Posts Tagged ‘Tien Tzuo’

Get a Horse

Posted: December 12, 2013 in CRM
Tags: , , , , ,

ImageI 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!”



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’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.

There is an interesting discussion brewing about the nature of Silicon Valley companies.  Are they “tech” companies as Zuora CEO, Tien Tzuo asserts, or are they “…companies in other industries that happen to make heavy use of technology” as CBS Money Watch blogger Erik Sherman says?

The gentlemanly disagreement started over the appointment of PayPal President Scott Thompson as the next CEO of Yahoo.  Many people have questioned Thompson’s selection for lack of direct experience in content or media.  But as Sherman accurately points out, “If exact industry experience were a requirement for chief executive success, Lou Gerstner would have taken IBM right down the tubes.”  There is gold in that observation.

Thompson has been on Tzuo’s board of directors and it says something that Tzuo is willing to be so public about Thompson’s qualities and qualifications.  For his part, Tzuo believes that the key to success is to remember that Yahoo and the highly successful and iconic brands from the valley like Apple, Google, Salesforce and Facebook are all tech companies.  But I think the meaning of “tech companies” gets lost between Tzuo and Sherman.

For Tzuo and for me, a tech company is less about being a technology user or developer and much more about being an innovator.  The companies he and Sherman agree are iconic (and someday we’ll have to add Zuora to the group too) are leaders precisely because they are innovators and because they were first in their fields.  But even more important they have been successful because each in its own way was founded and led by a person who is what I will call a crisis leader.

I make the distinction between a crisis leader and someone who can lead and manage when the sun is shining, the birds are singing and all is well with creation.  At times like that everyone looks good.  A fence post can lead an organization because there is relatively little to do.  A crisis leader is someone who thinks outside of the box or better yet does not see the box at all.  I can’t think of a more crisis oriented situation than running a start up.

I bring you these findings not from my head but from the mind of a very perceptive professor of psychiatry at Tufts University School of Medicine, Nassir Ghaemi and his new book, “A First-Rate Madness — Uncovering the Links between Leadership and Mental Illness.”  Just to set your perspective, mental illness doesn’t mean totally out of control and in desperate need of rubber walls.  Think instead of the phrase “crazy like a fox” and you get much closer to the meaning.

The book focuses on leaders in political settings and is most revealing, and entertaining in my opinion, in comparing Civil War generals William T. Sherman (Sherman’s march to the sea) and George McClellan, who may have coined the phrase “snatching defeat from the jaws of victory.”  Sherman was crazy now and then, McClellan was the poster boy for a successful general — at least in peace time.

What does this all mean?  Well, for starters, if this is interesting read the book.  But related to the Thompson as CEO question, I’d say that as president of PayPal helping to significantly grow that company’s business in a new market that has required great insight and innovation that Thompson might have the crazy-like-a-fox idea well in hand.  His first job is or ought to be trying to figure out, as Erik Sherman suggests, what business Yahoo is in today, not where it started, and what business niches Yahoo can invent using its innovation and technology chops.

Over time and in other contexts I have been fond of surprising people by telling them that Edison was not an engineer and neither was Jobs, that Gates didn’t graduate college, that Zuckerberg is sometimes portrayed as a social misfit and that the Wright Brothers were, in fact, bicycle mechanics.  Each was technical enough but not so much that their training blinded them to new possibilities.  And each possessed a spark of creative craziness that is what I believe Silicon Valley is all about.

Scott Thompson, CEO of Yahoo.  Why not?

Zuora and announced today a new offering that highlights the strengths of each company and delivers new functionality to the telecommunications industry.  Zuora for the Communications Industry is a solution based on the platform that handles billing, payments and customer care for telco and related industries’ customers.

This makes a lot of sense and, as often happens with Zuora, I am scratching my head wondering why I didn’t think of this.  Here are what I consider the highlights.

First, there’s billing and payment for subscriptions with emphasis on the special customer relationship that is defined by a subscription.  Subscribers are free to change almost at will.  True we’re usually locked into two year contracts for wireless services but that’s a relatively short time and there’s no telling when this model will be vacated in favor of something more fluid.  So vendors have to be ready and able to modify the relationship as a customer’s need changes.  Often billing systems don’t enable enough of this because they’re mired in a paradigm — and a system — that assumes customers are on board for life, or at least decades.  This presents a disruption opportunity for subscription billing providers.

Equally important, this relationship also does a lot to redefine an important aspect of CRM.  Over the last few years — in concert with the social revolutions — the contact center function has been deconstructed into two constituent parts that had always been thought of together — service and support.

I think of support as helping a customer with a technical issue related to product use.  Trouble shooting.  Can you help me fix it?  And the like.  Social channels have become increasingly popular for peer-to-peer support — customers helping customers.  Increasingly, support is now done through Twitter, Facebook, email and other community oriented solutions like the Salesforce Service Cloud and Lithium in a peer-to-peer setting today.

Enterprising customers even make video of service issue fixes and post them on YouTube.  In fact, YouTube is so popular that it’s now the number-two search engine.  Of course YouTube is not a search engine, people just use it that way and that’s the point.  Support is being taken out of the vendors’ hands because customers can do it better, cheaper and faster.  Vendors aren’t complaining.

Service is another matter.  I think of service as the irreducible part of the vendor-customer relationship where you have to interact on some level.  You can only go to the vendor when you have a billing dispute or other issue related to the core of the relationship, a peer relationship won’t do much good.  Today’s announcement of a new relationship between Salesforce and Zuora makes that clear and the combination of billing, payments and customer service is spot on.

The idea has legs and telcos around the world are already jumping on board.  The initial customer base includes communications vendors from several countries and continents including Canada, (Barrett Xplore) The U.S. (Open Range) and Australia (Macquarie).

This is a significant announcement for Zuora, which recently opened up its European offices, because it defines a new market and positions Zuora very nicely in the catbird seat in this market.  It’s important for Salesforce too.  Historically, a company like Salesforce has grown by acquisition and by extending product lines.  This announcement is more of a product line extension but it’s done through developing partnerships for its existing products.  Like last week’s announcement of a partnership with Intuit, Salesforce is developing new channels for its existing product as well as new ways to access them for minimal investment.

I expect to see more of this.  In fact, and this is only my hypothesis, last week’s activities might offer an additional insight or market signal.  Salesforce bought Radian6 for $326 million showing, as it has before, that it will buy a company for strategic advantage.  Radian6 is the category leader in social media monitoring and related things and Salesforce scooped it up to bolster its position.

The same could happen with Zuora if billing and telco service becomes strategic enough and there are some interesting reasons to consider this idea.  First, we’re in the beginning or middle of a replacement cycle.  Client-server call center systems have exceeded their useful lives and can be replaced by a new generation of SaaS based, socialized solutions that are significantly less expensive to own and operate.  Also, ten plus years ago, the wireless industry was very different and VoIP was a dream.  These and other factors are potential drivers for the Zuora-Salesforce coalition.

Finally, and this has to be said, Zuora’s CEO and co-founder was one of the earliest members of the Benioff team.  Tien Tzuo is a smart guy and a strategic thinker and he’s proven his chops at Salesforce and now Zuora.  Zuora’s platform is too.  Lastly, Marc Benioff has a personal investment in Zuora having provided some early cash.  All those stars are aligned, but we’re getting ahead of ourselves.  It is enough to say that the Zuora-Salesforce alliance makes sense for present reasons.  We need to see how the market reacts.

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.

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 ( 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.