesforce.com’s Q4 and annual earnings call with Tien Tzou, CEO of Zuora, a company that specializes in what’s below the subscriptions waterline.  Tzuo is also an alumnus of Salesforce having been its CMO and chief strategy officer before starting Zuora.

    As you know, subscriptions operate through customer payments on a periodic basis.  The industry became known by its per seat per month pricing but that doesn’t happen much these days because monthly billing got to be a challenge with big deals.  Today customers sign contracts for a fixed length of time and vendors invoice periodically.  A typical example might be a three-year contract with annual or quarterly billing.  Here’s where it gets interesting.

    The financial analysts and other Wall Street types—whom I have absolutely nothing in common with—are very accustomed to companies selling products rather than subscriptions and collecting the money net 30 or whatever and moving on to the next opportunity.  Subscriptions have a mixed bag of revenue recognition ideas that challenge the status quo (which has very well defined ways of recognizing revenue) significantly.  Product companies don’t have much when it comes to reliably forecasting future revenue streams but subscription companies are just bristling with information.

    Take the Salesforce revenue numbers from last week’s earnings call as an example, and here is where I am indebted to Tzuo for his insights:

    • Quarterly Revenue of $632 Million, up 38% Year-Over-Year
    • Full Year Revenue of $2.27 Billion, up 37% Year-Over-Year
    • Deferred Revenue of $1.38 Billion, up 48% Year-Over-Year
    • Unbilled Deferred Revenue of $2.2 Billion, up from $1.5 Billion Year-Over-Year

    If you are reading this (thank you very much) you have at least an intuitive understanding of revenue but deferred and deferred and unbilled revenue deserve explanation because who really cares about unbilled deferred revenue—isn’t that complete vapor?

    As Tien Tzuo said to me, think of it this way.  You do a deal with a company in which you agree to supply your service for three years for $36k or one thousand dollars per month and you agree to invoice once annually, in advance, for $12k.  At the very beginning then you have $24k in unbilled deferred revenue and, since you bill in advance, you also have $11k in deferred revenue and $1k in real live revenue which you can recognize.

    This $1k is also known as MRR or monthly recurring revenue.  Theoretically, if you add up all the MRRs on the books you can get very close to the forecast for the quarter.  But there’s also an upside possibility that you’ll sell something else.  If you do and you invoice for it, you’ll add to that pile of money.  Unfortunately, there is also a possibility that some of your MRR will go away either because the customer quit or because they didn’t renew or whatever.  We know this as churn so you really need to discount the MRR by the churn rate to get a better sense.  Life would be simpler if we could all agree on using a metric called the annual recurring revenue but, curiously, ARR doesn’t exist yet.

    So, all this has the potential to drive Wall Street types nuts.  They’re good with the $1k in MRR and they can tolerate the $11k in deferred revenue because it’s in hand, and the $24k in unbilled deferred revenue is sort of OK (but not really) because there’s a contract in place that defines the annual billings.  But this does have one effect that many financial types like—it smoothes out the revenue stream for months in advance.  Bookings might fluctuate but the monthly revenue stream should be rather predictable.

    Nevertheless, it’s bookings that have recently made some people skittish.  Sales has always been a lumpy affair.  Some months many deals get booked and other months not so much.  Early on the software industry trained its customers to wait until the end of the quarter to make purchases because that’s when they had leverage.  Finance guys didn’t like this but they got used to it.

    Today, the quarterly incentive is largely gone due to monthly recurring revenue but people still obsess over bookings.  What if bookings go down for a few months?  The logical answer is that future revenue would eventually feel it but it’s equally true that bookings could recover before real revenue took a hit in which case the fluctuation in bookings would not be seen.  Call it seasonality.

    Let’s summarize all this.  Salesforce has $1.38 billion in deferred revenue, which I presume will be realized in the next 12 months.  During that time they are advising us that the company will have revenues of between $2.92 and $2.95 billion.  This means that they have about 47 percent of next year in the bank.  They also have $2.2 billion under contract to be invoiced (unbilled and deferred) and some of this invoicing will be done at some point beyond the next year.  In the last quarter Salesforce had $632 million in revenue which grew at 38% year over year.  At some point in the next twelve months Salesforce could have a quarter in which it books revenue of $750 million which would give it a forward looking run rate of $3 billion.

    It’s still an uphill battle explaining revenue recognition and the difference between conventional companies and subscription companies but at least there’s a lot of black ink to do it with.

    Published: 8 years ago


    Welcome back to the discussion.

    At the top of my list is the idea of resiliency, which I consider a more practical form of sustainability for business.  We are now encountering a wave of sustainability-oriented ideas in the popular culture.  Forty miles per gallon is the new thirty, someone said and I have seen or heard the word sustainable used tentatively more than once in advertising.  But I wonder if sustainable is really what we should be shooting for.

    In too many cases, sustainable simply slows down our use of a resource to “sustainable” levels but in practice it is a moving target because it has to be tied to things like demand.  What is sustainable at one level may not be at a higher level.  And human nature being what it is, we tend to set a marker and promptly forget about it until something breaks revealing that our sustainable idea is not so any longer.

    But the big issue with sustainability is that it often does not engage a new paradigm.  It simply extends an older and frequently decrepit one.  Resilience puts us on a new track with an unlimited future and that’s where I prefer to be.

    All this has a practical business and CRM side.  I was first impressed with the idea of resiliency while perusing “The Post Carbon Reader”  a compilation of essays by writers with serious cred on topics like energy, land and water use and much more.  What got my attention, and what inspires this essay, was a report issued by the City of Portland, OR, dealing with how to make that city more resilient to the long term effects of Peak Oil.

    Now, I won’t go into what Portland did in any great detail but the very existence of the report made me ask what for me is the obvious question: Do our businesses have resiliency strategies and plans?  Bet not.  But can anyone afford not to have a plan?  If a regional or city government can develop a resiliency plan ought we not do the same for our businesses?

    I will probably add to my list of ideas for making businesses resilient over time but for starters, here are three things any, or at least most, businesses can do to help ensure profits in unsure economic times.  Of course, they are all mediated by first class front office technologies.  How could it be otherwise?

    Engage in the Subscription Economy

    We’ll see some form of economic bounce this year because there is an election looming, that’s my hunch backed up by much historic data.  The bounce might make credit easier to access but the demand for credit — to grow the economy and its availability — may not be well matched.  In lieu of licenses and product sales, we need to think again about subscriptions.  There is some evidence that customers are doing just that.

    I think Oracle’s missed revenues in its last reporting period suggest that we’ve hit a turning point in the conventional licensed software business.  I believe the demand for subscriptions is accelerating, so let’s give the market what it is asking for.

    I have often said that the two great sticking points for moving more aggressively to subscriptions include changes to corporate business models and to the billing systems companies use.  The business model change is a big and ugly issue because it alters revenue recognition and can upset valuations, which investors abhor for good reasons.

    But there is no time like a recession, or whatever euphemisms you use to describe this era, for making a fundamental change like this because the economy is roughly synchronized in a trough.  Much of your competition is in the same predicament and everyone understands this and that makes this year a great time for the herd to move as one to subscriptions.

    As for the billing system, well there’s plenty of evidence that there are companies like Zuora, Aria and many others that can help you through the billing system and billing model change.

    There’s no time like now for this kind of action and subscriptions will make your business more resilient, no question.

    Deploy UCS

    UCS or unified communications systems make a lot of sense for anyone thinking about a resilience strategy.  Good UCSs combine calendars, email, text, voice (VoIP) and video in a variety of ways that are dirt-cheap and that enable vendors to efficiently communicate with customers.  The UCS is also part of a must-have system of internal communications for many companies.  A UCS does its work over the Internet, which is far less expensive than going through the phone company.  It’s not a complete strategy because you still need an employee social network but it is a necessary step on your way to becoming a more resilient company.

    Ramp Up Your Cloud, Social and Mobile Strategies

    Part of cloud and mobile is implied in the above, but not completely.  Cloud and mobile are inextricably tied up with social.  Subscriptions are best driven by cloud technologies and they enable more flexibility and economy in deploying mobility strategies, not to mention the viral impact on and by social.  A good cloud, mobile and social strategy will open up your possibilities for deploying expensive and precious resources, like people, that face customers.

    While we’re on the subject a cloud-social-mobile (closobile?) investment opens up other possibilities for involving customers in self-help communities with attendant savings.

    Much of this isn’t new but it bears repeating because these ideas happen to work, they have not been universally adopted yet and importantly, because this is the season for implementing plans and resolutions.

    Happy New Year!

    Published: 9 years ago