COVID-19 - an unwelcome validation of the rise of the Subscription Economy as Zuora customers outperform in the crisis

Profile picture for user slauchlan By Stuart Lauchlan June 4, 2020
Summary:
The COVID-19 crisis isn't something anyone would wish for, but the pandemic has put Zuora's claims for the Subscription Economy to a harsh test. So far, the results have been positive, says CEO Tien Tzuo.

Tien Tzuo CEO Zuora speaks at Subscribed 2019
(Tien Tzuo CEO Zuora speaks at Subscribed 2019 - image via Zuora)

The inexorable rise of the Subscription Economy has been a familiar message from Zuora for many years, but it’s an ascendency that’s been given a boost by the COVID-19 outbreak, says founder and CEO Tien Tzuo: 

The current crisis has only emphasized the importance of subscription business models. Just look at how our lives have dramatically changed over just the last 12 weeks. We now live in a world of on-demand digital services for work, entertainment, transportation, health, media, the list goes on. 

Tzuo argues that while the pandemic is of course primarily a public health crisis to be tackled, it can also been seen as “a massive forcing function, changing our society and economy in profound way”. That, he says, includes validating the resiliency of subscription business models. As proof, he points to stats gathered from Zuora customers performance over the past few months: 

What our data is telling us is [that] in the months of March, April and May, half of our customers [did not see] their subscriber growth rates materially affected by the current crisis. Around 20% of our customers have actually seen their subscriber growth rates accelerate. And 17% of our customers are still growing, just at a slower rate. Putting all this together, more than 8 out of 10 Zuora customers sustained or grew their customer base over this time period. 

Now that's a pretty remarkable statistic, even more so when compared to what we're seeing with non-subscription businesses. For example, in Q1 2020, sales from the S&P 500 companies contracted at a negative 2% annual rate, while revenues from companies in our Subscription Index grew at 9.5% in the same quarter, continuing the outperformance even through this crisis. So subscriptions are a significant driver of above-market growth. As these moments of time tend to accelerate underlying trends, we believe that the current crisis will only accelerate the shift of the modern global economy towards digital services and subscription models.

Customers are also pushing ahead with changes and upgrades to their offerings to keep pace with the volatile changing market conditions that COVID-19 has triggered: 

GitHub went freemium, opening up the developer platform to millions. Pluralsight opened up all 7,000 of their tech classes for free for the entire month of April, signing up over 1 million new users. eMoney, a platform from Fidelity, gave their planning tools free to help their financial advisers build stronger client relationships during this time of financial anxiety.

Fender decided to offer free classes of Fender Play, their online guitar lessons. Originally hoping to sign up 100,000 new folks, they had to shut it off after 1 million sign-ups, essentially connecting their user base in just under 6 weeks. Of course, Zoom worked an extraordinary exercise helping customers scale in response to the demand of 300 million meeting participants…We enabled Resy, the restaurant reservation app, to credit March and April invoices for all of their customers, as they relaunched their app for takeout and delivery. That's a pretty amazing pivot. 

We've helped membership organizations suspend accounts for millions of members to prevent customers from churning outright. Now imagine having to do this with a homegrown system built around a payment gateway. Imagine having to tell your developers that in addition to launching and pivoting your service, they would have to go in and blow up your hard-coded billing system or your IT organization to retool SAP or Oracle. 

New biz

Organizations are also pressing ahead with new deployments, he adds, with 42 recorded over the past 3 months: 

We're seeing a restart of projects that were paused when the crisis first hit. We saw one $7 billion company indefinitely suspend their CRM deployment, but they're moving forward with our subscription billing and revenue deployment. We've seen a large manufacturing company that, while it's furloughing employees,  [is]  still moving forward with our connected device projects.

As for prospects, there were some deals that slipped during the early days of lockdown, but Tzuo says that around three-quarters of those had closed by the end of last month. 

There were some early concerns about how the crisis would significantly hinder our ability to sell and deploy enterprise solutions, but those concerns have not proven to be true. Everyone is at home right now, including our prospects and Zoom has been the big equalizer…That being said, many companies are still in a state of change. They're all sorting through their internal priorities and processes leading to a lot more noise in the system. The result is, it can take longer to finalize some deals.

The pipeline still looks healthy, he adds, although there is inevitably some caution about forward looking statements: 

I think it's a little hard to say that we're in a steady state [with COVID-19] just yet. There’s still quite a bit of unknowns. You're seeing ripple effects in the US. You’re seeing, what is it, 40 million unemployment. There have to be other ripple effects that are going to come about, resurgences of virus, things like that. So it's hard to say it's a steady state. 

But I would say what we're seeing [is]…that companies are pausing their CRM deployment, but continuing with ours. We're seeing manufacturing companies that are quite frankly, are having a hard time selling because of what they do. But they have 1 million, 2 million, 3 million assets in the field that are all connected, and they're seeing new revenue streams related to their existing purchase in market connected products, and they're continuing with our projects. And you're seeing other companies saying, ‘Gosh, we wish we had a subscription business. If we did, we would have been able to weather the storm just a little bit better’.”

We think that really bodes well. And then we're seeing it play out in our early conversations with these companies. But I would say COVID and shelter-in-place really hit mid-March, and we're still fairly early through this. And so we're going to be in the same boat as other companies in terms of understanding that the short-term future just does have a lot of uncertainty and chaos associated with it.

My take

Regardless of that note of caution, Wall Street reacted favorably to Zuora’s better-than-expected Q1 numbers yesterday with the company share price shooting up 21% following the results announcement. The firm reported total revenue of $73.9 million, up 15% from the $64.1 million reported the same quarter a year ago. Subscription revenue was up 20% year-on-year to $56.9 million, while the GAAP loss from operations was $17.7 million, down from a loss of $20.9 million in the comparable quarter last year. COVID-19 has put the Subscription Economy business model to the test and to date it doesn’t seem to have been found wanting. Given the wider impact of the pandemic on society and the economy worldwide, that may be cold comfort, but it’s a positive validation that ought to serve Zuora well as the “steady state” Tzuo talks about comes around.