Will Every Business be a Subscription Business?

It seems Tien Tzuo has always had his eye on where the ball is going. 

He grew up in New York City in the ’70s and early ’80s – a time and place, he points out, that technology wasn’t yet on the forefront of most people’s minds. After playing around with early IBM personal computers, he felt it was his “destiny” to come to Silicon Valley, and he moved to California the first chance he got. 

Then, starting in the late ’90s, Tzuo got a front-row seat to the early days of the business software revolution as an executive at Salesforce.com. There were hiccups as the company essentially invented an entirely new delivery model for software, but Tzuo recognized the massive potential of software as a service (SaaS) and subscription business models. In 2007, he co-founded Zuora, a business management SaaS company whose mission is to enable all companies to be successful in the subscription economy. 

“We made a bet that this whole subscription business model was not going to be limited to software companies, but that every business one day would become a subscription business,” Tzuo said. “And what you’re seeing happening now in 2020 is exactly that. Businesses are all transforming into subscription-based businesses.”

Tzuo wrote a book on the topic. His 2018 bestseller “Subscribed: Why the Subscription Model Will Be Your Company’s Future – and What to Do About It” explains how industries are evolving how they do business, shifting from selling things to offering access to their products and services. This shift is breathing life into what he calls the Subscription Economy. Considering that many recent software companies to go public rely on a subscription model, it’s not much of a stretch to say that the book is required reading for anyone starting a business today. 

Tzuo sat down with The Forecast to explain why the subscription model benefits both businesses and customers, how it is changing the status quo, and what companies need to consider before they make the leap. 

We’re Entering a Post-Product World 

People don’t want products, Tzuo argues; they want services. 

“We’re not looking to buy yet another product so we can deal with the hassles of ownership and more stuff in our closets,” he said. “What we want is a service. We want to whip out our phone and get from point A to point B, access entertainment, and get work done.” 

It’s this demand from customers that makes Tzuo so confident that the subscription economy will not be confined to technology. Rather, it will ultimately become the norm in virtually all industries. Even when Zuora was founded well over a decade ago, customers were already beginning to migrate toward services, rental or subscription services like Zipcar and DVDs-by-mail from Netflix. Since then, consumer and business technology innovation has helped entrepreneurs to launch a myriad of ridesharing, streaming media and other services, all based on monthly or annual subscriptions.

“We could see even back then that the idea of buying products was really becoming obsolete,” Tzuo said. 

Tzuo notes that a subscription model is different from leasing, which itself is more about product financing than service delivery. 

“A true subscription gives the customer flexibility,” Tzuo said. “You can dial your usage up or down, or pause at any given time.”

In a Subscription Model, Customers Become Collaborators

In a traditional product rollout model, companies spend years – and often many millions of dollars – trying to create products that customers will want, with nothing more than their instincts and a little bit of market research to guide their process. This is becoming more difficult to do in a world charged with rapid technology innovation.

“A subscription model lets your customers participate in the design,” Tzuo said. “We saw that during the early days of Salesforce. We would launch a service, and once it was out there, we would listen to our customers, and they would actually steer us toward a place that was slightly different from where we thought we were going. You now have the ability to gather information from the customer, which completely allows you to rethink how you approach innovation.”

Shift to Subscription is a series by The Forecast exploring the rise of subscription business models.

Companies that offer subscriptions tend to have much more visibility into how customers use their services, Tzuo notes. “These companies are rediscovering their customers,” he said. 

Companies Must Educate Investors

Tzuo said that one of the big challenges in navigating from a traditional business to a subscription business is how to communicate to the investor base. 

“When Salesforce first went public, Wall Street didn’t understand the model, and it took years and years of education and evangelism.” 

Things have changed. Subscription software is now common, so investors in that industry now largely understand how the model works. But companies in other sectors may still need to educate investors about why it makes sense to take in less revenue now to guarantee more revenue in the future. 

“One model is giving you $10 right now, and the other is giving you $10 a month for the next ten years,” Tzuo said. “You know the second deal is better than the first deal, but that doesn’t show up anywhere in the financial statements. And so there’s a different set of metrics around things like annual recurring revenue, churn rates and cost of customer acquisition that start becoming really, really important.” 

Transformation Requires Collaboration

A subscription-based business model requires a much higher degree of cross-functional collaboration, Tzuo said. A traditional model allows for siloed design, manufacturing, sales and marketing departments. In a subscription model, however, these teams must work much more closely with one another.

“You’re responding to customer desires in almost real time,” he said. “You’re building agility into your engineering, into your sales, into your marketing. It’s important not to see it as a transformation led by one department, but to see it as a whole cultural transformation. And that type of transformation has to come from the top.”

In the End, the Move Benefits Everybody

It isn’t just companies that benefit from a move to a subscription model. 

“For the engineers, they have so much more data about how their customers are using their product,” said Tzuo. “Sales teams can focus on keeping customers happy, and the orders are going to come in.” 

He said marketing used to do advertisements with a brand promise that might or might not be delivered by the product. “Today, marketing is creating an experience with the engineers, the salespeople are building deep customer relationships, and the finance department has predictable revenue they can bank on as they do their annual planning. It’s simply a much, much better way to build these businesses.”

Enterprise cloud software company Nutanix is a Zuora client. As Nutanix evolved from an IT hardware and software company to focus on software in 2018, company leaders also moved the company from traditional software licensing to a subscription business model. 

“Nutanix is one of the poster children of the shift to subscriptions,” Tzuo said. 

After just five quarters into the new business model, subscriptions accounted for 82% of revenue. Nutanix CEO Dheeraj Pandy said subscriptions can be more convenient for customers, giving them agility required to meet changing needs. “Beyond the IT industry, we expect zero companies with anything other than a subscription business model will go public in 2020 and beyond,” Pandey told VMBlog.

“It really takes a commitment from the top,” Tzuo said. “It really takes consistency in the strategic direction of the messaging and a keen focus on customers.” 

He said every business must create a value proposition that gets customers to say: I'm signed up and I would like to be a customer for life. “When that's at the heart of what you're doing, certainly Nutanix is doing that, the rest of it will work out.”

From all the business leaders Tzuo talks to, and all the research his company does daily, he remains convinced that the subscription economy will shape the future of every business — and probably much sooner than most people think.

“Once you move to a subscription-based business model, you’re never going to want to go back, because it’s better for everybody across the board.”

Calvin Hennick is a contributing writer. His work appears in BizTech, Engineering Inc., The Boston Globe Magazine and elsewhere. He is also the author of Once More to the Rodeo: A Memoir. Follow him on Twitter @CalvinHennick.

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