Get a Horse

I was literally gobsmacked and I had to re-read the post several times.  Gartner analyst Robert Desisto—who I don’t know at all—wrote a short post last week saying that today’s SaaS vendors, “will resist to the move to ‘pay as you go’ because it will have a very big impact on their business model predictability” and become “legacy dinosaurs” as his headline said.

But, but, but! I stammered to myself.  How can that be?  I have been researching and writing about this space for fourteen years.  I was the first analyst to cover Salesforce and a bunch of other early entrants, and one of the first people to have a practice dedicated to SaaS.  They all had pay as you go models, at least back then.  Did I miss something?

One of the real challenges of running a subscription business, and this includes SaaS companies as well as the Dollar Shave Club, ZipCar, and all the other companies that jumped on the bandwagon, is that you have very different revenue flows that must be accounted for.  Companies like Zuora have built big businesses and attracted hundreds of millions of dollars in venture funding to build billing, payment, finance and accounting systems that cater to this massive industry.  Now along comes Gartner with the clear implication that the pay as you go model is not in fact alive and well?  I didn’t get it.  Still don’t.

As a sanity check I contacted Tien Tzuo, CEO of Zuora, a subscription billing, payments and finance provider.  In his previous life Tzuo was CMO of Salesforce and at one point had the job of inventing a billing system for Salesforce that operated the way subscriptions run.  Here are some points from Tien.

• Just because some SaaS companies do three-year contracts that doesn’t make them enterprise software dinosaurs.  Every successful SaaS company realizes that keeping churn low is a core part of the model, and every successful SaaS company realizes that long term contracts do not equate to low churn—the only thing that truly reduces churn is to have strong adoption and customer success.  That’s why SaaS vendors invest in customer success while on premise software companies do not
• Many SaaS companies actually don’t offer three-year contracts.  At Zuora, we see lots of companies with month-to-month models.  CDNs, cloud companies, API companies, point-of-sale systems—these industries all skew towards month-to-month.  Radian6 also had a month-to-month model.  The post also says doing three-year contracts makes SaaS companies vulnerable to other startups who choose to offer month-to-month … but there’s nothing to stop the SaaS vendor from changing their billing policy whenever they want. (my note: provided they have a product like Zuora that makes this easy to do the billing and accounting).
• Customers don’t have to accept three-year contracts.  It’s naive to say that it’s the SaaS vendor that forces it on them—many companies actually prefer long term contracts once they are committed to the SaaS vendor, as this gets them the best price as well as longer-term price protection.  This can be a win-win scenario.
• This does create havoc on revenue recognition.  Monthly billing makes billing messy but revenue recognition easier.  Annual or multi-year billing makes billing easy but revenue recognition very hard.  There’s no free lunch.

It was such an odd thing to read.  It reminds me of some other chestnuts like, “If god wanted man to fly he would have given us wings,” or “We will never need telephones in England because we have such an abundant supply of messenger boys,” or “Someday every town will have a computer,” or my favorite, “640 KB is all the memory your computer will ever need.”  These are all such Luddite comments you just knew upon hearing them that they won’t stand the test of time.  Heck, this one didn’t survive a day before people started scratching their heads. 

Perhaps the last word on this comes from the most authoritative source—the marketplace.  On December 10, BrainSell, a Boston-based technology company announced it would offer an integrated solution of Intuit’s QuickBooks with bi-directional synch to Salesforce.  According to the press release, “What’s really great is that customers can get a Salesforce subscription from BrainSell with no contract, and the ability to pay month to month!”

http://www.itbusinessnet.com/article/Salesforcecom-Month-to-Month-Subscriptions-Now-Available-through-BrainSell-Boston-Based-Technology-Firm-2963070

 

 

Zuora User Meeting

Believe it or not some things that happened in San Francisco last week had little to do with Dreamforce.  Amazing that I’m just getting to that now.  Some vendors in the Salesforce ecosystem used the proximity of mutual customers to hold their own user meetings and if they weren’t exactly meetings within meetings, they were meetings within the same week and location.

Zuora held a successful user meeting just prior to Dreamforce that I attended and I was most impressed by its size and the new product introductions.  The event, “Subscribed,” is a couple of years old in name but older than that in practice and the company packed a lot of enthusiastic customers and partners into the Ritz Carlton.  The choice of location was smart, in the financial district at the other end of town from the Moscone Center, which gave some distinction from the larger event later in the week.  But my greatest interest was in product messaging.

Zuora CEO, Tien Tzuo, filled the last slot (for now) in his product universe and deployed a nifty description to how the product line comes together and why it matters.  The product focus was on Z-Finance, which joined Z-Billing and Z-Commerce in a holy trinity of back office applications aimed at subscription companies.  The description is “Subscription Business Management,” which I like as it elevates the discussion from simply how do I do my subscription billing to how do I manage a subscription business which is much different from a product business — especially when the subscription business is inside of the conventional business.

Z-Finance gives financial executives the tools they need to examine their subscription data and manage their businesses accordingly while being able to dump the proceeds into the conventional GL in a way that makes sense to the traditional side of the house.  It’s smart really and no simply feat.  So now Zuora provides its customers with the ability to simply and quickly configure, administer, bill, collect, analyze and reconcile the subscription business.

The importance of Z-Finance is two fold.  There is no doubt that pure subscription companies would need it sooner or later, but Z-Finance is also a key piece of technology that will help conventional companies exploring subscriptions to understand better how subscriptions fit into their business models.  This expands Zuora’s market significantly, so bravo for Zuora.

Truth check — Zuora is a client and I recently published a small book, “The Subscription Economy—How Subscriptions Improve Business.”  Fortunately, my messaging was congruent.

The Subscription Model’s Role in the Economy

Recent economic news is lousy.  The Eurozone can’t seem to decide on the fundamental question the robber asked, “Your money or your life?” and indecision is cascading across the globe in the form of slow or no growth.  It’s as if we’re choosing slow death, boiling our own frog.  Unemployment rates are either high or higher and various policy and economic experts offer conflicting prescriptions that cause food fights among the proletariat.

Hard to find credit and high debt loads are preventing most people and businesses from behaving as rational economic actors.  Rather than borrowing to start life and buying cars, housing, refrigerators and all the accoutrements of household formation, many recent graduates are moving back home.  They do this because the only jobs they can find might pay enough to enable them to pay off student loans but not enough to form households.

The situation is much the same anywhere you look and the combined reluctance or inability to spend is a drag on recovery.  Your spending is my income while my spending is someone else’s and in an economy where upwards of 70 percent of spending is driven by consumers, this kind of slowdown is debilitating.

I know what you are thinking.  Here’s comes a plea for more spending by government to perform what used to be called pump priming.  I won’t say that I am not thinking about it.  There was an article in the New York Times last week about the awful state of infrastructure in the U.S. and the need to repair it.  Those repairs would go a long way toward helping the economy recover.  The article suggested that we needed to spend about $2 trillion recommended by the American Society of Civil Engineers to do the job.

But I am not going to go there because there is an alternative.  It’s not a perfect alternative but it might be good enough to get us off the dime and it’s one that most people reading this will understand.  It’s the subscription economy.

We all know about subscriptions from things like software as a service.  You know the drill — pay a little each month for the use of a system rather than paying a lot up front for the right to own, house and feed a computer system.  We’re good with that and the success of cloud computing over the last dozen years is testament to the idea’s viability.

But software is not the only thing to consider when you think about subscriptions.  We lease cars or participate in ZipCar systems, we have monthly contracts for cellular services that include the cost of our devices as well as the use of the network.  But there are many other kinds of subscription that are becoming fashionable, like fashion.  You can subscribe to your wardrobe or at least part of it and there’s almost no limit to the things you can get cheap through subscriptions.

You might not think about it this way but if someone plows your driveway in the winter or cuts your lawn in the summer, you are subscribing to a service that keeps you from having to buy a snow blower or a lawn mower.

Employing more subscriptions would function like an economic stimulus to the degree that they would stimulate demand among people who have a little money but not a lot and who can’t pull together the cash needed for an outright purchase.  That would increase demand and possibly drive employment.

One of the big challenges in moving to a subscription economy is cultural.  Companies need to figure out how they can show positive results if the thing they once sold for a million bucks now only brings in $100,000 as an annual subscription.  The numbers are, of course, all over the map and this example is purely hypothetical.  But for sure, subscriptions will bring in less revenue regardless of whether that revenue represents profit or some other cost from a supplier.

And shareholders are accustomed to getting their numbers a certain way and as many look at it, lower revenues mean lower profits and lower profits means a less valuable company on the stock market.  The tipping point comes when enough people realize that subscriptions are the new normal and that the higher margins of outright purchases may not be coming back.

In spite of all this, subscriptions are making progress as an alternative business model.  Most frequently we see the subscription model used by startups but again, established companies are making progress bringing subscription products to market as well.

So the infrastructure for a subscription is present from individual services to advanced billing and payments systems like Zuora.  Maybe in addition to cash mobs we should consider subscription mobs when we’re thinking globally and acting locally.  Just a thought.

(There’s No) Accounting for the Subscription Economy

You may remember the subscription economy from previous posts.  It’s one way to make sense of cloud computing and the many new and very different ways of doing business on the Internet.  We’re most familiar with software as a service and how different it is from conventional licenses; so familiar in fact that I don’t need to describe it for you here.

But subscriptions as a way of doing business are just about everywhere; they’re not just in tech anymore.  For instance, if you want you can get your clothing as a subscription, and not only that but men (who as a group are notoriously lazy shoppers) have sites dedicated just to them.  You know the trend has arrived when something like men’s clothing is available as a subscription.

Nonetheless, we’ve more or less glossed over everything below the waterline in this new approach to business.  It’s taken over ten years to get the idea of the subscription economy into our noggins but we’ve barely started internalizing what it takes to support it and report on it as a business.

This all came into sharp focus for me last week when I reviewed Salesforce.com’s Q4 and annual earnings call with Tien Tzou, CEO of Zuora, a company that specializes in what’s below the subscriptions waterline.  Tzuo is also an alumnus of Salesforce having been its CMO and chief strategy officer before starting Zuora.

As you know, subscriptions operate through customer payments on a periodic basis.  The industry became known by its per seat per month pricing but that doesn’t happen much these days because monthly billing got to be a challenge with big deals.  Today customers sign contracts for a fixed length of time and vendors invoice periodically.  A typical example might be a three-year contract with annual or quarterly billing.  Here’s where it gets interesting.

The financial analysts and other Wall Street types—whom I have absolutely nothing in common with—are very accustomed to companies selling products rather than subscriptions and collecting the money net 30 or whatever and moving on to the next opportunity.  Subscriptions have a mixed bag of revenue recognition ideas that challenge the status quo (which has very well defined ways of recognizing revenue) significantly.  Product companies don’t have much when it comes to reliably forecasting future revenue streams but subscription companies are just bristling with information.

Take the Salesforce revenue numbers from last week’s earnings call as an example, and here is where I am indebted to Tzuo for his insights:

• Quarterly Revenue of $632 Million, up 38% Year-Over-Year
• Full Year Revenue of $2.27 Billion, up 37% Year-Over-Year
• Deferred Revenue of $1.38 Billion, up 48% Year-Over-Year
• Unbilled Deferred Revenue of $2.2 Billion, up from $1.5 Billion Year-Over-Year

If you are reading this (thank you very much) you have at least an intuitive understanding of revenue but deferred and deferred and unbilled revenue deserve explanation because who really cares about unbilled deferred revenue—isn’t that complete vapor?

As Tien Tzuo said to me, think of it this way.  You do a deal with a company in which you agree to supply your service for three years for $36k or one thousand dollars per month and you agree to invoice once annually, in advance, for $12k.  At the very beginning then you have $24k in unbilled deferred revenue and, since you bill in advance, you also have $11k in deferred revenue and $1k in real live revenue which you can recognize.

This $1k is also known as MRR or monthly recurring revenue.  Theoretically, if you add up all the MRRs on the books you can get very close to the forecast for the quarter.  But there’s also an upside possibility that you’ll sell something else.  If you do and you invoice for it, you’ll add to that pile of money.  Unfortunately, there is also a possibility that some of your MRR will go away either because the customer quit or because they didn’t renew or whatever.  We know this as churn so you really need to discount the MRR by the churn rate to get a better sense.  Life would be simpler if we could all agree on using a metric called the annual recurring revenue but, curiously, ARR doesn’t exist yet.

So, all this has the potential to drive Wall Street types nuts.  They’re good with the $1k in MRR and they can tolerate the $11k in deferred revenue because it’s in hand, and the $24k in unbilled deferred revenue is sort of OK (but not really) because there’s a contract in place that defines the annual billings.  But this does have one effect that many financial types like—it smoothes out the revenue stream for months in advance.  Bookings might fluctuate but the monthly revenue stream should be rather predictable.

Nevertheless, it’s bookings that have recently made some people skittish.  Sales has always been a lumpy affair.  Some months many deals get booked and other months not so much.  Early on the software industry trained its customers to wait until the end of the quarter to make purchases because that’s when they had leverage.  Finance guys didn’t like this but they got used to it.

Today, the quarterly incentive is largely gone due to monthly recurring revenue but people still obsess over bookings.  What if bookings go down for a few months?  The logical answer is that future revenue would eventually feel it but it’s equally true that bookings could recover before real revenue took a hit in which case the fluctuation in bookings would not be seen.  Call it seasonality.

Let’s summarize all this.  Salesforce has $1.38 billion in deferred revenue, which I presume will be realized in the next 12 months.  During that time they are advising us that the company will have revenues of between $2.92 and $2.95 billion.  This means that they have about 47 percent of next year in the bank.  They also have $2.2 billion under contract to be invoiced (unbilled and deferred) and some of this invoicing will be done at some point beyond the next year.  In the last quarter Salesforce had $632 million in revenue which grew at 38% year over year.  At some point in the next twelve months Salesforce could have a quarter in which it books revenue of $750 million which would give it a forward looking run rate of $3 billion.

It’s still an uphill battle explaining revenue recognition and the difference between conventional companies and subscription companies but at least there’s a lot of black ink to do it with.

Make Your Business Resilient

Welcome back to the discussion.

At the top of my list is the idea of resiliency, which I consider a more practical form of sustainability for business.  We are now encountering a wave of sustainability-oriented ideas in the popular culture.  Forty miles per gallon is the new thirty, someone said and I have seen or heard the word sustainable used tentatively more than once in advertising.  But I wonder if sustainable is really what we should be shooting for.

In too many cases, sustainable simply slows down our use of a resource to “sustainable” levels but in practice it is a moving target because it has to be tied to things like demand.  What is sustainable at one level may not be at a higher level.  And human nature being what it is, we tend to set a marker and promptly forget about it until something breaks revealing that our sustainable idea is not so any longer.

But the big issue with sustainability is that it often does not engage a new paradigm.  It simply extends an older and frequently decrepit one.  Resilience puts us on a new track with an unlimited future and that’s where I prefer to be.

All this has a practical business and CRM side.  I was first impressed with the idea of resiliency while perusing “The Post Carbon Reader”  a compilation of essays by writers with serious cred on topics like energy, land and water use and much more.  What got my attention, and what inspires this essay, was a report issued by the City of Portland, OR, dealing with how to make that city more resilient to the long term effects of Peak Oil.

Now, I won’t go into what Portland did in any great detail but the very existence of the report made me ask what for me is the obvious question: Do our businesses have resiliency strategies and plans?  Bet not.  But can anyone afford not to have a plan?  If a regional or city government can develop a resiliency plan ought we not do the same for our businesses?

I will probably add to my list of ideas for making businesses resilient over time but for starters, here are three things any, or at least most, businesses can do to help ensure profits in unsure economic times.  Of course, they are all mediated by first class front office technologies.  How could it be otherwise?

Engage in the Subscription Economy

We’ll see some form of economic bounce this year because there is an election looming, that’s my hunch backed up by much historic data.  The bounce might make credit easier to access but the demand for credit — to grow the economy and its availability — may not be well matched.  In lieu of licenses and product sales, we need to think again about subscriptions.  There is some evidence that customers are doing just that.

I think Oracle’s missed revenues in its last reporting period suggest that we’ve hit a turning point in the conventional licensed software business.  I believe the demand for subscriptions is accelerating, so let’s give the market what it is asking for.

I have often said that the two great sticking points for moving more aggressively to subscriptions include changes to corporate business models and to the billing systems companies use.  The business model change is a big and ugly issue because it alters revenue recognition and can upset valuations, which investors abhor for good reasons.

But there is no time like a recession, or whatever euphemisms you use to describe this era, for making a fundamental change like this because the economy is roughly synchronized in a trough.  Much of your competition is in the same predicament and everyone understands this and that makes this year a great time for the herd to move as one to subscriptions.

As for the billing system, well there’s plenty of evidence that there are companies like Zuora, Aria and many others that can help you through the billing system and billing model change.

There’s no time like now for this kind of action and subscriptions will make your business more resilient, no question.

Deploy UCS

UCS or unified communications systems make a lot of sense for anyone thinking about a resilience strategy.  Good UCSs combine calendars, email, text, voice (VoIP) and video in a variety of ways that are dirt-cheap and that enable vendors to efficiently communicate with customers.  The UCS is also part of a must-have system of internal communications for many companies.  A UCS does its work over the Internet, which is far less expensive than going through the phone company.  It’s not a complete strategy because you still need an employee social network but it is a necessary step on your way to becoming a more resilient company.

Ramp Up Your Cloud, Social and Mobile Strategies

Part of cloud and mobile is implied in the above, but not completely.  Cloud and mobile are inextricably tied up with social.  Subscriptions are best driven by cloud technologies and they enable more flexibility and economy in deploying mobility strategies, not to mention the viral impact on and by social.  A good cloud, mobile and social strategy will open up your possibilities for deploying expensive and precious resources, like people, that face customers.

While we’re on the subject a cloud-social-mobile (closobile?) investment opens up other possibilities for involving customers in self-help communities with attendant savings.

Much of this isn’t new but it bears repeating because these ideas happen to work, they have not been universally adopted yet and importantly, because this is the season for implementing plans and resolutions.

Happy New Year!

2011 Say Bye-bye!

Every year around this time I write two columns one on the year that was and another on what I expect the new year to bring.  There is no methodology for this process and I believe this lack of method is important.  I take a blank screen and fill it up with what has been on my mind for the last year and what made it out through my posts.  Here are a few ideas that bubbled up.

Steve Jobs

We lost Steve this year and the outpouring in the media was inspiring.  For some reason, many people felt the need to try to reconcile Jobs’ fastidious and demanding personality with the beautiful products he inspired.  One who did not was Malcolm Gladwell who placed Jobs in a long continuum of people who did not invent original products but who tinkered with and improved them significantly.  The world needs all kinds.  That might have been true for the GUI but Jobs still gets high marks for things like iPod (an improvement on Walkman) and especially iPad, iTunes and the store for which there was little if any precursor.

A quote from a Time Magazine (July 10, 2011)review of GM executive Bob Lutz’s book from 2011 “Car Guys vs. Bean Counters” http://amzn.to/sZEwaq

makes an important point: “It’s interesting to note that the one area of the U.S. economy that’s adding jobs and increasing productivity and wealth is also the one that is the most relentlessly product- and consumer-focused: Silicon Valley.  The company off Highway 101 that best illustrates this point is, of course, Apple.  The only time Apple ever lost the plot was when it put the M.B.A.s in charge.  As long as college dropout Steve Jobs is in the driver’s seat, customers (and shareholders) are happy.”  Thanks, Steve.

Social, mobile and analytics plus cloud

On deck to assume the Jobs niche in the tech industry and beyond may be chairman and CEO of Salesforce.com, Marc Benioff.  To be clear, Benioff and Jobs are very different people in most respects but Benioff has the same blue ocean strategy that Jobs had and a knack for entertaining his customers.  Benioff also likes to invent things.  He has driven the rest of the industry to embrace social, mobile, analytics and cloud much faster than it would have left to its own devices.  This combination of attributes is really all any Martian would need to know to understand the market upon arriving here.  The drive to embrace these technologies first is what separates Salesforce from all other conventional CRM companies and is a big reason for the Silicon Valley quote above.

Cloud computing

We’ve been hearing about cloud computing for many years already and interestingly 2011 was a year of a dramatic demonstration of its power in reverse.  Target Stores pulled its web site from the cloud into the premises in time to launch a huge marketing campaign featuring Missoni brand clothing.  The campaign was so successful that it clobbered the site and crushed the ambitions of any other IT leaders who might still think on-prem will be a workable strategy as we go “all in” on social, mobile and analytics.  Right?

Curation

The Missoni fiasco gave me a chance to showcase curation software from Storify.  Curation products enable anyone to find and bring together relevant content from the web to produce a one of a kind package of related information that is greater than the sum of parts.  Curation plucks gems from the torrent of things rushing by in the digital river (pun!) and it will be an important part of how we use the web in the future.

The Subscription economy

With cloud computing more valuable than ever we see a new idea taking shape called the subscription economy.  You probably recognize it and consider it old by some measures.  But the interesting thing about the subscription economy is that so far it has been at best held together with bailing wire and spit.  Old style ERP systems have been a major impediment to subscriptions and many of us never realized it.  I quoted others talking about how ERP has held back business innovation but also about Zuora and others who are pushing the envelope with billing and payment systems that enable subscriptions like never before.  Zuora announced its series D round of $36 million recently and I look for them to be a major IPO in the next 24 months.

Blue ocean strategy

In a press conference early in 2011, Benioff said he had no interest in developing an ERP system to complement his company’s growing front office footprint.  Without using the words blue or ocean in the same sentence he let us know that there is too much untapped potential in the front office, often in the form of applications of social concepts and business processes that have still not been invented or fleshed out.  By the end of this year that approach seems to have put Salesforce into a category of its own as most of the ERP players I watch seem to be focused on re-selling their legacy bases.

Oracle and Salesforce

One such ERP company is Oracle, a self described fast follower, that has nonetheless made big investments in the front office.  In 2011 Oracle acquired ecommerce provider ATG for one billion bucks and followed up about six months later with a $1.5 billion acquisition of RightNow.  We’ll miss RightNow but Oracle seems to have blue ocean plans of its own regarding retail in the future.  Watch this space.

Dreamforce and OpenWorld

We got an eyeful of how competitive the atmosphere is in San Francisco and Silicon Valley when Larry Ellison disinvited Marc Benioff to speak at OpenWorld.  At first it looked like a bizarre move by Ellison but later it looked liked improvisational comedy by a couple of masters.  It was certainly entertaining.  Ellison used the opportunity to announce his own cloud computing and social strategies though true to form I was not shown much product or given a date for general availability for some parts of the product line.

CRM Idol

Speaking of entertainment, Paul Greenberg got the industry organized around the Idol theme in the first annual CRM Idol competition, which I was part of.  The concept is still rough around the edges — one wonders how entertaining business ought to be — but it brought the industry together across most of the world’s landmasses and fun was had by all.  We discovered some very interesting companies and at least one, Assistly, was bought before the competition even finished.  I think Idol has legs if we can get a better set of pre-conditions in place to screen out some companies that are clearly not competitive.  Just sayn.

What’s going to get the economy moving again?

Over the summer there was fear of a double dip as the economy seemed to slow but that scare seems to have passed and the tepid recovery continues with job growth in the last 21 months and counting.  Not enough jobs to erase a big unemployment number mind you, but progress, slow and steady.

Marketo CEO Phil Fernandez offered his own prescription for recovery saying that the revenue performance management (RPM) methodology that he and others (Eloqua, Cloud9) are promoting could generate as much as $2.5 trillion in new revenue globally.  Maybe he’s right, but…

It’s all about energy

In May I was in Chicago to give a talk and noticed the prices for gas were almost hitting the five-dollar mark.  The cost of energy, transportation and raw materials all derived from petroleum, hold the key to recovery (and, yes, European bankers and politicians).  There’s no longer any slack in the petroleum production system and when demand spikes so do prices and when that happens, the economy cools.  We’re in for some uneven performance as long as that is true.

Books I have read recently such as, “The End of Growth” by Richard Heinberg http://amzn.to/vYJesf  and “World on the Edge” by Lester R. Brown http://amzn.to/sv0pvy, tell the same story.  Nothing grows forever and on a finite planet there are finite resources, which ultimately places a cap on many things.  That doesn’t mean doom and gloom but it does mean we need to think about our next steps as a species.  Global warming isn’t going away on its own.

All the technologies we’ve been debuting in the last few years will be an important part of the next strategy, especially as we are required to pivot away from dead plants as our energy sources.  That’s one vantage point from which I will be evaluating our industry in the new year.  The business processes we use are directly related to the technologies we have to work with — the subscription economy is a case in point.  Along with helping us make money, our great new technologies must serve our need to get carbon and costs out of our business processes ASAP.

But for now let me simply say thanks for reading my column this year and for your many good observations and comments.  I hope you enjoy your year-end celebrations, however you do them.

The Subscription Imperative Revisited

As often happens in evolutionary systems, availability precedes demand.  That’s a complicated way to say that we build products then figure out what they’re good for.  It’s not that innovators develop things willy-nilly, but no matter how well thought out an innovation is, the marketplace has the last word on its utility.  When we speak of early adopters and mainstream users it’s this dynamic we’re referencing.

In recent years one of the best examples of this evolution in action has been subscription billing.  Today we speak of the subscription economy and subscription billing as mutually reinforcing but when it was first introduced subscription billing was targeted at a more narrow business problem.  Initial buyers were companies that began offering their products as subscription services rather than as products to be bought once and then serviced.  Their need was for flexibility, speed and accuracy in the billing process, things that conventional billing systems could not adequately handle given the number of customers and transactions that subscription vendors were encountering.

If subscription billing merely stayed in that expanding niche its future would have been assured as increasing numbers of companies were converting to subscription business models.  But then the marketplace changed in two fundamental ways opening up even greater opportunity for the subscription model.

The first change was the rapid adoption of subscriptions as a new way to deliver products to customers.  Subscriptions proved to be so much better than conventional purchases with their large cash outlays, that customers rapidly concluded that subscriptions were better.  Market demand has driven numerous companies to scrap their decades old business models in favor of subscriptions.  Those companies that have not converted see evidence mounting daily that tells them to convert of perish.

The second change, which has not been remarked on nearly enough, is the credit crunch that has hobbled the economy since the housing debacle of 2008.  While business is still obviously being done, the economy is barely growing but a consistent bright spot is subscription companies because their business models enable customers to use their products while effectively amortizing the cost — without involving a lender.  This enables them to sidestep a conventional financing process that is crippled due to still tight credit conditions resulting from weak bank balance sheets.

The subscription economy isn’t a band-aid that companies put on their business models to weather a tough economy.  Driven by customer demand, the subscription economy is increasingly the way that customers prefer to do business and this preference is driving the market.

But the benefits that the subscription economy delivers are hardly one sided in favor of the customer.  Vendors have discovered that their old billing systems had been dictating the kinds and types of products they delivered to the market.  For instance, a good idea that could be built but not billed accurately and timely — which is the case with many subscription services — was simply a non-starter.  But the flexibility of the subscription model enables companies to break their complex products into smaller units that customers can then assemble in ways that make sense for them.  Customers are increasingly able to custom design products that fit their needs much better than the one size fits all products that are relics of the industrial age.  And vendors can flexibly respond to customer needs even if those needs change very frequently.

The marketplace has discovered many uses for the subscription economy and its enabler, subscription billing in the handful of years since the idea was first introduced.  As we can see, some of subscription billing’s uses were not even envisioned a few years ago but alert innovation by users and, especially, Zuora, have made subscriptions a phenomenon.

We’re certainly passed the early adopter stage in this market and mainstream adoption is well under way.  Companies that once would not consider a subscription business model are discovering that with subscription billing they can make their transition and preserve their cash flows and in these tough economic times that says a lot.

Subscription Economy Going Viral

We talk a lot about the cost of gasoline these days.  With prices pushing to the $4/gallon level it’s white knuckle time as we watch to see how the economy will react — and with good reason.  The economic stagnation of the 1970’s was due in part to the rise in fuel prices and the last time gas prices rose to this level (2008), Americans drove less and the economy tanked.

It’s true that in the 1970’s we were also working off the excess spending of the 60’s which included lavish spending on the Space Race and on a war we didn’t need that arose over some wise guys’ ideas about dominos.  But I digress.  Similarly, a couple of years ago there was a debt crisis triggered by an epidemic of bad mortgage lending — which is still with us — that helped bring on the misery.

But stay with me fuel prices are a real concern.  As prices continue to escalate the people who can least afford high prices — typically the young and economically disadvantaged — will begin to peel off from the car habit and look for a less expensive option that delivers transportation more as a service than as a possession.  We already have that with public transit in cities but for the times when you absolutely need a car, the subway won’t do.

The cost of a car, even factoring in gas, is far from the whole story.  There’s also insurance and parking to consider.  If you’re lucky enough to have a late model car, the cost of maintenance might be very manageable and if you live in the ‘burbs parking won’t be much of a bogie.  But if you live in a city all of those things add up in a big way.  City dwellers, especially those who live in places with good public transit, avoid car ownership if at all possible and it’s the insurance and parking that pile onto the other fees that break the equation.

So it was with great optimism that Zipcar, a Cambridge, MA based company, went public last week.  The reception has been robust.  The company went out at $18 per share and climbed to $28 very quickly.

This is another example of the subscription economy at work.  It’s doesn’t take any special intellectual capacity to figure out that all the costs associated with owning a car are prohibitive in a city and half a million people have joined Zipcar because they see the company’s “wheels when you want them” promise as a powerful alternative.

Buying into to a car service rather than buying a car is part of what many people are referring to as the subscription economy.  It started in the software industry when companies like Salesforce.com began selling access to their customer management software rather than selling licenses.  Just like the car example, software has many hidden costs beyond the core cost of the software.  The term has been popularized by Zuora, a company focused on providing subscription vendors with billing and payment systems that cater to the unique needs of subscription providers.

Companies can easily spend multiple times the cost of software on things like computers, networking and integration services to make it all work.  A subscription service for software is a neat and clean alternative that provides the customer with a single low cost bill each month.

Zipcar’s growing popularity evidenced by its IPO and already large customer base is a testament to the importance of subscription services.  As many software companies move their offerings to the cloud and to subscriptions and many other companies like Zipcar apply the subscription business model, we are witnessing an important inflection point in business and in the way we live.

As businesses and individuals discover the benefits of subscription services many will see that they have more discretionary cash available because they have smaller monthly payments.  Cash availability drives spending power, which may likely drive demand and create a virtuous circle that drives the economy.

Every recovery has an engine, something that drives demand and spending.  Historically, this has meant a product category.  The Internet served that purpose at the beginning of this century.  I don’t know if a business model change has ever played the same role in a recovery, but the advent of the subscription economy may be playing that role this time.

Tien Tzuo Talks About the Subscription Economy

We just posted a new interview with Tien Tzuo, CEO of Zuora, a company that provides billing and payment systems for subscription oriented companies.  Zuora sees a new economic model forming not just for SaaS but for any commerce that can be conducted through subscriptions. According to Tzuo, one of the things holding back more entrepreneurship in subscriptions is the ability to accurately provision, invoice and collect on subscription services.  Tzuo thinks he’s got the answer and if the $20 million C-round he just closed is indicative, lots of other people think so too. Check it out.

The Subscription Economy

I get a lot of email.  It’s not all because of my job or because I publish my work frequently.  Some of it is like that, but it seems like my email address is on a lot of lists and I am one of the people who get spammed whenever there’s a webinar to fill.  Perhaps you know this feeling.  Last week I was invited to a webinar for a sales product and it made me think about why we aren’t more successful and what might be done about it.

Jim Dickie and Barry Trailer at CSO Insights (www.csoinsights.com) have a big data set culled from major sales organizations over many years.  In their annual surveys they capture information about sales attainment and other things relevant to selling and managing sales people.

It should be no surprise that in a recession, companies have a hard time making their revenue numbers and the CSO data backs this up.  Companies lay off under performing sales people, give more responsibility to those who remain and watch expenses carefully.

I am not sure if this helps a lot but it’s what we do and you can’t argue effectively against such actions.  But in a world where we all know Einstein’s famous dictum that the definition of insanity is doing the same thing repeatedly and expecting different results the art of selling is over filled with techniques for doing exactly this.

For instance, two strategies to be taught in a sales webinar I was recently invited (by email) to include:

• Discover key techniques to break through the gatekeeper and get straight to the decision-maker.
• Discover key techniques that will get your prospect actively engaging with you instead of simply tolerating your pitch and ending the call with a vague promise of interest in the distant future.

Now, to be fair, selling is difficult under the best circumstances.  Experienced sales people know that getting appointments is hard because people don’t have time or budgets or who knows what and getting to a decision maker is always challenging but always necessary. There are times when a straight ahead strategy works better than others, times when getting the appointment is really the key to getting a deal.

Nonetheless, we might all do better today if we consider the situation we find ourselves in rather than selling in the conditions we wish we had.  We’re in an economic recession and budgets are locked down for many companies and spending on non-essentials is carefully scrutinized.  In this situation decision making retreats up the chain of command and getting to a decision maker is indeed tough.

At this point you might seriously think of alternative strategies.  Rather than using interpersonal tricks to get people to agree just to shut you up, you might consider selling to the pain.  Often we define a customer’s business pain as being without our product and while that’s true enough, it might not be the customer’s only pain.

In the current circumstances, the business pain can easily extend from not having a product and its capabilities to not being able to afford it or to pay for it.  In other words, if your product isn’t selling, the feature you might be missing may be payment terms.

I have written in this space before about creative financing in the form of the layaway plans that some retailers have fallen back on in an effort to keep sales momentum up in a down economy.  The thing that layaway or any similar approach provides is not discounting, which many vendors instinctively reach for whenever there’s a price objection.  Layaway provides a means for the buyer to maintain cash flow while paying for an item and I think this is exactly what we are missing in enterprise selling right now.

To the extent that a product we’re offering provides a way to improve output or reduce waste, there is a natural demand bias in favor of a purchase.  So we need to carefully examine if slow sales is a function of demand or if the demand itself is being artificially controlled by funding.  In that case, finding creative ways to finance a buy may make all the difference.

This is really a simple extension of the idea started by on-demand computing — companies pay by the month for computing services rather than in a lump sum.  The purchase isn’t financed in a classic way with on-demand, it is eliminated and the capital expense is turned into an operational expense.  It’s one thing to provide IT services this way and another to provide a durable good, but we should be able to find solutions.

Tien Tzuo, CEO of Zuora likes to talk about the subscription economy and I think he’s onto something.  And I think one of the key takeaways from this recession might be the importance of subscriptions — metered and elastic provision of all kinds of products regardless of whether those products exist in a central location or on a customer’s premises.

As in the case of the retailer offering layaway, we might find that an adjustment to help the customer’s cash flow situation could yield benefits all parties in a transaction.