At the recent Zuora Subscribed17 London event, Founder and CEO Tien Tzuo took about 10 minutes to demonstrate that over the last 12 months the subscription economy has grown considerably and assert that Zuora is committed to supporting organizations that make the transition to such a business model. The numbers Tzuo presented were impressive but more striking still was the understanding that emerged during the event and at a lunch for analysts of the nature of the transition companies are going through: software companies moving from on-premises to cloud-based models, a major industrial vehicles-for-hire company moving from renting out machines to providing subscription-based services so the organization hiring the vehicles knows exactly what the machines are up to and how to get best value out of them, a car manufacturer moving to renting cars on a subscription basis based on miles driven, a utility company increasingly automating people’s homes, and a real estate firm providing access to legal advice and mortgage experts as needed.
At the event, I also chatted with executives from a telecom company providing services on a subscription and usage basis and it reminded me of the time when I was responsible for selling and delivering a customer and care billing system for emerging cell phone operators – perhaps the subscription economy is not quite as revolutionary as Tzuo presents. However, it is growing rapidly; the range of services that are available is expanding and changing our lives dramatically. At its core is the internet; using it, companies are providing what not so long ago were physical products now as on-demand services – music and video downloads are two often-cited examples.
I also noticed that Tzuo’s presentation had more down-to-earth content than what I remember from a year ago. The company, in his words, is focused on the “order-to-cash process” – the steps from taking and maintaining customers’ orders, to enabling the services, to capturing usage, pricing that usage and other services to produce bills, and collecting payments.
To support these requirements, the company recently released its “Zuora Central Platform”. This has six components – a Subscription Orders Engine, Pricing Engine, Rating Engine, Subscription Accounting Engine, Global Payments Engine and Subscription Metrics Engine. Each of these components does what the name suggests – takes orders, prices services, rates usage, etc. Each of course supports a lot of detailed capabilities that I won’t cover in this piece but there are a few highlights.
Subscription services are by their nature more complex than physical products. For this reason, the platform includes capabilities that allow organizations to create a catalog of services that are sold for a contracted period, can include one-off, recurring, and usage-based charges, and are typically sold in bundles, often with various degrees of discount. The rating engine is unique to subscription billing and includes capabilities to capture usage of the service – calls made, music downloaded, miles driven – and factor these in for billing based on the agreed contract. The subscription metrics engine generates metrics related to all aspects of subscription billing, such as orders, payments and, importantly, billed vs. unbilled revenues. Zuora provides methods to help organizations with revenue recognition related to subscriptions as my colleague has pointed out.
Even with all these capabilities, the platform by itself is not enough to support an organization running a subscription business – it needs to sit within an overall systems architecture that connects it to other business systems. Zuora supports this in three different ways. First, it has created several complimentary products, each with additional capabilities: Zuora Billing, CPQ, RevPro, Collect and Insights. Insights is especially important as it extends the analysis and reporting capabilities by using both data internal to Zuora and data from other systems to produce reports and metrics that relate to wider aspects of running a subscription business, such as propensity of likely customer churn. Second, it has created several REST APIs that enable integration with other third-party systems such as CRM and ERP. And third, like several other cloud-based vendors, it has created a marketplace where other authorized partners can offer relevant complementary products.
In addition to all these options and products, the company provides a wide range of professional services that not only help organizations get the best value out of the products but advise them on some of the in-and-outs of running a successful subscription business.
Our benchmark research into recurring revenue shows that running a subscription business fundamentally changes the customer relationship. In a traditional physical product business, the customer buys the product and may or may not buy ongoing support; that is normally the extent of the relationship unless the customer buys more products. In a subscription business, the customer subscribes for the service and then uses the service on an ongoing basis for the duration of the contract. During that time, the aim of the organization should be to ensure the customer is happy, goes on using the product, possibly buys more services and, most importantly, extends the contract before it ends.
Organizations thus must provide a combination or marketing, sales and service throughout the duration of the contract to maximize customer lifetime value. Operating this way will help address the top three issues the research finds that organizations face running such a business: increasing revenue (51%), improving the customer experience (51%) and increasing customer loyalty (46%). The need to address these underscores the importance of integrating Zuora products into an organization’s wider systems architecture, including customer engagement channels and customer feedback systems.
The company emphasized at the event, and reinforces on its website, its view that the subscription economy provides more freedom in the way organizations provide services and how they are consumed, and thus puts the customer more in control. I am not entirely convinced by such assertions because even something as straightforward as changing my mobile phone provider is not as easy as I would like. But it certainly fits closer with the mobile, internet-driven and increasingly IOT-dependent lifestyle many consumers are adopting. It also allows organizations to reinvent how they do things, and indeed invent entirely new services.
So, like Tzuo, I expect the subscription economy to grow and keep on growing. My cautionary note is to remind organizations that this trend is not just about technology; they must consider cultural, process, people and metric changes to support a different business model. Those that do should evaluate how Zuora can help support the new ways of working they will find themselves having to adopt.
VP & Research Director, Customer Engagement