Interest in subscription business models has been rising for several years, as enterprises have explored the value of maintaining continuous relationships with customers, rather than the more episodic patterns of traditional transaction models. The experience of the pandemic, when traditional contact was disrupted and digital connection was often the only way to stay engaged, has heightened that interest. But organizations that introduce new subscription offerings are finding it's not easy as it may look.
Todd McElhatton, who took over as CFO at subscription platform Zuora one year ago, recounts the case of one brand that came to Zuora for help with its new subscription offering. It had a confusing online sign-up process that many would-be subscribers failed to complete. Those that did were often dropping off a few months later — subscriber churn was running at an abysmal rate of almost 50%. It was a telling example of just how much can go wrong. As he explains:
A lot of the problems they had was just the fact [of] how they were trying to run it. They didn't have the right infrastructure. They didn't have the right tools. They weren't thinking about it the right way.
This is a remarkably typical experience. The switch from product sales to a subscription relationship runs much deeper than simply swapping a single large transaction for a series of smaller recurring ones. At diginomica we talk about the virtuous cycle at the heart of the digitally connected Everything-as-a-Service (XaaS) model, in which the provider first engages with customers, then monitors their usage of the offering and finally improves it over time. This requires a change of mindset, in which closing the sale is just the start rather than the end of the relationship. Then there are everyday procedural issues such as, what happens if the customer wants to upgrade midway through their subscription, and how do you manage the renewal process? Enterprises need help to get all of this right. As McElhatton puts it:
It's hard for companies, they don't have this expertise. They don't have the infrastructure. A lot of traditional ERP or CRM systems aren't built for this circular relationship, this ongoing [contact]. The bill for a product is one and done. And so they're looking for the expertise, all the way, from, 'How do I structure the offering?' to 'How do I make sure I fulfil it? How do I make sure I renew it? How do I keep that customer happy for life?'
Whether to delight, or disappoint
As well as getting the right processes and infrastructure in place, the ability to flex as demand patterns change is also important. "There's lots of opportunities for companies to really delight their customers, or to disappoint," says McElhatton. The past year has been full of examples of both. Video meetings provider Zoom, a Zuora customer, saw its subscriptions surge as businesses, educators and social groups switched from in-person meetings to online video with the onset of COVID-19 lockdowns. But one competitor was left behind, according to McElhatton. He explains:
One of the reasons they missed the entire boat was they didn't have the infrastructure, they weren't able to have that flexibility and agility to get customers up on their platform. They weren't able to give the free trials.
That's an opportunity they've lost for a generation. It's never coming back.
Another challenge in succeeding with a subscription business model is that customer expectations are constantly rising. He comments:
You know who your customer is, you have that re-occurring revenue stream. But the longer you have that customer and you keep interacting, the expectations go up. People expect to have a fantastic experience, and they expect those experiences to get better.
Having worked with large numbers of enterprises that have made the journey to the subscription model, Zuora now has a huge store of benchmark data, which it is able to use to help customers tweak their offerings. This is an important part of its proposition, as McElhatton explains:
Being able to say, 'Look, you benchmark really poorly here,' and how do you help them fix their processes, or give them the technology to improve that, is hugely important. In my business, I can tell you, there's a huge difference in valuation between a company that keeps 98% of their customers versus 82% of their customers.
The fact that we have data and can say, 'Look, you're on the wrong side of this, how do we help you get there? What are the tools that we have?' I think is a huge thing for Zuora. That's something that even our biggest ERP or CRM competitors don't have.
What it takes to scale Zuora
McElhatton joined Zuora in June last year, succeeding longstanding CFO Tyler Sloat, whose departure — to become CFO at up-and-coming CRM provider Freshworks — spooked markets at the time of last year's full year earnings report in March 2020. McElhatton was previously SVP and CFO of SAP Cloud Business Group, and had previously held senior finance leadership roles at VMware’s Hybrid Cloud Business, Oracle’s Cloud Services and HP's Managed Services Business. He believes that experience gives him an insight into Zuora's needs as its business scales. He says:
I've seen what it takes to scale and what great looks like. I think being able to bring those things together has been really helpful. One of the things that you see is, companies hit inflection points. Not many companies make it to $100 million of revenue, very few get to go public and hit that quarter of a billion dollars. But as you start hitting those spots, what got you to a quarter of a billion doesn't get you to a billion ..
As you start to get to be a bigger company, it can't all be one-offs. It can't be one or two people, you've got to have process and methodology and consistency. I think that's one of the transformations that Zuora has undergone over the last 12-18 months.
At the same time, Zuora's ability to turn on a dime makes a contrast to those other companies, where decision making doesn't have the same agility. He describes one case where he was looking at numbers one weekend and within a couple of days the management team had decided to change course and was able to turn things around before the end of the quarter. As he explains:
We had the data, we knew how we were doing, but we saw it, we acted on it, we could do that. The ability to do that in a matter of days and then see these fantastic results at the end of the quarter was a lot of fun.
To me, that has been probably the one thing. How fast you can move has been a real upside to being here.
CEO Tien Tzuo first briefed me about Zuora at the time of its Series A funding round in March 2008. Already he saw the potential market opportunity, telling me:
It's not just software that's moving to [a subscription-service model], it's entire industries ... We really believe the Internet is just going to accelerate the shift from manufacturing to services, and that lends itself to a subscription-based services model.
That view was far-sighted back then, now it's mainstream. In the meantime, Zuora has built up a wealth of knowledge and experience in helping its customers navigate from a product sales model to a consumption-based as-a-service model. At a time when all manner of industries are adopting the as-a-service model, the opportunity for Zuora just keeps on growing, and McElhatton and his colleagues are providing the C-suite team it needs to nurture that continued growth into a higher league.