Zuora CEO Tien Tzuo - welcome to phase 2 of the Subscription Economy, here's what you're going to need!

At its recent Subscribed Connect London event, Zuora made a raft of new technology announcements for its service monetization suite. I caught up with the firm’s founder and CEO Tien Tzuo after the event to get his insights into what impact the latest products will have for customers, and how it can support firms offering more sophisticated payment models. 

The four main announcements were:

• Extension Studio, designed to make it easier to tailor Zuora for specific business requirements via drag-and-drop capabilities;
• Expanding Zuora for Consumption with a native Mediation Engine, helping companies run consumption-based offerings with different models and inform customers of consumption in near real-time;
• Integration Hub, which makes it quicker and easier to work with Zuora’s 60+ pre-built connectors to systems like CRM, CPQ, ERP and payment gateways;
• A new Zephr capability, Subscriber IQ, offering a connected view of subscribers combined with industry benchmarks, aimed at driving conversion and retention.

The product updates are in response to the current shakeup in the subscription market, which is hitting an inflection point and entering a new phase, according to Tzuo:

As the industry matures, there's a little bit of a shakeout happening. Which streaming services and SaaS companies are going to survive?

From Zuora’s perspective, the two key strategies in this next phase of the Subscription Economy are going to be around consumption-based models and continual unbundling/rebundling of services. The New York Times is a good example of this. Customers get to pick from a broad range of options rather than just a flat per-month fee, including a free tier, subscriptions to recipes or games or sports or news, or an all-access pass. Tzuo notes:

They create this dynamic environment where they give the customers choice. The common thing we're hearing is the companies that survive, that have staying power, are the companies that set up a dynamic relationship with their customers that allows their customers to consume what they want when they want.

To demonstrate this dynamic relationship, Tzuo shared an example of an electric bike hooked up to Zuora technology, with a device measuring how often the tire spins. The system uses that data to analyze how many miles are travelled in real time, which supports a usage-based model where people pay for how many miles they have cycled. It could add a cap of how many miles a user can travel - if the rider goes beyond the cap, they could go into overages or do a top-up purchase for more miles. All the information flows back through to the financial accounting systems from a revenue perspective. 

Dynamic

Zuora’s latest product launches are all part of supporting this dynamic engagement system, and will make it easier for companies to offer this to customers. Tzuo explains:

A lot of companies think of us as billing and revenue recognition and payments. We sit on top of all these other payment methods like Stripe or Direct Debit or SEPA or PayPal. We orchestrate complex payments and taxes on top of the networks.

But increasingly you're going to see us helping customers build a dynamic subscriber experience. Why did we launch Consumption, Integration Hub, Subscriber IQ, Extension Studio? It's all about giving companies the agility to build dynamic subscriber relationships, which we think is going to be the differentiator between companies that succeed in this phase two of the Subscription Economy.

Integration Hub is in response to Zuora customers evolving from running its technology in a standalone environment to becoming more integral to a business. As subscriptions have gone mainstream and pureplay subscription business, like Zoom or Zendesk, have experienced huge growth, so the number of integrations that Zuora has to link into has grown exponentially. Tzuo says:

We are the heart of a company, we're like Grand Central Station or Paddington. Everything is flowing through us and then touching other systems. You've got to activate the service; you got to tell the customer they've hit or they're approaching their consumption limits; the accounting system says, 'I need to close the books' and the key thing is you have all the information; the customer wants to look at their last 12 or 24 bills off the customer portal.

Integration Hub is designed to make integration with the other services required to fulfil all these tasks simple, from Salesforce and Hubspot, to Stripe and Avalara. Tzuo adds:

We will build all those things. Not only that, we'll monitor all the integrations. What people hate is, something broke in the system, but where did it break? Just come to us. We're monitoring all the integrations, and we'll tell you is it on our side, is it on the Avalara side, is it on the Adyen side. Our customer service team will help you troubleshoot and reach out to those companies as needed.

Compared to traditional per-user pricing, consumption-based billing can prove challenging for companies to manage as it’s a much more sophisticated and flexible model. All the data coming out of a SaaS application, or physical devices like a handset or IoT sensor needs to be translated into billing information. 

Mediation 

Customers wanting to switch to a consumption-based model requires technology that combines mediation, pricing, real-time rating and revenue recognition, according to Tzuo. He explains:

Mediation is taking all that raw data coming off the service and then translating, aggregating, summarizing and calculating it into - at the end of the day, this is the unit that you were supposed to charge for. 

In the old cellphone days, you charge per minute for the phone call, but the stuff coming off the switches is going, it started at 7.03, it ended at 7.05, what do I do with that? I've got to translate all that into what the billing system is expecting from a unit standpoint. So that's mediation.

Then there’s pricing, which might have different tiers and the ability to roll over unused consumption from one month to the next. Tzuo says:

These complex pricing models are things that you've got to design into the system. Everyone wants to start with a pure pay-per-use model but once you have some certainty in how much you spend, you don't want to be on a meter. Just put me on that 10GB plan, some months I'll use five, some months I use seven. But the 10GB plan is good.

Rating is the usage calculation, which has to be done in real time, as users will want to know if they’re approaching any limits so they can respond appropriately. Tzuo adds:

Everyone hates it when all of a sudden there's a surprise $30 bill at the end of the month if you're a consumer; or if you're a business, a $250,000 bill. You need to give all the customers the right information to do what they need to do.

The last challenge is the financial accounting, which is complicated where accounting rules dictate you can't recognize revenue until a service is performed. Tzuo says:

When they purchase 10GB up front, when is the service performed - when they consume 1GB, a half gigabyte? What if they only use 2GB out of the 10GB a month? There's all these complicated accounting rules and calculations associated with it for revenue recognition.

These four aspects of consumption-based pricing are basically what Zuora is promising its technology will make it easier to manage and earn revenue from, especially with the latest product releases. Tzuo explains:

It’s basically being able to do that translation of the RPMs on a wheel to a kilometer. This requires rating, this requires subscriber identity. We launched Subscriber IQ that says, if you're going to create an environment where, as the customer's engaging with your service, you can tell them – you need to do a top-up at this point; at this point, put the offer for recipes in front of the customer because they seem to cook a lot; at this point, put the offer for puzzles in front of the customer because they've been playing the free Wordle but they might like to subscribe to the crossword puzzles or spelling bee.

Fatigue

As well as dealing with the complexities of consumption-based billing, there’s also an element of subscription fatigue creeping in, according to Tzuo. While he maintains that Zuora customers have a relatively easier time managing subscriptions because of the agility and capabilities his company’s tech offers, consumers or businesses are often finding they have too many different subscriptions. He notes:

Some companies are saying, I almost have as many SaaS applications as I have employees. That just doesn't make any sense. You're seeing consolidation, you're seeing people question whether these things are important. Do I really need four streaming services? They're all raising their prices.

However, while the subscription industry is evolving and maturing, that’s not to say firms are considering a return to just selling or buying a piece of software upfront. Tzuo adds:

Consumers are saying, 'I don't want to buy DVDs or CDs or software', but they're demanding more sophistication in how they pay for services. They don't want their prices to be jacked up. Why don't you give me the smaller bundle, I just want to pay $10 a month for Netflix. I don't need the million movies, I just need these movies. Why can't you customize a bundle that meets my specific needs?