There’s a new trend in purchasing and that trend is renting, also known as subscribing. In a big city, why buy a car when you can rent one for a few hours? Why purchase a Blu-ray movie when you can rent it instead? Tune in as Denis Pombriant of Beagle Research and author of, “The Subscription Economy: How Subscriptions Improve Business,” joins Brent Leary for an in-depth look at this concept and how it can benefit your business.
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Small Business Trends: Can you tell us a bit about yourself and your background?
Denis Pombriant: I’ve been an industry analyst for about a dozen years. I started at the Aberdeen Group in Boston, and was there for four years. During that time I had just about every job in CRM including managing director of the practice.
At the end of 2003 I left Aberdeen and started Beagle Research.
Small Business Trends: As the author of, “The Subscription Economy: How Subscriptions Improve Business,” what is your definition of “The Subscription Economy?”
Denis Pombriant: Instead of buying something like a car, or even clothing it has become a lot more feasible to rent it instead.
For example, if you live in a city and need access to a car once in a while, you probably don’t want to pay the high tax rate, or find a place to park the thing, so you might use a service like Zip Car. A subscription is, I think, $50/year for membership. When you need a car, you can access one that’s pre-positioned around a city, drive it for a couple of hours, bring it back and get charged for a couple of hours of use.
Small Business Trends: How has the billing management platform Zuora advanced The Subscription Economy?
Denis Pombriant: Billing, invoicing and collecting for subscriptions is a big deal. It is a very different kind of business process than generating invoices for products, for the simple reason that subscription customers can go to the vendor and say:
“You know, I was buying six of these last month but this month, I want to buy 12.”
All of a sudden, the configurations of what the customer is buying has changed. That has to be reflected in an accurate bill. Because if the bill is inaccurate, the customer is not going to pay it, or the company is going to lose money. Conventional accounting systems aren’t real good at allowing a company to do that on a scale of hundreds or thousands of customers at a time.
Zuora found that sweet spot for supporting businesses with very dynamic requirements for their billing.
Small Business Trends: When I think of “The Subscription Economy” I think the poster child is Amazon.
Denis Pombriant: In some ways they are. You go to Amazon when you want to buy a book for example. Back in the old days, I can remember being a member of something like Book of the Month Club (BMC).
The difference between BMC and Amazon is, if I didn’t want the selection that BMC sent me, I would have to turn around and send it back to them. With Amazon, I only go to Amazon when I want something. I find what I want and these days, I just download it to my Kindle.
Small Business Trends: With Amazon Prime it seems like having a membership allows them to stay connected on an ongoing basis with a customer.
Denis Pombriant: I don’t know the statistics on it but I would say you’re probably right. Ideally, this all goes towards customer loyalty. Amazon is the first place you think of going when you want to buy a book and others things too.
Whether or not you spend more money per unit with somebody like Amazon because you are a member, or you just spend the same amount, Amazon – by making you members – is taking a little of the variability out of the relationship.
Small Business Trends: What do “Grow, Flow and Know” mean in terms of The Subscription Economy. Start with “Grow”.
Denis Pombriant: Well, if you think about the life cycle of being a customer in a typical situation, you might engage with a company to buy something. Then once you have bought it and paid for it, you’re sort of on your own again. Maybe they remember who you are, maybe they send you a Christmas card.
With The Subscription Economy though, it is very important for the vendor to keep you in the fold and keep you happy. Because you can leave at any time. Ideally, if you’re happy, you won’t just stick with the original purchase. You will add other products or extend the use of the products that you bought. That is the “Grow” part.
Small Business Trends: Let’s talk “Flow”, shall we?
Denis Pombriant: When the customer says, ‘I want to change my configuration’, that ripples back through the organization, through the accounting system, and the billing system to product configuration. It may also ripple back to product designers. It may ripple back to marketing people in terms of understanding the customer need.
All of that working in unison to deliver the right product to the right customer at the right price at the right time, etc. is “Flow.”
Small Business Trends: We have gone from “Grow,” to “Flow.” How about “Know?”
Denis Pombriant: To get your best price, you might sign up for a one year/two year contract. Depending on the nature of the relationship, you may pay for one year in advance or two years.
The subscription company might take in 12 months’ worth of subscription fees, but they actually only recognize 1/12th of it every time they start a new month. So in subscription terms, the 1/12th they recognize is called recurring revenue. You can look at your database of customers in their agreements with you and calculate both your monthly recurring revenue and your annual recurring revenue.
The other 11/12th that you aren’t recognizing is called deferred revenue. Deferred revenue comes in a couple of flavors. There is the deferred revenue that you collected and you know very logically there is the uncollected, or the unbilled deferred revenue.
If you are a subscription company with subscription accounting, you can go into your system and see how much money is in my future that is already pledged. How much money is there in the future that is pledged, but not collected? How many of my customers are churning? How many renewals are up this month, and next month, and the month after?
With that kind of information, you can know a heck of a lot about the health of your business and how it is running. That is the “Know” part.
Small Business Trends: Where can people check out your eBook ,”The Subscription Economy: How Subscriptions Improve Business?”
Denis Pombriant: Yours and my favorite book seller, Amazon, has it.
This interview about using subscriptions in business and the subscription economy, is part of the One on One interview series with some of the most thought-provoking entrepreneurs, authors and experts in business today. This interview has been edited for publication. To hear audio of the full interview, click on the player above.