Zuora stopped off in London this week as part of a world tour and we sat down with CEO Tien Tzuo to discuss how companies are evolving in the subscription economy.
It doesn’t take a great deal of effort to notice that plenty of companies are now shifting from providing customers with a product, to providing them with an ongoing service or subscription. It’s become very popular in publishing and media, as well as telco, but it is also prevalent across manufacturing, autotrade and even printing.
The idea is that although selling a customer a product once is easy to plan for and may deliver big margins, it doesn’t mean that you know your customer at all and it doesn’t allow you the best mechanism to improve upon that product. However, if you are providing a service as a wrap around for that product and your customers are subscribing to that service, this allows for a far more intimate relationship to occur.
Companies can constantly use data provided by their subscribed customers to iterate and improve the product. The idea being that this ultimately leads to better products and services, plus a more ‘engaged’ customer that keeps coming back for more.
Zuora is a company that provides cloud-based business systems that support this idea of the ‘subscription’ economy. We’ve written previously about how the company recently raised $115 million and is smoothing the path towards its IPO.
I got to sit down with Zuora CEO Tien Tzuo to dive a bit deeper into the company’s thinking behind subscription based businesses and how they’re shifting away from their product models.. My first question to Tzuo is about whether or not he’s seeing a shift in mindset amongst the companies that are persisting with their product-based thinking. He says:
We went through a wave of them saying, well why can’t I just do this on top of Oracle or SAP? I feel like they’re educated enough to realise that’s not possible.A whole different set of systems is needed. I think they’re also starting to realise that the integration of this thing we call Relationship Business Management back to the accounting system, is actually pretty straightforward. We can just simply produce entries that are consumed by the general ledger application. The whole thing flows pretty straightforward.
The things that they seem to be wrestling with now is more around organisation, culture - do I set up this service as a separate organisation on the side? Is it an innovation or incubation arm? If it’s starting to become more mainstream, how do I reorganise my salesforce to care more about selling multi-year contracts versus one time sales. And those seem to be the things they wrestle with the most.
This is hardly surprising. As we know, technology is hardly ever the sticking point when it comes to transformational thinking. It’s about shifting processes and people to operate in a way that is different to the way they have been operating for a number of years.
So what’s needed? A driving force from the top helps. Tzuo said:
[It’s now a] strategic initiative that’s being driven by executives. I’d say two or three years ago there would be some person at the side, some digital person, or some innovation person, that’s experimenting with these services but they weren’t taken seriously.
This is really a CEO driven thing now, they’re saying that this is where the world is going, they can see it and feel it in the technology. They really think this through and say this is important to the organisation. They all want to be customer centric organisations, they’ve been drilled into this in the last fifteen years, but this is the last step to becoming the customer-centric organisation.
Iteration and agility
Tzuo explains that you can put in a CRM application, where you can get the sales team on board, you can get the marketing team on board and you can get the services team on board. He believes that that’s good, that that’s a big step. But that still doesn’t really mean that you’re a customer centric organisation. He says:
You’re still trying to sell them product, you don’t have an incentive to keep them as you would in a subscription business. You’re not taking data from your customers, then iterating.
He provided an example of the Financial Times (a Zuora customer), which at one point wanted to try some new things with its subscription business. For example, it toyed with the idea of creating 1 day subscriptions that could be bought by a reader if they wanted to try out the paper, or if they were in a situation where they needed to pass the time with some quality content (perhaps at an airport).
However, the Financial Times, says Tzuo, spent six months developing this product, sunk money into it and then it failed. He argues that this is where Zuora is helpful, as it should allow companies to iterate their subscription business far more quickly, in a more agile way.
That being said, the shift from product to subscription isn’t an easy one - even with the CEO on board. It requires a rethink and restructure in the way that you operate sales, CRM, customer services and finances. This can sometimes leave a disconnect. Tzuo explained:
We talk to CEOs, they almost always turn the conversation to culture and organisation structures. You have got to be customer centric. We had a company where the CEO invited us to one of their one day off-sites, where they let us sit around.
The CEO literally took to the stage and told his employees that the company no longer sells a product, it sells an experience. He explained that there are all these things that the customer cares about beyond the product the company sells. The CEO said the company needed to start using performance status scores, it needed to start looking at churn and retention, etc. It was pretty inspirational story.
Then the CFO got up and explained the company’s recent progress, said there were three product lines, explained the margin for them, and the rest of it. You could just see the stark difference. That’s what they’re frustrated about. Their whole measurement system, whether it’s financial, or people, they’re all anchored on the past.”
However, Tzuo argues that this is a hurdle that companies are overcoming because they realise that subscription is the future of business. He adds that it’s becoming an easier process as the company grows. And growth is the target right now for Zuora, following its recent round of funding. He said:
We are going through a big global expansion right now. The subscription economy is really starting to take hold. Companies all around the world are coming to us, so we have got to be there. So we are staffing up in order to do that. We are staffing up both our field facing organisation, our salespeople and consultants, as well as our R&D organisation.
Zuora is an incredibly obvious use case. So obvious, it’s surprising that the larger players didn’t think of it first. However, Zuora has its stake firmly in the ground and the pitch is convincing.
However, there are things that companies should consider when shifting to subscription. For example, data feedback and constant iteration is great. But in my opinion it can lead to an obsession over certain services, which can result in being a bit blinkered. It requires extra effort to think outside the box and invest in innovation elsewhere.
That being said, it’s obvious that subscription businesses are growing in popularity and wouldn’t survive without providing a service that is superior to providing one of products. The customers just wouldn’t stick around otherwise. That can only be a good thing.