More and more companies are turning to the emerging subscription economy, and it could be time for the manufacturing industry to tune in, Zuora CEO Tien Tzuo told CNBC Wednesday.
“They know how you use your product. They provide a service to you,” Tzuo said in a sit down with Jim Cramer on “Mad Money.” “What you’re gonna see is every physical product, from appliances [at] Whirlpool, cars from Ford, tractors from Caterpillar, they’re all going to go through a transformation and become services. ”
In the past 7 years, Cramer pointed out, subscription businesses have grown revenue five times faster than the S&P 500, according to a subscription economy index. That equates to about 300% of growth during that period, Tzuo added.
Zuora provides software to help businesses launch and manage their subscription-based services. The cloud company has a $2.2 billion market cap.
“What we’re seeing is the early adopters of the subscription economy are finding growth and that’s why everybody is moving into the space,” he said.
A large subscriber base of long-term customers could help influence a company’s value, Tzuo said. That explains why Wall Street has placed a lot of value in the more nascent subscription businesses, he added, such as Netflix.
“This business is about building customer-centric business models taking technology today – IoT, mobile, whatever it is – and then transforming what you do as a service,” he said. “This is the heart of these digital transformations that the companies are going through.”
Cramer: There’s a great line in your conference call where you say: “The vast majority of business models have to eventually transition to subscriptions.” That seems like a bold comment given the fact that most businesses don’t even know what a subscription does.
Tzuo: For the last ten years we’ve seen the rise of this thing we call the subscription economy, but here in 2019, what we’re starting to see is this idea of the end of ownership. That might sound like a crazy idea but all around you you’re seeing unit sales go down. Just look at the car industry. The number of cars sold last year actually went down.
Cramer: I’m glad you mentioned it with employment up and with household formation growing we should have the biggest number of cars sold.
Tzuo: We should. Car sales are down in China of all places, where so many more people are coming into the middle class but it’s going down because there’s so many other options out there that anybody under 35 is probably opting not to buy a car.
Cramer: Now do Ford and GM understand this?
Tzuo: Well here’s the thing, the number of miles driven has gone up. And so, if the car companies can think like a subscription company and tie it to miles driven their revenues would go up. But if it’s tied to car sales it’s only going to go down for the next decade. McKinsey says there’s $1.5 trillion of connected car services available and the question is, who is going to get that revenue? Is it going to be the car companies? I would bet on them.
Cramer: I think people have to understand the unique proposition you offer. Every subscription company I know has to use you because you are the gold standard and yet when I look at it, I see companies like caterpillar what do they know? they reported today, a good company but they’re not new in the sense of knowing how to subscribe something.
Tzuo: Well what’s driving the end of ownership? We think subscription business, we think these technology companies – Zoom is a great example. Or you think about media companies – Dow Jones, the Financial Times, The Economist. But every single physical product is now coming off the assembly line connected to the internet. And what’s happening is these products are becoming essentially edge devices in a network. What companies are seeing is now that my products are smart, when my engineers know how my customers are using my product – which is exactly like SaaS companies. They know how you use your product and they provide a service to you. What you’re going to see is every physical product from appliances from Whirlpool, cars from Ford, tractors from Caterpillar – they’re all going to go through a transformation and become services.
Cramer: Well I think it’s rather amazing because I think a lot of these companies will be far more lucrative. not something they should necessarily fear, correct?
Tzuo: Well if you look at the software industry, the software industry was in the doldrums around 2005/2006 but when the industry tipped over to SaaS, it found growth and we really believe the manufacturing industry – as it goes through this transition – is going to find new sources of growth because the power of subscription businesses ultimately is growth – it helps you grow your business,
Cramer: You’ve got a great stat from the Subscription Economy Index. The latest from the fall shows the last seven years they grew revenue five types faster than the S&P 500?
Tzuo: Yes, five times faster than the S&P 500 and grew 300% in the last seven years. So what we’re seeing is the early adopters of the subscription economy are finding growth and that’s why everybody is moving into the space.
Cramer: Now, usually I hear that Europe is way behind us. But Europe’s moving fast on this?
Tzuo: This latest study we did was super interesting. Europe is slightly faster in growth to subscription in the economy. For a while, the technology sector was in the lead but the IoT sector has actually eclipsed the technology. Manufacturing companies releasing smart devices connected to the internet.
Cramer: Now, you also have Collect which I like because there’s a lot of — one of the big problems people with subscriptions is deadbeats we don’t call them that, we call them that people who haven’t paid.
Tzuo: Collections is a great example of how these businesses are so different in the old model, I shipped you the product. if you didn’t pay me I’d come to collect. But, I want you to continue using the service. Maybe you need a break, maybe you need to update your credit card or maybe you need help through a period of time. So — once have you a relationship with a customer, collections becomes a sensitive dance to make sure – look, I would like you to retain a long-term customer, how do you do that?
Cramer: The key to me and subscription is long-term value of customer and if you can make it so someone is a customer and stay long-term, I can price that company’s value.
Tzuo: Well, that’s why Wall Street is valuing these new subscription businesses coming on the market so much higher than their product counterparts and I think you have the essence of it. The people don’t quite understand the subscription economy are taking existing products and trying to figure out how to pay over time. That’s not what this business is about. This is about building customer-centric business models. Taking technology today – IoT, mobile, whatever it is – and transforming what you do as a service. This is the heart of these digital transformations that these companies are going through.
Cramer: Well I said this to you when the company was private and now it’s public. It’s a game breaker. You can’t really run a subscription business unless you hire these guys. It’s rather amazing. It’s about as close to a monopoly as you’ve seen if you are in the subscribe that’s Tien Tzuo, founder of Zuora. I don’t get why it’s trading so low.