1 The Definitive Guide to Subscription Commerce January 2011
2 The Definitive Guide to Subscription Commerce The Subscription Economy Just as the Web rocked the bricks and mortar world of business 15 years ago, the burgeoning subscription economy is forcing today s enterprises to change how they do business. Subscriptions used to be just for newspapers and magazines, but not anymore. The last 10 years have seen a dramatic increase in companies using the subscription model to offer everything from music, movies and textbooks to even cars for a monthly fee. Every day, more and more traditional players are joining the subscription economy in response to changing consumer habits. For most companies, this shift means relearning a lot about selling, pricing, packaging, and building customer loyalty. As we move to this new economy, companies need to move away from a manufacturing-oriented, product-focused way of thinking, and embrace a world of services that fundamentally change customer relationships. But what will it take to succeed in this new world? Right now, business leaders need to gain a more nuanced understanding of the strategic, financial, and operational implications of a subscriptionbased model, or they risk losing ground in the time-to-market sprint. They need to understand that the competition will be governed by new rules, and if you can t provide the right service at the right price, your competitors will. Consider BMW versus Zipcar. BMW s leasing business already operates much like a service. You pay a one-time set up fee, and then you pay a monthly fee over the life of the contract. Oil changes and maintenance are all included in that price. In fact, in 2008, 60% of BMW s sales came from its leases. But compared to Zipcar s pay-as-you-drive subscription membership, BMW s leasing service falls short. With Zipcar, you might drive a Toyota Matrix one day and a Mazda the next. If I m a BMW customer, why can t I grab a 3 Series for a few weeks, and then switch to an X5? And Zipcar s fees even include the gas As companies move to the subscription economy, they have to fundamentally rethink what it is that they sell, not just how they sell it. Forget fire sales, seasonal specials, and other brute-force price promotions. Armed with better insight into how prices affect demand, subscription companies can lower prices in a more rational, granular way to manage inventory while maximizing yield. For example, when the iphone 3G was introduced, AT&T dropped the price of the iphone by $100 and simultaneously raised monthly fees by $10. In doing so, they were able to sell more iphones (lower entry fee) but earn more money over the life of the two-year contract. The Old Model: Linear Transactions Before the shift to a subscription economy, commerce consisted of simple, one-time transactions. This process begins with the initial customer acquisition process. This might involve a direct sales force using a CRM tool to get the deal closed, or it could be the result of marketing campaigns
3 driving traffic to an e-commerce website. Customers pick their products, each with a single SKU and a single price. A simple quote and invoice, or a one-time online payment completes the transaction, and your general ledger system takes care of the accounting. While this lead to cash process is straightforward, it s also limiting. To keep your business growing and revenue flowing, you need to close additional transactions with new customers. Even generating additional revenue from an existing install base requires a new sales cycle. The New World: Subscription Commerce The subscription economy introduces an entirely different commerce process. It s no longer just about Lead to Cash. It s about Lead to Cash to Renewal. This new process not only offers several advantages to end customers, as discussed in the ZipCar example, but also to companies delivering the service. Subscriptions deliver a steady recurring revenue stream that will compound over time. For established vendors, it s not unusual to see renewals account for 70-80% of annual revenue. Unlike the world of one-time transactions, the subscription model also offers the opportunity to start your customers small and grow their usage and spend over time. New SaaS and Cloud Computing vendors have become experts in this process. A common strategy is to hook initial customers with a freemium offering, and then to up-sell that customer to a premium bronze, then silver, then gold package. And if you have the right type of service, you might get that same customer to adopt that service at work, delivering an enterprise package.
4 For this strategy to be successful, companies need to identify the right product packaging, prices, and bundles to drive customers up the chain. And as every market, customer segment, and service is unique, there is no one-size-fits-all model for success. Companies need to experiment in the following 5 areas to find the mix that maximizes customer value: Frequency: How often should you bill your customers? Is a simple monthly charge the most attractive model? Or can you drive more loyalty and improve cash flow by offering a pre-paid yearly solution? Add-On s: You may start with a single product line, but find adjacent products or services that are complimentary. Like a cable company that now offers internet and voice services as well as television. Or Salesforce.com, who started with a Sales Force Automation service and now offers a Customer Service and Support applications as well as Collaboration tools. Usage: Beyond simple recurring payment models (i.e. per user per month), it s likely that you ll find ways to measure customer usage. How many GB are customers using? How many s are they sending? How many miles are they driving? The possibilities are endless, but usage charge models open the door to a whole new world of pricing and packaging options. Upgrades: Once you re tracking usage, you likely have a means of upgrading your customers from one tier of service to another. Cell phone plans are a great example: You start out with a 400 min/mo plan, then later upgrade to the 600 min/mo plan once you get rid of your land line at home. International: Finally, international markets offer tremendous growth opportunities. Though beware, buyers in different markets might respond completely differently to your domestic pricing strategies. You ll also need the right systems in place to manage currency and taxation issues.
5 The Missing Middle Office In this new subscription economy companies need to manage all aspects of subscription commerce including pricing and product catalog management, quoting and order management, billing and payments, up sells, cross-sells and renewals, and revenue and customer value metrics. In the front office, there s a need for new marketing automation tools, like Marketo, and proven CRM applications, like Salesforce CRM. These are great for bringing new customers to the table. But once they re in the door, the differences between the old world and the new subscription commerce world become clear. Unfortunately, traditional back-office systems, like order management, ERP and accounting systems, as well as custom, home-grown billing solutions, were designed for simple, one-time transaction commerce, not recurring billing and payments that define subscription models. As a result, companies have had to deal with manual processes and highly customized, inflexible solutions that introduce errors, drain critical resources, and hold back pricing and packaging innovation. Subscription commerce (Lead to Cash to Renewal) also requires the concept of a Middle Office not found in transactional business. Companies need to manage an ever-changing product catalog while keeping Finance and Sales in sync on the latest pricing. They need quoting and ordering tools that account for not only initial orders, but upgrades, add-on s, or downgrades. And front office employees, like sales reps or customer support agents, need access to customer invoice and payment information, usually locked away in back office applications. Companies that fail to consider this Middle Office and who base their subscription business on billing and payments platforms designed for one-time transactions will run into roadblocks that will impede future growth. As new customers, product lines, and pricing strategies are introduced, these challenges become more pronounced.
6 Subscription Commerce Considerations Zuora has helped hundreds of companies in industries like media, telecommunications, SaaS and cloud computing, deliver the missing piece to monetize the entire Quote-to-Cash-to-Renewals processes. Customers like Reed Business Information, Coremetrics, Insideview, Marketo, Ricoh, Box.net, Xactly, Cloud Central, Open Range Communications and Ning have already seen the benefits of Zuora s subscription commerce solution. In our work with these customers, we ve seen the same themes arise again and again. The following considerations are critical for any company planning for and managing their subscription business. Product and Pricing Strategy How do you want to price and package your offerings? What is the right structure today, and in the future as your customers, marketing, and sales demand new product packaging? What is your mix of one-time fees, usage fees, and recurring fees? How quickly can you roll out pricing changes? Can you do it on your own, or are you dependent on a back-logged IT department? One of the biggest roadblocks that companies run into is a rigid back office application that will prevent them from executing their growth strategy. You should also consider how to keep the front office (sales and service) in sync with the pricing and packaging changes you roll out. Orders created with out of date pricing can take hours to unwind and strain a new customer relationship. Customer Subscription Management Unlike one-time transactions, a customer subscription lives on over the lifetime of that customer. What is your strategy to progress a customer from free or light usage, to premium and heavy usage? Do your sales reps have visibility into customer subscription details to help them cross and up-sell and manage renewals? Do they have the right tools to not only create a new quote, but a renewal, upgrade, add-on, or downgrade quote? Or do they need to create everything manually in spreadsheets? If you don t have a direct sales force, how do you manage subscription changes on your website and through your channel partners? Finally, what is the back office impact of a change in subscription? Does everything flow through to the billing system automatically, or does a small change on the front end result in a 5x increase in work for the finance and accounting department? Subscription Billing and Payments Can your billing and payments platform handle the complexity and volume that comes as the result of subscription commerce? A payment gateway or a general ledger application may work for simple one-time transactions, or even basic recurring payments for a single product. But as customers change their subscriptions, it s important to consider how you ll be able to manage things like co-termination, charge alignment, and revenue recognition. Can you handle all of this in an automated fashion, or does each customer change result in hours of manual work? Can you generate invoices that reflect what s really going on with a customer s subscription? Or is there a mess of one-time charges and adjustments that will confuse customers as well as your service agents? What happens to these challenges when you add new products or dramatically increase your customer base? And when you make a strategic pricing and packaging change, can you quickly change your systems accordingly, or are you limited by what IT can deliver?
7 Subscription Analytics Once you have these pieces in place, what mechanisms do you have to measure the success of your subscription business? Can you track your Monthly Recurring Revenue (MRR) in real-time? Do you have insight into how metric are changing over time? Can you tell what each customer s Total Contract Value (TCV) is? Or are your subscription charges broken up into on-time transactions that hide a customer s true value? What are your Days Sales Outstanding (DSO) and what can you do to get that number down and improve cash flow? Selecting the Right Subscription Commerce Partner Selecting the right subscription commerce partner is a significant decision, and any technology you implement will likely be in place for years to come. As such, it s important to consider not only the functional needs your business has, but also the characteristics of the company behind the technology. Compliance and Security: Your partner should have the highest level of accreditation such as PCI Level 1 for payment processing, the worldwide standard set forth by the Payment Card Industry Data Security Standard (PCI DSS) and SAS 70 Type II certification, the internationally recognized auditing standard developed by the American Institute of Certified Public Accountants (AICPA) for internal controls and processes. Scalability and Reliability: Assuming that you are selecting a SaaS provider, your partner should have a multi-tenant architecture that allows for scalability, growth and capacity planning, just like Salesforce.com. Be sure that any partner you chose has true disaster recovery measures in place, like multiple redundant data centers. Ecosystem: With Cloud Computing today, multiple touch points are required with various systems and applications such as CRM, payment gateways, and back-office accounting systems. Your partner should have a strategy that involves productizing common integration points to reduce your risk and eliminate the burden of maintaining multiple integration points and upgrade cycles. Openness: An open system should be a requirement for any business operating in the cloud. This means that APIs are publicly available and releases are made available instantly to all customers and partners. Innovation: You don't want to be stuck with a vendor who is not innovating, as your business requirements will change over time. Innovation means having a standardized approach to product development, engineering and release management providing consistent new features, upgrades and long-term benefits to adapt your business over time. Billing Care: As billing is mission critical, your partner should have an experienced Billing Care team and support system in place 24x7.
8 Leadership and Viability: You want a partner who will be there for you for years to come. Investigate who sits on the executive team and be sure they know what it takes to drive an enterprise grade organization. Investors and board members are another great indicator of long-term success. Finally, inquire about measures that may or may not be in place to protect you from a loss of partner viability. About Zuora Zuora is the leader in on-demand subscription commerce solutions changing the way that subscription businesses manage and sell to customers, allowing them to bring new products to market in less time, with more flexibility and less hassle. Built from ground up by SaaS industry visionaries and veterans from today s leading technology companies such as Salesforce.com, WebEx, ebay and Netsuite, Zuora provides a complete solution to manage all aspects of your subscription business from lead to cash to renewal. *.C--*D%&<':*E?$F*G0&):*,-H*8:<B""<*&)$F*6*IC-JK***E("3:L*MJK-N*JC.OHPPP**Q1RL*MJK-N*KK.O.K--*****BBB5S0"%154">*