Zuora IPO and how subscriptions changed how we do business

Denis Pombriant Profile picture for user denis_pombriant April 18, 2018
Summary:
Placing invention on top of invention leads to dramatic change in business. Zuora's IPO is an enlightening validation of the thesis.

zuora
Zuora goes public

The recent Zuora IPO has been seen in some quarters as a watershed moment and then some. The company went public at $14 last week and closed its first day at $20, a 43%  increase giving its founders and investors a valuation of roughly $2 billion. Nicely done.

But before we call this the golden age of SaaS, bear in mind that perhaps the best is yet to come. Certainly, cloud computing, especially in CRM, would not be where it is today had it not been for Zuora and its cohorts figuring out how to bill and collect for subscription services.

Zuora began at a time when subscription meant software but quickly captured the business public’s imagination as it broadened the notion with its pitch of a Subscription Economy.  This should be seen as a great commoditizer and it wouldn’t have happened unless we could first get a handle on the subscription billing model because it was that fundamental. As Jason Lemkin, founder of SaaStr, a firm that invests in SaaS startups, pointed out at Tech Crunch:

The most interesting part of Zuora is that it is a “second” order SaaS play. It could only thrive once SaaS became mainstream, and could only scale on top of other recurring revenue businesses.

But in reality, it was more complex because SaaS needed subscription billing as much as the subscription economy needed products as a service. Each built on the other which you find in the best examples of innovation going all the way back to the Industrial Revolution.

For example, the stationary steam engine drove water pumps that made it possible for mining companies to extract iron and coal at steadily decreasing prices. The availability of those products created a virtuous cycle in which the mining companies benefitted with cheaper raw materials for making engines and fueling them. Soon enough other businesses dependent on those raw materials and steam power evolved reaping the same benefits.

Dominance to come

Despite Zuora’s IPO, the subscription business model is still a long way from market dominance which inspires advocates and encourages further innovation. A recent report from McKinsey shows how far the industry has come and how far it can still go. There are three kinds of subscription services, replenishment, curation, and access, according to the report and although they’ve been around for a long time, it’s not likely most people could tell the difference at first.

Replenishment subscriptions allow consumers to automate the purchase of commodity items, such as razors or diapers. Curation subscriptions seek to surprise and delight by providing new items or highly personalized experiences in categories such as apparel, beauty, and food. Last, access subscribers pay a monthly fee to obtain lower prices or members-only perks, primarily in the apparel and food categories.

Also, there’s significant variability among the categories

Curation services, with 55% of total subscriptions, are by far the most popular, suggesting a strong desire for personalized services. Replenishment accounts for 32% of subscriptions and access subscriptions for 13%.

So it should be no surprise that the subscription model has had a significant influence on the evolution of CRM in the last decade. A hallmark of most subscriptions is the customer’s ability to discontinue the service at the end of a relatively short contract period, even as quick as monthly. With this reality staring at them, subscription vendors have made it a top priority to interrogate customer data to better understand customer behaviors and to provide exceptional experiences that keep customers coming back.

The attention to this detail has invaded every part of CRM and helps explain some of the interest in customer metrics and thus, AI. The most successful subscription companies recognized early that they had to find ways to hang on to customers (retention) and sell more things to them. They also need to continually reduce the costs involved in selling and improve the onboarding experience. All of these things can be aided by inspecting subscription data with metrics specific to a business.

Annual Recurring Revenue (ARR) or monthly recurring revenue came naturally but quickly enough we also discovered that minding revenue wasn’t enough to guarantee it. At about the same time, we also discovered that subscriptions could generate a great deal of data that we could use to better understand business.

There’s a large class of metrics businesses didn’t often consider prior to subscriptions such as:

  • Customer Life Time Value (LTV) or how much of your stuff can you reasonably expect a customer to buy if they don’t attrit but not assuming you’ll invent wonderful new add-ons. Wait till you make the invention to modify your assumptions.
  • Attrition and churn in which customers stop subscribing. Attrition usually refers to refusal to renew an annual contract whereas churn happens on a more frequent basis. Either way when customers leave there’s no more recurring revenue and a business has to work to replace the revenue and onboard new customers. The less the better.
  • Time to onboard is just what it sounds like but the surprising thing is that the longer it takes the less happy customers may be and the greater likelihood of churn. It may show that they don’t have an urgent need for your product and if that’s true how long will they pay for it? Modern subscription providers monitor this number and have robust programs for getting through onboarding.
  • Percent utilization is useful in many situations, for instance, when selling software. Vendors like a high utilization rate because it means customers are engaged and may need more.

My take

Where do we go from here?

The second order move in subscriptions is likely to be in the Internet of Things (IoT). Everything that business has learned from selling subscriptions, especially understanding the data generated from them, will go to support unmanned business processes in which machines connect with machines and sometimes with people.

This places a lot of responsibility on managers of businesses that don’t yet have an IoT plan. Many won’t need such a plan or they won’t need one for a long time. But in a world where selling earth moving equipment has been reimagined as subscribing to earth moved by the cubic yrd, it’s impossible to say IoT won’t affect you.

So subscriptions have been a force on their own but now they’re setting the table for a new iteration of business and technology. If you’ve ever stepped back and wondered how things have changed so dramatically the answer is that often change happens in barely noticeable increments. The subscription is a great example.

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