Analyst Perspectives

Zuora provides software that supports the rapidly expanding subscription economy. I recently attended the company’s user event in London, called subscribe16. During his keynote speech CEO Tien Tzuo insisted that the subscription economy is not only here to stay but is likely to grow substantially. In the U.K. alone, he said, 40 million users are using subscription services, including 14 million use video streaming services, 5.4 million use music streaming services, and perhaps most surprising, 78 percent of adults age 55 or older use at least one subscription service.

So what is the subscription economy? I don’t believe the subscription economy is new, having worked more than 20 years ago in what was and still is a major subscription business – telecoms. This industry is based on a relatively simple model: customers sign up for service and are billed for phone usage based on an agreed monthly fee and the volume and type of calls made. Other industries are taking up the model. For example, many software vendors have moved from a one-off license fee and a periodic (typically annual) support fee to having customers sign up for a fixed term and pay a variety of fees, including a recurring fee based on usage. What is new is that the internet allows many more businesses to make a similar switch from a one-off product sale to services based on usage; this is the subscription economy. Examples include music and video streaming services, photo shops (online services that allow photos to be printed on demand), on-demand car hire, news feeds and flying (subscribe to a service, book flights and pay on a subscription basis).

This model changes two fundamentals: the customer relationship and billing. The customer relationship becomes more proactive and connected. Organizations need to work harder to ensure that customers perceive they get maximum value from their contract and in return the organization maximizes customer value over the life of the contract, by extending and expanding it and increasing usage. In the telecom example, marketing strategy encourages the customer to make as many calls as possible and use voice and data services; at the same time it tries to reduce the need for customer service by spotting and resolving inefficiencies before they become issues for the customer. Our benchmark research into recurring revenue shows that in this environment customer engagement becomes key. It must be proactive throughout the duration of the contract, involve marketing, sales, service and finance, and be based on information derived from the customer’s use of the service.

The second change, in billing, becomes far more complex because it is based on usage and may include pricing bundles for multiple services. Organizations thus have to collect data from the systems used to manage and provide the service (for example, the telecom network), price individual items and them combine price and usage to produce the customer’s invoice.

The subscription model introduces further challenges such as creating and maintaining a catalog of service offerings and related pricing, producing pricing for various bundles of services, initiating and managing service features based on the customer agreement, collecting usage data, managing financial aspects of the service, and monitoring and assessing service usage.

Zuora has built a product of the same name, which it provides as a cloud-based service, that addresses these issues In 2015 it won a Ventana Research Technology Innovation Award. Zuora has eight components that span from end to end the process of managing a subscription business:

• Subscription Management enables organizations to build their catalog of services and create pricing rules.
• Subscription Quoting allows organizations to produce price quotes for any bundle of services included in the catalog.
• Multi-Channel Commerce lets customers manage their own subscriptions and accounts.
• Recurring Billing manages the specialist tasks associated with subscription: It can activate services, capture usage, price usage, and produce bills or information to be exported to the organization’s invoicing system to produce bills.
• Recurring Revenue tools allow organizations to manage revenue recognition and associated tasks.
• Global Payments enables organizations to collect payments through a variety of methods, including importing payment details from their invoicing system.
• Analytics tools analyze multiple aspects of running the subscription service.
• The Cloud Platform is an underlying collection of tools that centrally manage common services used by all the other tools, including integration with third-party systems, scalability, reliability, security, extensibility, and an app store where Zuora partners can make available tools to support specific aspects of running a subscription service.

Each of these modules includes a range of capabilities that Zuora has built specifically for running a subscription-based business. To me, analytics and the platform are the keys. Using analytics, organizations can assess how their usage-based subscription service is performing, what capabilities users are using (or not), and faults or potential faults. For example, a software vendor can see what capabilities users use most (and what they don’t use), and historical analysis can predict likely software errors. This crucial information allows organizations to do two things: proactively reach out to its users (for example, to suggest ways to get more value from the service) and focus on developments that avoid potential errors or add functionality to the most heavily used capabilities. It also allows organizations to rethink the metrics they need to run a successful subscription service and create rules to calculate them.

The platform is key because it not only provides common services for all the other applications but includes tools that allow integration with third-party systems. This is vital because Zuora doesn’t claim is to offer all of the systems needed to run a subscription business. Rather it fits into a framework of systems that typically will include CRM and ERP. This limit is both a good and a bad thing. Integration is key, because the system has, for example, to exchange customer data with the organization’s CRM system so the company has a “single version of the truth” about its customers, and in several instances data has to be exchanged with the corporate financial systems. Zuora’s underlying platform supports these types of integration, which also facilitates implementation and operation. On the down side, organizations need to think carefully about what data must be exchanged between systems and how this should be done to ensure data is consistent across its architecture.

For me one of the gems included in the platform is the ability to manage subscriber identifiers. Our research shows that customer data is at the core of many issues organizations have in running subscription-based services and providing common customer experiences. Most organizations have multiple systems that manage customer data, and each is likely to have its own key – the customer identifier (such as name, account number, telephone number, email address or invoice number). The Zuora platform includes a customer database that stores all of these against a common customer record. The database can be populated manually, or the system can “learn” what records belong to what customer and populate it automatically. In this way the system can fit within an architecture and orchestrate the exchange of data or the consolation of information to produce reports and analysis. Zuora spokespeople admit that this integration is not yet perfect, but it goes further than other systems I know about.

I have no doubt the subscription business is here to stay and is likely to get more complex. The Internet of Things (IoT) will allow more devices to be connected, which will enable more on-demand, subscription-based services. With that comes more complexity of running such businesses, increasing the need for specialist system such as Zuora, a view supported by my colleague Mark Smith. Organizations should reimagine their business models because other companies are likely to spring up that reinvent how products and services are provided; for instance, like it or not, Uber has changed the way the “taxi” business operates, and in the future driverless cars available on-demand might even reinvent its business. I recommend that as companies develop subscription-based services, they assess how Zuora can support those efforts.

Regards,

Richard Snow

VP & Research Director Customer Engagement

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