Last week in San Francisco, Zuora’s fifth annual Subscribed event presented a bold view of the future of subscription-based business. As their “Relationship Business Management” moniker shows, they’re taking the conversation far beyond the billing component where it began. It’s a vision that seems to resonate, both with customers and investors. I’m not quite as bullish on the inevitable dominance of subscriptions over traditional asset ownership, but I appreciate Zuora’s conviction and believe that their enthusiasm in bringing that conversation to the market will help everyone involved. Here’s why:
If we only thought about subscription billing, its value would be judged mostly in terms of facilitating transactions. That doesn’t adequately draw attention to what’s required from the business side in rethinking how we design products and services, engage customers, and intelligently measure business performance. That’s a broader discussion that focuses on different concerns and involves different participants that wouldn’t usually be involved in the traditional quote-to-cash process for products or project-oriented services. So even if you’re not a current or potential Zuora client—or even if you’re a competitor—it’s beneficial for everyone to have someone championing this dialogue.
So let’s start with an idea that certainly deserves to be labeled “bold.” It wasn’t a focus of the main-stage presentations, but the idea of having a customer relationship-centric application supplant ERP as the main enterprise system of record was certainly present. In this environment, ERP is relegated to a home for the GL, rather than as the foundational system into which everything else must integrate. The system that manages customer relationships assumes that central role. To be honest, prior to the event, I hadn’t realized exactly how ambitious RBM really was.
That’s just crazy, right?
No, I don’t think so. ERP’s origins came out of a specific need tied to production. What began as Material Requirements Planning (MRP) grew and evolved over time to become what we know today as ERP. Its core, at least for the larger players in the space, remains dedicated to the making of things and all that entails. Newer entrants like NetSuite, Unit4, and FinancialForce are more in tune with the professional services world, which is certainly different than product manufacturing, but still isn’t naturally attuned to the pricing complexity, provisioning, and alternative financial metrics that subscription business requires. With that background, I don’t think it’s out of the realm of possibility for something like RBM to form the core of a new system which follows the same path of evolution and expansion over time.
But it’s at least a little bit crazy.
For new businesses who focus on subscription-based services (i.e. those who are starting from scratch technology-wise) the storyline makes sense. For young businesses who have reached the limits of QuickBooks and would need to transition anyway, it’s not a stretch. But for established businesses that are already up-and-running on an ERP, the transition is more difficult and seems less likely. The same goes for businesses who are not exclusively subscription-oriented. For whatever portion of their portfolio requires manufacturing, warehousing, inventory management, logistics, etc., traditional ERP systems will win out. I don’t think this is a huge loss, or a sign of weakness for the model, however. You don’t need 100% penetration to be a wildly successful business.
A Counterpoint from a Grumpy Old Man
The belief that anything and everything will evolve to be subscription-based requires a pretty big assumption: that individuals and businesses will be perfectly happy in a rental economy.1 That’s what we’re really talking about. A move towards subscriptions means a move away from ownership. It makes all the sense in the world for the sell-side of the equation: they’re willing to potentially lose money on customer acquisition because they more than make up for it in the long run. Buyers, however, lose control. Let’s use a simple example: purchasing a car.
To keep the numbers easy, let’s say we purchase a $36,000 car at 0.0% APR and a three-year term. We’ll pay $1,000 per month and own it outright in three years. We could have leased the same car for $500 per month, or $6,000 per year. At the end of Year 3, the lease looks like a good deal: we had the same amount of car usage for half the price. At the end of Year 6, assuming we picked up another lease with the same terms, we’re all tied up (ignoring inflation). But what happens next? Every year thereafter, the car owner drives for free, while the lessee pays another $6,000. Let’s say we get to the end of Year 10, and the owner needs a new car. They’ve gotten ten years of car usage for $24,000 less than the lessee.
Now, we all make choices. In this example, we could choose to own or we could choose to lease. It was up to us to figure out what option was best. In the “new world order” of aggressive subscription-ization, we don’t get to choose. We’re forced to pay that extra $24,000. For businesses, that is a demonstrable negative change in their Total Cost of Ownership for any investment. This is exactly what we’ve seen with the early-movers like Adobe (with the Creative Cloud) and Microsoft (with Office 365). Some folks are perfectly happy to accept less-than-cutting-edge functionality in order to extend the life of products they’ve bought in perpetuity. Those options are gone… for now.
Three Cheers for Economics and Michael Porter
The good news is that one of two main things will happen as the subscription pendulum swings a bit too far: either customer discontent will force providers to offer ownership options, or someone else will bring a competitive offering to market that does. If there’s an underserved market for perpetual licenses, someone will fill that competitive gap. Either that, or the FTC and DOJ will be very busy looking for signs of an underlying agreement to limit competition and force the subscription-only model on consumers and business customers.
This All Came Up at Subscribed?
Well, no. Subscribed was a great catalyst for these types of discussions, however. What did come up were a series of product updates and announcements that built out Zuora’s RBM vision. The two biggest (to me, at least) are the introduction of RBM Connect and the acquisition of Frontleaf, which is the foundation of the new Z-Insights product. With RBM Connect, Zuora introduced a new app marketplace that gives customers a one-stop shop to find and acquire supplemental solutions to add new functionality to their subscription management process. It’s a smart move, as it adds value (and stickiness) and cements Zuora’s position as the central hub for RBM. Z-Insights expands their portfolio with a customer intelligence solution capable of integrating multiple data sources to compile a holistic view of the customer – to better understand their experiences and needs, and to better tailor outreach and offers to reduce churn and facilitate cross-sell and up-sell opportunities. Not too shabby.
One of their recently-announced partnerships also underscores how the subscription business market is maturing. By bringing Tidemark into the fold, they enable the application of strong enterprise planning, budgeting, and forecasting in the subscription arena. Even in traditional companies, this is a process that all-too-typically is still run via spreadsheet – and all-too-often simply extrapolates from historical numbers rather than applying analytics to understand and model business drivers. Adding this level of functionality by means of the partnership helps to elevate the discussion, and positions it as truly within the realm of subscription business rather than just subscription billing.
As I head back from San Francisco and think about everything I’ve heard this week (both at Subscribed and IBM Vision, which is the subject of another publication), I’m encouraged with where this market is headed. While I may be a bit more reserved in my expectations for (or, actually, adamantly opposed to) subscriptions being applied to everything in the economy, I think there a huge number of areas where they can make sense. Right at the top of that list is the data, and data-enabled, services that we’re seeing evolve in the Internet of Things space. There is a huge opportunity here for product and services companies, and an equally large opportunity for providers who can help them understand, plan, and successfully execute subscription business strategies. Even if you don’t end up choosing or evaluating Zuora in that context, it would be tough not to thank them for helping to push this important conversation forward.
1. There’s another, related concern to keep in mind as well: a lot of data-oriented services and customer analytics solutions rely on the existence and accessibility of large customer datasets to mine for behavioral information. These services’ and solutions’ potential will be compromised if there is a societal/political push-back against ubiquitous data collection and exploitation. When we’re simply talking about integrating weather data to better understand its impact on retail sales, no one will object all too much. When we pivot to retailers or financial institutions analyzing your spending behavior to predict what life events you’re planning (new house, new car, new marriage, etc.), it starts to feel much more invasive. Big Data is all fun and games until you realize you’re being targeted as a “Segment of One.” But that’s a grumpy old man discussion for another time.