Welcome to another in our One on One series of conversations with some of the most thought-provoking entrepreneurs, authors and experts in business today. Tien Tzuo, CEO of Zuora, a leader in cloud-based subscription management for billing and payment solutions, spoke with Brent Leary in this interview, which has been edited for publication. To hear audio of the full interview, page down to the loudspeaker icon at the end of the post (the gray and black icon right above the “About the Author” section).
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Small Business Trends: Can you tell us a little bit about your background and what Zuora does?
Tien Tzuo: I have been in the enterprise software industry all of my career. I joined Salesforce.com in 1999 as employee number 11 and held a bunch of executive roles there [including Chief Strategy Officer]. I had a ringside seat to watch an industry transform from a product to a subscription way of thinking.
At Zuora, we think that years from now businesses will find themselves buying less and less products and subscribing more and more to services, whether software services [like] Google applications, or transportation services like a Zip car, or computing power from Storage, or collaboration from Box.net. We think the world is shifting to a subscription-based economy.
Small Business Trends: What are the differences between the subscription economy and the economy we have grown up with?
Tien Tzuo: It’s a whole different way of thinking. The old way is a 20th-century way of thinking anchored around manufacturing, where you think about your product and how many units you can ship. The new way of thinking starts with the customer:
- How many customers do I have?
- How many customers did I have at the start of the year?
- How many customers have I acquired?
- How many customers have I lost?
- What is my average revenue per customer?
Perhaps if I am more sophisticated: “How do I segment my customers into high, medium and low value customers? How do I move them up that chain? How do I get a greater share of wallet?” It’s a way of thinking of the customer as a user of your service on an ongoing basis, and coming up with subscription-based plans that allow them to opt for the plan that best suits their needs at that moment.
Small Business Trends: What are the positives and negatives of the subscription economy?
Tien Tzuo: It’s a great way to increase revenues and generate customer loyalty. Amazon.com is a transactional oriented company, but they came up with this idea of Amazon Prime. This allows people to pay $79 a year and [join] a club that has benefits: in this case, free shipping. That creates customer loyalty. Amazon Prime customers are much less inclined to go to a competitor’s website because they have this membership and get [value] out of it.
How does that apply to small businesses? Perhaps you run a print shop. You can have a transactional mindset: People come in, pay for a print job and that transaction is completed. Or, you can say; “Why don’t we put all of our customers on a plan?” There can be a zero-dollar-a-month pay-as-you-go plan, or a $200-a-month plan where you get 10 percent off all of your print jobs. On the $1,000-a-month plan, you get 25 percent off of all your jobs and priority placement in the queue and a dedicated account manager, or something like that.
Think about your business, not in terms of how many transactions you can have or how many products you can ship, but as a collection of customers—high-value customers, medium-value customers, low-value customers–and find ways to drive customer loyalty to drive repeat purchases, drive greater revenues and build a sustainable business.
The downside is the systems we use. From accounting to point of sale to e-commerce, [they] aren’t really geared toward this way of thinking.
At Zuora, [we offer] a set of systems that help companies, build, manage and grow subscription-based businesses, including a billing module, a membership management module, a subscription management module, a payment and collections module.
Small Business Trends: What kind of companies would thrive as part of the subscription economy?
Tien Tzuo: All sorts of businesses. Technology companies, media companies, business services. It’s really your choice as to how you want to view your business model.
Small Business Trends: How developed is the subscription economy?
Tien Tzuo: It’s in the early stages. There are subscription-based services that we all subscribe to–cable TV, phone–but nobody has taken a step back and said; “You know, it’s not just a billing model; it’s a business model.”
Small Business Trends: What should companies do upfront to make sure they have the right kind of business model to take advantage of the subscription economy?
Tien Tzuo: Start by looking at your customers. How many customers do you actually have? How many customers have actually purchased your services or products in the last quarter or year? How many customers have made key purchases? Start segmenting your customers into a top 20 percent, middle 40 percent and bottom 40 percent. Go talk to the customers—ask:
- What other services would you like to have from me?
- Is there anything that would encourage you to use additional services?
- If you use my competitors’ services, when do you choose my service as opposed to my competitors?
- Is a subscription-based plan something that you would be interested in?
I also encourage companies to experiment. If you have the right tools, the cost of experimentation isn’t that great. Why not just launch a service with a $50 plan and a $200 plan and a $2,000 plan and see where it goes?
We have a customer, Ning, that allows users to build a social network. For several years they offered [this] free. Overnight, they switched from a free model to a paid model. The percentage of customers [that converted] exceeded their wildest imagination. Why? Because they had a great service. By having a three-tiered pricing model, from $19.99 a month to $49.99 a month, they allowed customers to choose their own [price] and were able to transition into the subscription economy.
Small Business Trends: Five years from now, where do you think we will be with the subscription economy?
Tien Tzuo: I think we will find ourselves buying much, much less, but a big part of our daily lives will be wrapped around services we subscribe to.
Small Business Trends: Where can folks learn more about the subscription economy and Zoura?
Tien Tzuo: Visit our website, www.Zuora.com, and also connect and network with other companies that [use the subscription model].