This Q&A, translated into English, with Zuora CEO Tien Tzuo was originally published in Journal du Net by Adrien Tsagliotis.
Last October, the former Salesforce CMO published a book to decipher the subscription economy boom. His company, Zuora, offers a platform to deploy offers by subscription.
Ten years ago, Salesforce, pioneer of SaaS, overturned software codes by marketing its CRM application via the web by subscription. What led you to join Salesforce?
I joined Salesforce as the 11th employee before taking on the roles of CMO and Chief Strategy Officer. At the time, I was filled with disillusionment watching how the software industry worked. It was as if the objective was to trap the customer so that they buy your software without really trying to add value in return. It made no sense. At the same time, this invention called the internet began to be adopted by households, even though most of them had not yet Wireless at home.
However, we observed that access to the web was being democratized and we had the idea of marketing Salesforce as a service. We would now store our software on our servers and thus become responsible for its infrastructure.
Was it easy to convince the first customers?
For 9 years, my role within Salesforce was to convince companies that they no longer needed to own software. At the outset, our speech did not find resonance with large companies. Our target was rather SMEs, many of which were start-ups. The decision-makers of large companies thought that buying costly licenses guaranteed them more security and that this purchase was cheaper in the long term, which made no sense to me. Because by choosing to subscribe to software stored in the cloud, these companies could instead save money. For example, they no longer needed to install huge internal servers or hire maintenance technicians.
What are the advantages of this subscription model?
When Salesforce went public in 2004, analysts and investors on Wall Street thought our model was stupid. Their reasoning was: why generate revenue over a long period of time with a subscription rather than cashing in this money all at once by selling a license?
When Adobe made a similar change by selling its solutions by subscription, the company’s revenues logically fell and its short-term costs increased because it had to invest in its infrastructure. For Wall Street, it was therefore a bad model. However, once a company develops its subscriber base, its business becomes much more stable in the long term. Because for customers to come back every month or every quarter, you have to offer them a service that they will really continue to use. If it succeeds, a company will be rewarded with stable long-term revenues and therefore faster growth.
In your book entitled “The subscription business model: Why the subscription model is the future of your business – and how to do it” published in 2019, you talk about this change in era called ”end of ownership“. How do you explain this evolution?
In 2007, I was already convinced that having software made no sense and then I asked myself this question: does owning something still make sense? Consumers now have Netflix and most of them probably haven’t bought DVDs for a long time. Each year, the rate of possession of vehicles is falling. This is also the case in India and China. There are now alternatives such as Zipcar or Uber. However, the number of kilometers traveled per individual is increasing! In reality, we have moved from an era of ownership to an era of usership: people read more news, watch more movies, listen to more music, play more video games, etc. Companies that make their customers use their services more will generate more revenue in the long run.
Do you think that the business-customer relationship has evolved in recent years?
For many years, consumers have maintained a close relationship with their merchants, whether with their butcher, grocer, baker, etc. It is only in the last 100 years, with the development of the manufacturing sector, that companies have started to mass sell products from the same assembly lines. These companies did not seem to listen to the expectations of their customers. They simply created products that people bought and the relationship ended there. Conversely, I like to know that the services I use every day, such as Spotify, Google or Amazon, take my opinion into account and seek to bring me value. I think a personalized relationship between a company and its customers should be the norm. The relationship maintained by most companies in the manufacturing sector in recent years was, in my opinion, the anomaly. The new generation goes even further and now requires companies to assume their ecological and social responsibility.
Did the development of the Internet change the consideration that companies have for their customers?
When I was at Salesforce and we first put our software online in 1999, we were able to see the next day how our customers were using our product. It was fascinating because previously we had no idea how our customers behaved towards our software. We just couldn’t, unless we followed them into their office. This access to data has changed the way we design products.
Whether pharmaceutical devices, activity trackers or washing machines, etc. All of these objects are now connected to the web. This data windfall allows engineers to create better products and experiences. Think for example of the automotive sector: companies like You’re here now know a lot about their customers thanks to the connected car. This revolution should moreover accelerate in the years to come.
However, do you think that tomorrow’s consumers will have countless subscriptions for all types of services?
My vision is that the concept of ownership will no longer exist in the world of tomorrow. Of course, there will be exceptions, particularly vis-à-vis collectors or for certain types of products. However, this does not mean that we, as a consumer, will have monthly subscriptions for everything. For example, Uber has chosen to invoice its customers based on journeys made by offering prices that vary according to day, time, etc. However, Uber remains a service provider. The question linked to the pricing model chosen is, in my opinion, secondary. The way in which a company can innovate in terms of supply and pricing is endless. Apple is one of the companies that has made this change in recent years by choosing to monetize its customers through services. The company has also stopped reporting its iPhone sales figures.
Have you been surprised by companies from so-called traditional sectors that have adopted this subscription model?
In the book, I cite the example of Fender, a company that historically markets guitars. It is the perfect illustration of a brand that has understood its customers. The company has indeed realized that 50% of its sales were made by new customers. She also noticed that 90% of them gave up learning the guitar after a few months. The brand thus understood that, for many, learning the guitar was not so simple. Fender, therefore, decided to invest in an online training platform by creating an application called Fender Play that allows you to learn to play. This strategy has paid off, and this is the lesson for me: what do your customers really want and how can you use technology to help them achieve their goal?
Does this subscription economy still have good years ahead of it?
I’m convinced. We also observe at Zuora (a company that develops software allowing companies to manage their subscription services, editor’s note) that this underwriting economy is growing very rapidly in Europe. Today there are a plethora of tools for creating services and that is why companies have no excuse not to do so. The business model of selling products without trying to understand customer expectations is a thing of the past. To businesses I say this: stop selling a product, think of providing a service to your customers to turn them into subscribers.
If you’re interested in receiving Zuora CEO Tien Tzuo’s insights directly to your inbox, sign up to receive the Subscribed Weekly here. And check out his book SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future – and What to Do About It.