Zuora CEO Tien Tzuo - why the subscription model shift renders ideas of front and back office out of date

Lower third quarter losses and higher revenues brought some year-end cheer to Zuora as CEO Tien Tzuo argues that the shift to subscription models renders traditional notions of front and back office as “a little bit dated":

That division made a lot of sense when you were shipping product. The front office sold the product; the back office fulfilled it, accounted for it, collected for it. It's a very product-centric view of the world.

If you look at the companies that [have] always been subscription businesses - for example, the telecom companies - they don't look at it like that. They start with the customer and they build great subscriber experiences for those customers. And those subscribers experiences have to span the front office and they have to span the back office, whether it's calling the call center or changing your credit card on your billing account or spinning up some more service on a Sunday night without having to talk to a salesperson - those are the things that are the most important.

Just think about your own life right now, - sitting at home, picking up your phone and then food shows up. You get work done, entertainment shows up. Those are the subscription experiences you will demand going forward. Companies realize that and they realize that, in order to do so, they have to put in a customer-centric subscription management platform.

That realization is what drives sales at Zuora. This calendar year has in part been one of getting past some bumps in the road in 2019, although the pandemic has inevitably made for a volatile economic climate and unexpected challenges. But the company’s Q3 numbers were strong as it turned in a net loss of $16.8 million, against $18.2 million for the same period last year, while revenues were up from $71.8 million last year to $77.2 million, comfortably beating Wall Street expectations.

Other key stats from the quarter:

• Subscription revenue grew 15% year-on-year to $62 million, 80% of total revenue, the highest percentage in three years.
• 25 new Q3 customers, including the largest deal to date.
• 6 deals were over $500,000 in value.
• 90% of customers have annual contract values in excess of $100,000.
• 41 go lives.
• 100 upsells on existing contracts.

Size increasingly matters as Tzuo points to larger enterprises tapping into the subscription business:

We are seeing big brands continue to embrace the subscription models. We continue to move up market and find partnership with global enterprise companies. During this quarter, we started meetings with big brands in our core markets of high tech, media, manufacturing, including companies like Fuji Xerox, Elite Café, The Catalogue and one of the top three electronic retailers in the US. We continue to execute go-lives in big brands across industries and medium publishing companies like Thomson Reuters and Media24; in tech manufacturing, including Bosch Automotive Services, Sonos, Panasonic and Siemens Smart Infrastructure. We continue to help big brands seeking to turn their customers into subscribers.

All these are companies that are looking to change their operating model approach to a greater or lesser degree, he adds:

Elite Café is a very interesting use case here. We're helping them launch a subscription service that will give them regular touchpoints with the customer base, as well as a steady, predictable source of recurring revenue. And we're seeing this dynamic play out across the entire consumer, retail and consumer packaged goods space.

We continue to help our large manufacturing high tech clients find new sources of growth. In Japan, with the addition of Fuji Xerox, we're now working with the top five multi-function printer manufacturers. We're helping all five of them launch flexible subscription services within a very competitive hardware market.

These larger big brand enterprise customers ultimately represent a significant opportunity for expansion and growth as they continue to shift their businesses towards subscription models.

Platform power

The enterprise customer rise is helped in large part by the Zuora Central Platform, argues Tzuo:

One of the top three electronics retailers in the US cited our platform as a key factor in its buying decision because our platform tools will allow this company to quickly and efficiently launch and manage warranty programs, repair services, video streaming, trust files. These are real tangible benefits that this customer is using to enhance value with its own customers.

That retailer was in fact the largest deal to date for Zuora cited above. Tzuo says:

iI's a big, big strategic bet. Obviously, with what's going on in the retail industry, we see the shift from retail stores to e-commerce going on right now. But I think the story is much more deeper than that. Retailers are realizing that waiting for the customers to purchase something or to come to the website or to go to the store is not sufficient. They've got to deepen their relationships. They're going to have a lot more constant interactions with their customers. They've got these fantastic brands, but how do they translate those brands into a deep customer relationship? In other words, turn the customers into subscribers. The deal was for the billing product, but think of it as a broader subscription management system. And it was for the platform. 

The platform has now been adopted by two-thirds of the overall customer base, he adds, a take-up driven by common needs:

Delivering a great subscriber experience is not easy. Every touchpoint from the customer - service activation, payments, usage, renewals, upgrades, suspensions - every touchpoint requires co-ordination across a plethora of actions. Customer-facing operations, like charging credit cards, internal operations, like provisioning or shipping, and even financial operations, like chargebacks or recognizing revenue.

That's why automation is so critical. You can't deliver a great subscriber experience without automation. For example, we work with nine of the top 20 largest auto manufacturers. We added another one this quarter. Now, imagine millions of cars on the road, all powered by connected services. Our platform workflow tools today enable our auto customers to successfully orchestrate a number of connected car services, from finding parking spots, listening to music or subscribing to add-on capabilities, thereby enhancing the value that they're delivering to their customer.

My take

A solid quarter that saw Zuora bounce back from the problematic higher level of churn that it encountered in Q2, with Q3 churn rates declining 55%. That higher churn earlier in the year has been attributed to the COVID crisis and its disruptive effects. In fact, the knock-on effects of the health crisis have ended up being helpful for growth overall, notes Tzuo:

What we're seeing in a broader sense is the COVID shelter-in-place situation is only accelerating companies efforts to say, “We have to go build customer-centric subscription business model’. That's really the business model of the future.

That’s a sentiment that Tzuo will be hoping has sunk in for the coming year without the prompt of a pandemic.