The Subscription Economy Shift Is Bigger than You Think

July 19, 2018

Guest post contributed by Craig Hanson, General Partner, NextWorld Capital, in conversation with Tien Tzuo, CEO of Zuora.

You can read the original article here.

The movement of businesses toward a subscription-based model has firmly entered the mainstream now, spurred by successful examples like Netflix, Spotify, and Salesforce.

“Digital transformation” is a boardroom-level imperative at leading global corporates.

Public markets value the revenue of companies with a subscription-model 2–3x higher than those with a one-time, transactional sales model. And yet, with all this change, we are only beginning to realize how massive this shift is.

To understand what everyone is underestimating, we went to the visionary who foresaw this shift a decade ago. At our recent 1to100 conference, we sat down with the CEO of NextWorld Capital portfolio company Zuora — Tien Tzuo — who (quite literally) wrote the book on the subject of subscription business models and just took the company public earlier this year. Tien explained why the ‘subscription economy’ shift is bigger than most people realize, and its implications more far-reaching and exciting.

Watch Craig and Tien in conversation:

Or read on for some highlights from their discussion…

Solving a big, boring, pain-in-the ass problem

Tien started his subscription journey at Salesforce (where he was employee number 11) and helped build the foundation for the industry giant it is today. Salesforce’s subscription-based software forced the company to reimagine every part of its business, and sowed the seeds for Tien’s future. “It sounds simple, but that had massive, profound implications on the entire company, from our business model all the way down to how we built the product” says Tien.

And so Tien’s vision for Zuora was born — a new finance platform for subscription businesses (and traditional enterprises seeking to transform into one). As Tien admits in his book, “we were trying to solve a big, boring, pain-in-the-ass problem.” He rightly anticipated that the impending movement to subscription models was going to create a massive opportunity for widespread discontinuity at a core operational level — the entire quote-to-cash and revenue recognition process (basically everything in between ERP and CRM and just as big of a market size). It was a prime opportunity for a startup to attack.

“[The subscription model] was interesting because it invalidated all the incumbent companies — the Oracles, the SAPs of the world — and gave us a chance to build something profound and new.”

Subscription = stronger relationships with customers

It has become clear that Zuora’s initial product was just the spark for a wholesale reimagination of how a company engages with its customers and runs its business. Subscription business revenue is growing 8x faster than S&P 500 — and for a very good reason. Tien attributes this to subscription-based companies having a more intimate understanding their customers’ behavior, wants, and needs.

“The subscription model isn’t about, ‘Look, I’m gonna sell you the same way, but I’m gonna sell it to you at 10 bucks a month versus 100 bucks up front.’ It’s about a whole different way of engaging with customers that leads to a much healthier company and a much healthier product.” According to Tien, shifting towards a subscription model is a fundamental transformation in the nature of customer engagement. It changes a company’s focus pushing products to customers (where the central unit of business is the transaction) to servicing customer needs in an ongoing, dynamic relationship (where the central unit is customer happiness).

“Imagine that you’re a company that used to just send out a product but didn’t really know what your customers were doing — and now you can actually see what they’re doing every single day. If you apply that to General Motors with the millions of drivers that they have, or Disney with all the folks watching movies, buying stuffed animals, and going to theme parks, you’ve got a whole new way of thinking.”

Subscription-based companies can listen, engage, and continually serve their customers’ expanding interests. As a result, they can also develop their products iteratively, providing ever-growing value to the customer.

Beware startups — subscription is no longer an edge over corporates

Early in his career, Tien believed that startups had an edge over established enterprise companies when it came to moving toward a subscription model. However, he sees that gap beginning to close. Even the most traditional industries, such as manufacturing and automotive companies, are setting up recurring revenue subscription businesses. “What we’ve seen over the last 10 years though is that although this shift can favor a disruptor, it can also favor an incumbent. These big companies have big customer relationships, so they can learn a lot from them. In the last five or six years the conversation about digital technology is causing these guys to transform pretty quickly.”

A big inflection point in Zuora’s growth has been the embrace of platform by the very largest, global corporate giants — expanding beyond the software companies that kicked off Zuora’s initial growth. These traditional corporates leaders don’t just see subscription models as defense against disruptors, but as a substantial, long-term competitive advantage. On its recent quarterly earnings call, Zuora announced that over half of its business is now coming from non-tech companies.

The future of the subscription model

Looking into the future, Tien sees the subscription model continuing to pick up steam — and fueling growth across all sectors, both those growing rapidly and those that have been stagnant or even in decline.

“The best examples of that today are the technology industry where you look at what’s happened with Adobe or PTC. Or the music sector that had been on a 15 to 20 year decline ever since Napster. And now in the last two or three years it’s been growing again because they rediscovered their customers through Spotify and others. The artists are making money again and the whole sector’s starting to grow. What these companies are discovering is that if they do [subscription] right, they become growth companies again.”

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Read more about the rapid ascent of the Subscription Economy and the latest trends across industries and geographies in the latest edition of the Subscription Economy Index.