This is an $8 trillion opportunity.
Tien Tzuo, CEO of cloud-based subscription management provider Zuora, is challenging business leaders to pursue an ambitious stretch goal. $8 trillion is the size of the entire global economy — and in the coming years, he argues, all of it will transition from a traditional product sales model to pay-as-you-go service relationships. That provides an historic opportunity to capture customers as they make the switch from the old model to the new, he explains:
When customers change, their business is up for grabs.
Making an early switch to subscription-based revenue models offers the opportunity for faster growth, too, he argues. Zuora has just launched a new industry barometer, the Subscription Economy Index (SEI), a weighted average based on subscription metrics from 350 of its most established customers. With millions of transactions and billions of dollars in revenue to draw on, Zuora believes its index is a proxy for the subscription economy as a whole — and finds that, over the past five years, subscription businesses grew their revenues 15.1% a year. That's nine times faster than S&P 500 company revenues and four times faster than US retail sales over the same period.
Such metrics are designed to transform Zuora's own sales pitch from a technology replacement into a means of driving business value. Companies need to understand, cautions Tzuo, that adopting the subscription model means much more than simply dividing up a product's one-off purchase price into monthly payments.
[Our customers] are not talking about plumbing, or automation — they are talking about re-inventing their businesses and driving business model innovations ...
Most people, if I don't show it to them, they see putting in our system as just plumbing — just capturing the business rules of today and putting the plumbing in to capture that. There's huge benefits to do that, because we are taking away cost and inefficiencies. But that's not the true benefit.
The true benefit is, now you want to go in, you want to change your business model. You need these flexible engines underneath, that you just go in and reprogram that part of it and the whole thing knows how to react.
This is because the subscription model is fostering new patterns of consumption that give buyers more freedom, says Tzuo. Done right, it lets them exchange "the shackles of ownership" for a relationship that lets them "try, buy, upgrade, downgrade, pause, cancel, rejoin" in whatever configuration and delivery model suits them best.
Scalable, flexible, responsive
What that means for Zuora customers was on display at its Subscribed event in London last week, as a quartet of customers joined the keynote to tell their stories. Key themes were scalability for growth, flexibility to support experimentation, and responsiveness to changing opportunities.
- Alex Sloley, CFO of social media monitoring company Brandwatch, said that Zuora had played a crucial role in supporting the company's tenfold growth from £3m to £30 million ($37m) in annual revenues over the past four years.
- JP Vantiel, head of commercialization at Hive, the smart home division of energy distributor British Gas, discussed the business model changes built on Zuora's capabilities.
- Warren Palk, COO of DAZN, a new OTT sports channel that delivers live events direct to subscribers over the Internet, talked about the importance of timely marketing. He said Zuora's subscriber analytics capabilities help to target that marketing.
- Steve Hare, CFO at small business software giant Sage, explained the change impact of new business models at an established product company.
- Tzuo also described how business news publisher the Financial Times had had the flexibility to take down its paywall for the weekend after the UK's Brexit vote. It saw subscriptions surge six-fold compared to a normal weekend.
Being able to monitor and react to subscriber behavior is increasingly important, says Tzuo. To help its customers keep on top of trends, Zuora last week released a new analytics capability. Based on its acquisition last year of 7-person startup Frontleaf, Zuora Insights brings together behavioral, demographic and financial data to provide subscriber segmentation, dashboard metrics and predictive scoring. Tzuo gives an example of how this helps identify the likelihood that a customer will renew:
There's all these signals that the customer is sending you based on their behavior. But what's signal, what's noise, how do you separate all that data?
We threw a couple of hundred pieces of data on usage into the system, [based on] our own use of it. Then our data scientist went to town and brought it down to about twelve different things that seem to have the biggest impact on churn. He created a formula to translate that into a churn percentage — it expresses as a renewal percentage, so it's a positive number.
When I look at a customer in our system, I can see, is it a 97%? Some customers are 100%, some are 15%, some are 50%. Because we know the twelve key metrics that roll into that, [we can see] which one of these things are actually dragging the retention number down. It's just math, it's not psychic. But now that you know it, you can manage that.
Zuora's experience of working with subscription businesses has allowed it to develop a sophisticated platform that's tuned to their needs, Tzuo believes.
We are fairly differentiated as a vendor, so there is not that many companies that do what we do.
The idea that a NetSuite or an Oracle or someone could just build what we do, it's not very realistic. We've spent eight years, a hundred million dollars building this product. It's not something that somebody else can just copy. On top of that it's not just a product, it's all the know-how of how to use the product — this turns out to be just as important.
Our job then becomes to convince companies to embrace subscriptions. When they do, then we are currently the only game in town.
The new Subscription Economy Index is designed to calibrate the growth in subscription businesses and their impact on the wider economy. It finds that companies with more than $100 million in annual revenues are experiencing the fastest growth in subscriptions, at 28% per annum, while the most challenged are companies with revenues in the $1-20 million range, which grow at less than half that pace. SaaS (software as a service) is the most established market and remains the fastest growing at 25%, while media, telecoms and corporate services are growing at 13-15%.
Subscription management is the financial expression of the trend towards servitization, which we examined last week in the context of field service management. In that article, servitization expert Professor Tim Baines from Aston Business School makes the same point about moving away from ownership as Zuora's CEO:
That shift really does move away from, ‘It’s simply about product and the ownership of a product.’ It moves much more to, ‘What it is that we’re trying to do with things?’ And that moves it much more to a conversation about services."
With the services, you’re buying an outcome. You’re buying a process, rather than simply buying a thing which you then want to figure out what to do with.
Baines had been a speaker at the EMEA conference of field service management provider ServiceMax, which last week agreed to be acquired by GE Digital. That GE is itself a Zuora customer merely serves to underline the crossover between servitization and the subscription model. These are two sides of the same phenomenon — a long-term shift from one-off product sales to long-lasting service relationships, powered by connected digital technologies that enable the real-time feedback underpinning those relationships.
That shift is fueling the 15% annual growth in subscription revenues that Zuora's new Subscription Economy Index reports. That growth is a little slower than I'd expected frankly, although it may be pulled down by the slower growth among companies in the $1-20 million revenue range, which Zuora says reflects the challenges many startups face as they begin to establish their market presence. Nevertheless it's far stronger than the wider economy, reflecting the scope for growth as more and more economic activity switches from traditional product sales to pay-as-you-go service relationships.
But as with any shift to new models, there's a danger that enterprises will adopt the new methods without changing their business model to exploit its full potential. Tzuo is right to emphasize the disruptive, game-changing nature of this change. Given the traditional view of subscription, it takes some chutzpah to come out and describe ownership as restrictive and subscription as liberating. This is the kind of language that's needed to challenge conventional thinking and provoke real investigation of what Zuora's platform can help enterprises achieve as they embrace subscription relationships.