By 2020, more than 80 percent of software vendors will change their business model from traditional license and maintenance to subscription. – Gartner
There has been a growing preference for consumers and businesses to subscribe to services instead of buying a product. The “subscription economy” is a range of services – media (example: Netflix) and technology products and services (example: Salesforce and Zuora) – delivered digitally by mobile devices, powered by the cloud. This is a shift from a pay per product to a subscription based model. Subscription management business models are implemented by the fastest growing tech companies across multiple industries. The pay as you go option provides a degree of flexibility that allows businesses to scale and manage expenses as needed. The adoption of cloud computing technologies in the last decade and software-as-a-service solutions have fueled the explosive growth of the subscription economy. The shift to the cloud and subscription-based business models will affect more than $1 trilllion in IT spending, per Gartner.
According to Gartner, the main drivers for subscription services include:
Consistent access to updated software via the cloud
Flexibility to scale up or down based on usage
At the heart of the Subscription Economy is the idea that customers are happier subscribing to the outcomes they want, when they want them, rather than purchasing a product with the burden of ownership. – Zuora
The subscription economy was a phrase coined by Tien Tzuo, founder and CEO of Zuora.. Tzuo is widely recognized as one of the thought leaders in the software-as-a-service industry. He founded Zuora in 2007. As Zuora’s CEO, Tzuo has not only built one of the fastest growing SaaS companies, he’s also evangelized the shift to subscription based business models and the complex billing structures they inherit, coining the phrase Subscription Economy. Zuora has been enabling the Subscription Economy by building the next generation commerce platform. Zuora’s subscription management software has enabled 21st century businesses around the world from startups to enterprises in any industry to launch and monetize any subscription products and services.
Before Zuora, Tzuo was one of the ‘original forces’ at Salesforce, joining as employee number 11. In his 9 years at Salesforce, Tzuo built Salesforce’s original billing system and held a variety of executive roles in technology, marketing, and strategy organizations, including building out the product management and marketing organization, serving as Chief Marketing Officer for two years, and most recently as Chief Strategy Officer.
Ray Wang, bestselling author, futurist and CEO/Founder of Constellation Research, and I invited Tzuo to our weekly show DisrupTV to learn more about the importance and benefits of a subscription-based business model.
What is the Subscription Economy?
Tzuo reminds us that we are buying less stuff using cars and ride sharing as examples (Uber and Lyft), and DVDs and CDs versus streaming services on browsers and smartphones for entertainment (Netflix, Spotify and cable channels). Businesses are also buying less hardware and software and instead investing in software-as-services consumption models. Tzou believes that businesses need freedom to grow, freedom to experiment, freedom to reinvent.
According to Tzuo, there is a once-in-a-century shift going on right now. Customers no longer don’t want to buy products. Customers and businesses want freedom to get what they want. Companies are realizing this and they are going beyond the product to offer a subscription experience. This is a whole new world causing businesses to change.
The introduction of subscription business models have accelerated market disruption. Since the Fortune 500 was first published in 1955, 89% of the list has turned over. Of the top 10 companies in 2000 by market value, only 2 are still on the list. Digital disruption in businesses, powered by cloud and mobile technologies, will impact every business in every industry.
According to Tzuo, study of digital disruption points to new business models that are centered on customer relationships. Large companies have the most customers already and the biggest brands and innovation capabilities. Today, these companies are thinking about products. Today, companies have to shift their focus on services and digital reinvention and subscription-based business models.
What is causing the shift from buying products to subscription services? And how fast is this new business model growing?
Digital transformation of business is causing The Subscription Economy to grow faster than expected. Zuora published the Subscription Economy Index (SEI) for 2016 to show how large and fast Subscription Economy is growing. Tzuo sees the subscription based business growth trajectories across the globe, inclusive of all industries and different size businesses.
- IDC predicts that by 2016 65% of the world’s largest enterprises will have committed to becoming information-based companies, shifting their organizational focus from product sales to ongoing services.
- The revenue growth of the subscription based businesses is growing on a quarter-to-quarter basis, nine times faster than the growth compared to their general S&P 500. – Zuora SEI 2016
- SaaS companies are growing 30-50% annually versus perpetual software license business models growing at low to single digit revenue growth rates. – Zuora SEI 2016
What is holding back the companies stuck in the product era?
Tzuo points to the importance and dichotomy of technology model innovation versus business model innovation. Business leaders often ignore the fact that these two things go together. Tzuo points to Salesforce as an example of a company that has always been focused on technology reinvention and business model reinvention. A new business model was as important to Salesforce as the new technology model. At the core of business model reinvention, Tzuo believes is the idea of rethinking your business model as selling products to a distribution channel but rather wrapping around your customer. What is the value proposition, how can you monetize the relationship and build a stable reoccurring revenue base around the earned loyalty that a company generates. This a shift from brand to customer loyalty. Its about customer success – a mindset and philosophy that Tzuo and team invented at Salesforce.
Tzuo and team Zuora wanted to engage their customers in a whole new way, using a fundamentally different business model. Zuora wanted to be a customer success company. A customer centric business model requires dynamic systems that is adaptive, intelligent and flexible. Tzuo viewed the customer relationship as fundamental to the subscription model and billing is key to that relationship. Billing and invoice is critical embodiment of a customer relationship. Tzou points to large companies with legacy billing systems that are unable to meet today’s business demands because of their product-centric business models versus customer-centric business models.
The idea for Zuora actually started at Salesforce. People think of Salesforce as the pioneer of a new technology model we now call Cloud Computing. But we spent just as much time, if not more, on creating a new business model for software — subscriptions. But to do that, we had to build all these systems, and those systems could never keep up. No company today would dream of building their own email or ERP system or billing platform. – Tien Tzuo
The Future of the Subscription Economy
The future of the Subscription Economy will be powered by artificial intelligence. Tzuo points to Internet of Things and intelligent applications and reporting capabilities that ultimate create subscription services. All companies are becoming service oriented companies and the subscription-based business models are best suited to support business adaptability and customer-centricity. In the age of the customer, where personalization, immediacy, and intelligence is the new currency to compete, the subscription business model ensures the company’s focus to earn the right to future business. “The Subscription Business Model is exploding and all companies are moving. Our primary focus is continuing to innovate and help these companies succeed in this new world,” said Tzou. The best retailers in the world are using emerging technologies to better understand their customer identity and future needs.
Every device and application will be smart. Tzuo share his point of view on future business trends powered by emerging technologies, including adoption of intelligent commerce, intelligent applications powered by AI, and the Internet of Things. Please watch our video conversation o learn more about future of the Subscription Economy and Tzuo’s predictions for 2017.
Market takers focus on the product and technology innovation. Market makers focus on business model and technology innovation. Zuora is a company that best represents the latter and Tzuo is a pioneer in this space.