Why You Should Be Excited About Subscription Billing…Really!

By Erika Malzberg March 17, 2016

Subscription billing. Say those words, and people may start to snore. But if you understand how the subscription economy really operates, you know that subscription billing has implications for your entire business. That’s why we get excited – yes, excited! – about subscription billing. It’s not just about the logistics of sending out an invoice and collecting payment. Subscription billing is at the core of subscription businesses, and at the root of the massive changes we are seeing as businesses across all industries shift from a product focus to a relationship focus.

ERP is dead!

To understand how subscription billing is at the heart of this shift, let’s take a step back and look at enterprise software (like SAP or Oracle). Historically, many companies have run on these ERP systems, which are built to ship products. In an ERP system you have modules like inventory, supply chain management, warehousing, and distribution. A business boils down to taking an order, making the order, shipping it, charging for it, and collecting payment.

But ERPs aren’t cutting it anymore because consumers are tired of this product-centric focus. People don’t want to buy a widget any more. People want outcomes. For example, they don’t want to purchase DVDs; they want access to the entertainment they want, when and where they want it. These days, it’s not about products; it’s about access, services, and outcomes.

The customer-centric model

To provide these desired outcomes, businesses need to build a brand new business model that’s wrapped around the customer. Within this new model, a customer isn’t just a name and an address for shipping a product. The customer is it: the center of it all. You need to know what the customer has purchased in the past and what they are likely to purchase in the future, how they are using your product, and how many times they’ve called the call center. You need to build a whole picture of the customer and then craft the relationship in a way that allows you to deepen the relationship and turn it into revenue.

Subscription billing – the core of the customer relationship

So that brings us to the bill. With the old ERP run business model, the bill was simply the manifestation of a transactional relationship: I ship you 5000 widgets, you owe this amount of money, you pay me. But now the bill represents the relationship. What does the customer get, and how much usage did they have, and how did they translate that usage into a value? When your customer gets a bill, that’s their chance to see how they’re using their subscription and to optimize for their desired outcomes (for example through downgrading their subscription).

So now, with that single act of billing, you can see the depth of the relationship. Your subscription billing lets you see customers who are going to churn, and customers who are thinking about it. And every month (or whatever your billing cycle is) your customers get another bill that allows them to reflect on whether or not they are actually getting the value that they want from their relationship with your company. Subscription billing should communicate this value. Rather than sending an invoice that says “You owe $500,” send a bill that quantifies your value, like “We delivered $3000 of value for which you paid only $500, based on our agreement.” That’s a clearer picture – and better communication – of the relationship.

So subscription billing has become really important. And what subscription businesses are saying is that, while the ERP applications that they’ve been using for the last 20 or 30 years are great for a product business, as they shift to a customer-centric model, they need something new. Subscription billing is at the core of relationship business management, it’s what glues together the vendor with the customer to create the customer relationship. Rather than being a by-product of the seller/buyer relationship, it’s now the relationship itself. Everything comes down to that bill.

Customer bill + customer usage information = magic

Once you start focusing on your subscription billing process, you quickly get a read on what’s going on with your customers and how they’re interacting with your service – which serves as a helpful tool in better serving your customers and providing what they actually want (and will pay for). When financial information, like a customer bill, is married with customer usage information – that’s the magic that you need in order to build the relationship with your users. These combined analytics give you deep insight into customer loyalty. The next step is to take those insights and those relationships and turn that into a recurring revenue model that brings you closer to your customers.

And that’s why we get excited about subscription billing. Because we’ve moved beyond the old-fashioned idea of a bill simply being about invoicing and collections. Because we’ve moved beyond a simple transactional view of customers. Because we’re moving from a product economy to a subscription economy, from ERP systems to relationship business management systems. Because we’re prioritizing building relationships over shipping products. Because we’re in the middle of a once-in-a-century transformation of business models across all industries. And because subscription billing is at the center of it all.

If you’re excited (!) to learn more about subscription billing and how the subscription economy is changing the way every business operates, check out Zuora CEO Tien Tzuo’s CXO Talk: Digital Transformation and the Subscription Economy or read highlights from the podcast here.

Questions about subscription billing? Ask us in comments below.