The subscription economy is a critical component of digital transformation, as organizations shift from selling products to offering services. Tien Tzuo, CEO of Zuora, is widely recognized as one of the thought leaders in this area.
Digital Transformation and the Subscription Economy with Tien Tzuo, CEO, Zuora
The subscription economy is a critical component of digital transformation, as organizations shift from selling products to offering services. Tien Tzuo, CEO of Zuora, is widely recognized as one of the thought leaders in this area.
As Zuora's CEO, Tzuo has not only built one of the fastest growing SaaS companies, he's also evangelized the shift to subscription based business models and the complex billing structures they inherit, coining the phrase Subscription Economy. In an effort to empower this new Subscription Economy, Tzuo has spent over six years working with the best companies in the world to build an award-winning platform powerful and flexible enough to fuel any subscription business.
Before Zuora, Tzuo was one of the 'original forces' at salesforce.com, joining as employee number 11. In his 9 years at salesforce.com, Tzuo built salesforce.com's original billing system and held a variety of executive roles in technology, marketing, and strategy organizations, including building out the product management & marketing organization, serving as Chief Marketing Officer for two years, and most recently as Chief Strategy Officer.
Tzuo holds a bachelor's degree in electrical engineering from Cornell University and a master's in business administration from the Stanford Graduate School of Business. He was named CMO of the Year Finalist by the CMO Council and BusinessWeek Magazine while at salesforce.com and is on DestinationCRM's Who's Who in CRM list. He is on the Board of Directors for Network for Good.
(00:11) Welcome to episode number 158 of CXOTalk. I’m Michael Krigsman and I am thrilled to be here today with Tien Tzuo, who is the CEO of one of the most interesting software as a service that is out there today, Zuora. Tien how are you?
(00:37) Good, good Michael I’m doing well. When you put 158 episodes to get on the show it’s great to be on now.
(00:43) Well you know, we’re a little overdue but better late than never, and I’m so grateful that you took the time today to join us.
(00:55) Good, good, glad to be here.
(00:57) So Tien tell us about Zuora, tell us what you guys do, what do you sell, who’s your market, tell us about Zuora.
(01:09) Yeah so we’re a software as a service company, so think of us in a very similar way to Salesforce or NetSuite or Workday. I know a lot of these companies have been on your show before. What we do specifically is we provide ecommerce, billing and finance tools for companies that sells there stuff as a service versus a product.
(01:31) And what we’re seeing today is that people don’t want to buy products anymore. Why buy a DVD if you can get any movie and any TV show you want with services like Netflix or HBO Now, right. Why buy a car if you can get from point A to point B with services like Über and Lyft or services like Zipcar. Why even buy software applications, right. Why buy the software on a CD and deal with the headaches of hardware and databases and upgrades when you can simply point your browser or cell phone at a salesforce dot com or a Google and be able to do all the work that you’re supposed to do.
(02:04) So we’re seeing that companies are realizing this and they’re starting to go beyond the product and rethink what they do as a service offering for their customers. And what we help them do is to wrap what they do around this whole concept as a subscriber identity record, to help them price and package the way they want. Reinvent all their business models and then automate all the conflicts, billing and payment processes that go along with these types of businesses.
(02:29) So billing and subscription why is this so important, and tell us for the people who don’t know about it why is this fascinating? Why is this critical?
(02:43) Well it really starts with you and I as individuals right, and we take a lot of stuff for granted but when we pause and think about it you know, we’re changing as customers; our expectations are changing right, every day that passes and we don’t have to buy products and have to deal with product ownership. I mean talking about Über, if I need to get somewhere I know longer have to think about, well where’s my car you know, does it have enough gas, have I paid up on the insurance right and I have to actually go and get it. I can just whip out my phone and say here I am, I want to go over there and a care will come and pick me up and drive me to my destination.
(03:23) So what’s happening is our expectations are changing, and more and more you know, we simply want a service that delivers the outcomes that we need right. We want that service to be customized to our specific preferences. When I walk into that Uber car I want my Spotify playlist playing in that Uber. When I log into a salesforce dot com, I expect my business policies, my business processes.
(03:48) And then more importantly, we expect these services to getting better and better. So once you’ve used Salesforce dot com and the thing upgrades itself, the applications on your phones upgrade themselves. My TV upgrades itself and even the Tesla’s now they’re all connected to the internet; cars are updating themselves.
(04:10) And when we go and use a product that doesn’t change and it’s not focusing it feels weird, and so there’s a big big transformation going on in all our lives where more and more of our needs are being offered by services, right.
(04:22) Now that’s hard for companies to do and where we come in we really help companies transform the industry, transform their companies, launch new innovations and that’s why it’s really exciting.
(04:33) Tien we hear a lot about companies shifting from offering products to offering services as you were just describing. What are some of the challenges that company face when they want to make that transition? It sounds good on paper, ‘oh we’re going to offer what we do a service’, but I think for many companies who are not necessarily on the technology leading edge of Silicon Valley, they’re not sure what that means or how they go about it, so any thoughts on that topic, that transition.
(05:09) Yeah people think well how different is this right. I used to sell a product and I would sell it for $100 and now I going to sell the same product and you know I’m collecting $10 a month instead of $100 for the one time sale. That’s not really what it’s about right this is a really profound change and let’s start with pricing.
(05:29) Most of our customers want to have a conversation about pricing, why is that? Well pricing in the old world was simple right. You’ve got a product, let’s say a pen, it’s a laptop, it’s a car. You know how much it cost to make that. Maybe it’s cost you $5 to actually produce that product and I think I’ll sell it for $15 right, on a per unit basis and that gives me enough money to pay my channel, pay my salespeople, pay my resellers, pay my retailer, however I happen to sell it.
(05:55) Now you flip and talk about a service, well how do I price the service? What is the value the customer is getting from it? Do I price it per gigabyte or do I price it per user. Do I price it per day, do I price it per month. Do I ask them to simply pay me every day? Do I ask them to pay me a month upfront, right? It’s really really complex in how you express the value, and by the way it changes because different customers might perceive the value in different ways. This customer will pay you 30c a gigabyte and this customer will pay you 60c a gigabyte, but they will have a whole different expectation of the service that they want and so pricing and packaging becomes very very different.
(06:34) Tell people, right. In the old world when you sell a product you train your salespeople to say, well here’s the widget. Here’s all the features of the widget and here’s how you know of communicate to it, and go talk about the benefits of this widget.
(06:47) Now we’re in this customer service orientation, well where are you as a customer, what are your outcomes you’re trying to achieve? What are you trying to achieve as a business and I’ll bring the services to bear and help you accomplish that, and salespeople become more solution orientated, more customer orientated versus simply pushing a product. I go on about every part of a company has to change when you reinvent yourself to sell products versus services and that’s what we’re seeing I the marketplace.
(07:16) So elaborate if you would on this notion that when a company shifts from selling a product to a service it drives greater alignment between what the customer expects and what the company is offering. So look at it from a customer centric point of view and may be talk about it that way please.
(07:43) That’s a great question. I mean a lot of people think about this and they say well I used to sell product and I would sell it one time and now I’m simply trying to sell a service, but that’s not the profound change. The profound change is to invert your whole business and start with the customer. So we talk about relationships and we talk about the new economy going forward really being a relationship centric economy.
(08:06) That’s what it used to be like right. It used to be that you were a butcher, you’re a baker, you’re a blacksmith, right. The neighborhood person come customer come to you. You know who they are. You have a relationship with them. You feel that you have an obligation and responsibility to provide good service because it’s somebody you know.
(08:27) A 100 years ago that started breaking down right with industrialization, with assembly lines, mass production, with folks like Henry Ford coming out saying, hey you can have any color as long as it’s black, because my goal is to sell as many cars as I can and oftentimes company wouldn’t even know who the customer was right. I give it to a distributer, I give it to a retailer and they sell it. So all I know is I’ve sold this many units of my product but I have no idea who my customers are.
(08:54) This is all changing. It started changing with the internet. It started changing with companies putting in CRM applications right, for services like Salesforce. And now you know who your customers are. You can actually see what customers are doing right, how often are they using your software, how often are they using your writing service. How many movies are they watching? How often are they purchasing.
(09:16) Look at Amazon versus Walmart as an example, so what’s the difference between an Amazon and a Walmart. Most people say well Amazon is an ecommerce store and Walmart is a bricks and mortar retailer. And that’s not really it. I mean you see at Amazon is launching physical bookstores right, over there in Seattle and Walmart does a lot of business online.
(09:36) The big big difference is Amazon starts with the customer. Every transaction is brought back to the customer. You can login to Amazon and you can see every single purchase you have ever done on Amazon, right, including the first one. You know for me, I logged in the other day and it happened to be a book. It happened to be Crossing the Chasm and I bought it in ’97 on Amazon right, but everything I bought on Amazon is all there. So you can see it’s all shaped and wrapped around the customer.
(10:01) If you look at Walmart, 100 million people walk into Walmart here in the US. Every two to three weeks, I mean that’s like a third of the US population walks into a Walmart every two to three weeks and buys something, Walmart doesn’t know who they are. They’re completely anonymous. They pick stuff off the shelf, they swipe their credit card they walk out. So Walmart is not building a relationship driven business while you see that Amazon is and that’s why Amazon can go into so many areas right. They know about you. They can sell you groceries. They can sell you newspapers. They can sell you songs. They can sell you videos right, because they’re wrapping your lives about who you are and delivering service to you, as a individual, as a customer and that’s why it’s sp exciting.
(10:42) And so this whole return to vendors knowing who their customers are, knowing the relationship, why does that inspire, because as a customer, I want to know that there’s somebody on the other side that cares about me right. I want to know that there’s somebody on the other side that’s watching my behavior, understanding my preferences, tuning the service to be better for me. You know, wants me to continue to be a customer, and this whole relationship driven business really allows you to do that.
(11:07) Okay so fundamentally then what you’re saying is the subscription relationship between the seller and the customer, the subscription relationship drives a continuous need for the seller to do what’s best for the customer to continually attract.
(11:34) Yeah that’s exactly right. You have a lot of software execs and IT exec’s right on your show. This is the transformation if you just sort of scope down and just look at the software industry right. And when I was at salesforce dot com I was one of the early folks there. I joined in the first few month of the company and when you look what we had to do, and most people think we’ll what salesforce did was reinvent the technology right instead of shipping software on a CD, we reinvented the technology to be delivered over the internet what people know call cloud computing and that’s certainly true.
(12:07) But if you listen to how Salesforce talks, how Marc Benioff talks, how we talk at Salesforce we said there was a second transformation that was just as profound which was the change of business model, the change of a pay as you go business model, and that’s when we realized that when we really cared about our customers.
(12:23) And we all came from the software industry and so in the old world when we sell a CD, we don’t really care if the customer is using our software or not, they already paid us. But in this new world we were manically focused on are our customers are they actually using our service. Are they logging in, or are they running reports, are they getting value? Because what would happen if they didn’t get any value they would stop paying us. They would simply cancel the service and we couldn’t build a successful business, and so that business model really forced us to care about customers.
(12:52) I think you were at Saastr just a couple of weeks ago and you could see that permeate the entire software industry right there’s customer success folks that care about renewals, they care about value from the customer. But this isn’t a software industry phenomenon right. You just get the sense that Netflix cares about you because they want you to keep on renewing the service to keep on watching the show. You can feel like Über cares about you in a different way than say General Motors right, that’s selling you cars with faulty airbags right. I mean why would you do that as a service company those things would just be impossible.
(13:30) Okay here’s the point that I’m a little bit confused about. So what you’re really describing Tien is the heart of digital transformation with implications across the company and even going to the heart of the culture of the company and the relationship that the company has to its users right, to its buyers, its customers.
(13:58) That’s exactly right.
(14:00) But subscriptions though, you’re a company that automate subscriptions and billings, so again reinforce for us this link between this kind of massive company change and massive impact on the customer relationship that rises out of a billing which is a sense of a form of billing. It’s only a form of billing.
(14:27) Well that’s right, so we talk to some of the biggest companies in the world right, General Motors is a customer, Ford is a customer, News Corp is a customer, Schneider Electric and digital disruption is on top of everybody’s minds right. And you hear about digital disruption and you hear about big data, mobile. At the core what these companies are saying is business models are transforming and we used to sell products and now we build customer relationships and we turn those relationships into revenue, but what does that mean?
(14:49) Well if you sort of take a step back and you look at enterprise software right, the software applications that companies run on. Companies historically have run on these so called ERP systems right, ERP systems from an SAP or an Oracle. These ERP systems are really built to ship products, and what are the modules in an ERP system. There’s inventory, there’s supply chain management, there’s warehousing, there’s distribution. The whole point is to take an order for 50 widgets and then figure out how to ship it to you. Make it, ship it to you and then charge you for it.
(15:34) Customers think that’s not our business model anymore, we need to build a brand new business model that’s wrapped around the customer, and the customer isn’t just a name and an address anymore so I know where to ship the product or send the invoice. The customer is it. Everything I do needs to be wrapped around the customer. I need to know what has the customer purchased in the past, what are they likely to purchase in the future. Are they using my product, how many times are they calling the call center. I need to build a whole picture of the customer and then craft my relationship in a way that allows me to deepen that relationship and turn that relationship into revenue.
(16:10) To talk about the bill. The bill in the old role was simply, well I shipped you 5000 widgets, you owe this amount of money and you pay me. Now the bill represents the relationship. What does the customer get, and how much usage did they get and how did they translate that usage into a value and the customer gets the bill. That’s chance for them to say, hey you know I’m not using this cell phone as much as I used to. Maybe I should downgrade to a different plan. Maybe I should cancel the phone service. Or I just got another charge from my you know cable company. I haven’t really watched cable TV in the last two or three months. I seem to be watching more Netflix, I seem to be watching more Hulu maybe I don’t need that cable channel anymore.
(16:50) So that bill represents the relationship and that single act you can see the depth of the relationship, you can see the customers that’s going to churn, you can see other customers thinking about it, and you’re doing it on a recurring basis. Every month that customer is getting another bill that allows him to reflect on am I getting the value that I want from this relationship.
(17:08) So billing becomes really really important, and so what companies are saying is these ERP applications that I have been using for the last 20 or 30 years, they’re great for my product business. As more and more of my business ships to these customer relationship centric businesses I need something new. What they are saying is this new thing called relationship business management that has billing at its core. That’s why we exist.
(17:32) That’s pretty interesting so the bill then becomes the glue that binds together the seller with the customer and the customer perception and the customer relationship.
(17:48) That’s exactly right, the bill used to be the after the fact that says I shipped you the product and you pay me, but now it is the relationship. It’s the embodiment of the relationship. Everything comes down to that bill. So rather than just sending a bill that says by the way you only $500, right, why not send a bill that says here’s the value that I got from you, I delivered you $3000 of value and you know, based on our agreement you’re only paying me $500. That’s a much better communication of the relationship
(18:17) Okay, now you mentioned manufacturing companies, so it’s pretty clear how this works for a software company but what about a company that’s making stuff that’s making hard goods, making ships, airplane engines, cars, manufacturing fans – anything, how does this affect them.
(18:38) Your exactly right it was technology companies right, software companies are realizing customers wanted a service now they want a pay as you go. Hardware companies realizing you know, what companies really want is they want what Amazon gives them. They want computing power not hardware. They want networking bandwidth not more physical devices. So the whole technology industry is moving in this direction.
(19:02) We have a wave of what I call digital companies, newspapers, magazines, movies, music, content that has been repurposed in digital format and translating your service. People aren’t buying songs anymore right. Individual song sales are down 20% year over year, and people are instead moving to music services like Spotify, Pandora, Tidal, Apple music and so on and so forth.
(19:20) But in the last two years we’ve seen the manufacturing sector shift over as well. And what’s going on there is the Internet of Things, right. We were talking to this is a major tractor company right in the US, and they told us we have hundreds of thousands of physical assets like tractors, engines, and they sell heavy goods out there and they’re all connected to the Internet. Schneider is saying we spent the last five years making sure that all our physical products have sensors and areInternet enabled right, Wi-Fi enabled and collecting all this information.
(20:02) Wow, now we realise that we’re going to continue to sell products, but we can layer on services, outcomes on top of these products and actually deliver more value to the customer. We’re becoming services organizations.
(20:15) Ford and GM are saying look, we will still be selling a lot of cars but what we’re really excited about is the connective car space right, it’s about launching transportation services on top of our physical car network that tells people, that it delivers on the transportation needs. So maybe I have a Ford, maybe it’s in the garage at home and I’m trying to get from point A to point B, can I pull out and Ford calls this a Ford Pass application, that delivers my transportation needs in a similar way to Über and a similar way to Zipcar, right, but that brand is Ford and that’s what these companies are truly excited about.
(20:50) So there’s a close link then between the data and capturing data to be able to offer products in the form of a service.
(21:04) I would say a lot of these companies right, they get the Internet of Things, it’s easy for them to design new products that have sensors that collecting information and putting into a cloud-based service, and their first reaction is how do I monetize all these capabilities. But the profound change that the go to is I can reinvent myself as a customer centric business.
(21:29) So if you look at the Amazon versus Walmart example, right. You’re walking around right now with an Amazon ID. You’re walking around with a Google ID. You’re probably walking around with a Facebook ID and Apple ID. These ID’s are dominating more and more of your life.
(21:44) You’re not walking around with a Walmart ID. You’re not walking around with a Toyota ID. You’re not walking around with a Nike ID, or a coke ID, right, but if you are and these things represent parts of your life it represents you know, food, it represents entertainment, it represents health, right. These things can now deliver outcomes and services to you in a much much more profound way than simply buying a sneaker or buying a can of you know, sugar water, or walking into a store to buy some groceries.
(22:17) So when you talk about outcomes, we hear a lot of times in conversations about digital transformation, discussion of outcomes. Can you define that, what does that actually mean?
(22:28) Well I would say that the winners of every industry on the ones that are able to answer that question for their industry. So when I buy a car, what is the outcome that I really want? Is it simply that I want to get from point A to point B? Is it simply that there’s a pleasure and romance of being able to drive a vehicle down Highway 1 in California? What is the essence of the thing that people really want, and can I deliver it to them in a greater way verses selling them a product and saying well, you figure it out of how to get the outcome that you want from this product.
(23:03) And that’s really the magic, and so Schneider is saying you know we used to – Schneider is a 20 plus billion dollar global company, and I think of it as the industrial version of Nest we’re all familiar with and Nest thermostats, well Schneider sales equipment, thermostats, generators, solar panels, wiring that go into energy management into these big commercial buildings. And they’re saying, what if we didn’t have to make our customers buy these products, what if we simply owned the physical infrastructure. And the same way that salesforce is saying, you don’t have to buy the hardware. We’ll own the physical data center infrastructure and you’ll simply sign up to us as a service. What if Schneider said look, we will provide you an energy management service and we can do it better.
(23:49) Right, we are all frustrated when we’re in a room and it’s too cold or it’s too soft, and you’ve got to call somebody else to go and manipulate these things. What if Schneider said we have put all sensors in your equipment, we’ll give everybody RF ID badges, we’ll actually know what people’s temperature and humidity preferences are. So, there’s 10 people in a room and we’ll know what is the best temperature setting for the folks in the conference room and we’ll manage that remotely. And then our price to you will actually be based on how much energy in savings we give you, because we can do a better job of it. So it’s a win-win situation.
(24:22) And that’s a better way to deliver the outcome which is energy management, good cost efficiency, a comfortable room and we can deliver that outcome to you without saying okay, bye bunch of products and then you go figure out how to do those type of things. That’s what’s profound and that’s what’s transformational.
(24:42) So when a company is offering services as you’re describing on a continuous basis there’s a closer mapping or a closer tie between the service that’s being offered and the consumption of that service so it leads to greater transparency and it starts to shift the customers’ expectations and the customer stats to have much higher expectations of the supplier as well.
(25:15) Yeah and we would argue you that this is the natural state for the service providers that you have in your personal life, your lawyer, your tax accountant. I mean go back 150 years and visualizing you know, Provence in France, beauty and the beast, right, you’ve got your butcher, and got your baker and you knew who your providers were. There was a relationship, there was a trust of relationship, and there was give and take in that relationship. And this whole idea of anonymity, where companies are selling products and they don’t know who their customers are, and their only goal is to sell as many widgets, right as many pens, as many laptops, as many cars, they didn’t care if it eventually all winds up in a landfill anyway, right, that model just doesn’t make any sense. The natural state is a relationship between a buyer and a seller, and so we believe that the subscription economy is making business more human and bringing the human aspect back to business relationships.
(26:09) From a consumer standpoint it’s a much better world, right. There’s people out there delivering the outcomes I want. They know what they’re doing, and they understand my need, they care about what I want, they want me to remain as a customer. That’s a much much better way to do business.
(26:21) And Zuora’s roll in this applying that glue from your perspective is the bill.
(26:31) So absolutely so, because we’re shifting from this product economy to a subscription economy, the systems that companies run on have to change and they have to move away from traditional ERP like systems, to these new relationship business management systems centered on building. That’s absolutely true.
(26:49) But I’ll tell you what inspires us right, the 650 something odd employees at Zuora and what we do on a day-to-day basis, is to be part of a inspirational transformation. We love being part of our customers producing innovative services that are changing and making the world a better place, getting humanity back into business’s, that’s what inspires us. You know, we think this is the better way to create a better world.
(27:15) So what are the implication of all of this from areas that seem rather far flung from what we’re talking about things like HR, talent, hiring, corporate culture, talk about those implications.
(27:32) The shift is so profound, when we talk to the CMO, the conversation always turns to pricing, packaging, cost of customer acquisition right, how do I grow my business. When we talk to the IT department it’s typically well, how do I transform my old architecture if you will, let’s center it around and ERP system with this new thing that gives agility to customers. When we talk to sales right, it’s how do I scale my sales organization, but the get them closer in touch with the customer. Salespeople are more customer account managers now than people often in products.
(20:08) But when we talk to the CEO of these companies, it always goes back to culture. I used to have a hit product culture. Right, my goal was to have an engineering organization right, the marketing organization, you tell me what the market wants, you go and design it. Manufacturing, you go and build it. Salespeople, you go and sell it, and if it all works will sell 1 million units and we’re going to make a lot of money. If we don’t make our targets then we end up losing money, it’s more of a hit product culture.
(28:36) And they are saying this just doesn’t work anymore, right, I’ve got customers they have existing needs and they’re using my stuff already, how do I reinvent my organization so that we have a customer centric culture, a subscription culture if you will. How do I break down the functional silos, so that for any specific customer, a cross functional team that spans marketing, R&D, and sales, and post sales and come together that delivers the outcome that that customer is looking for. That’s a profound transformation, and it’s causing companies to rethink their organization charts in order to build this.
(29:13) So that’s really interesting. You’re going from a hit culture which means we come up with a big hit. We doing something and we hope we have another big hit and expect to have lots of small hits or non-hits along the way to an ongoing series of relationships, an ongoing relationship that has more or an even keel.
(29:43) Yeah, I mean you think about Netflix and Hollywood versus Netflix right, Hollywood tries to create a movie. Maybe they spent $100 million on a movie, and how many tickets can they sell around the world. Now you look at Netflix and right now you know Sundance was a couple of weeks ago and if you read the news there’s like a bidding war going on between Netflix and Amazon on some of the latest content movies that are coming out of Sundance.
(30:08) How do you think about that as Netflix because you don’t sell it. Right, I’ll pay x million dollars to commission the next House of Cards, but I’m not putting it to a movie theatre. People aren’t buying tickets to go see that show. It kind of goes into the library right, and my goal is to simply grow my subscriber base around you know from 50 million to 60 million, reduce churn right. You Know maybe increase the revenue that I’m getting per subscriber, my average revenue per user if you will, but how do I think about that? How do I think about that investment? This is a whole new world, and at the end of the day right, Netflix’s revenue model is based on how many customers do they have and how much revenue that they get the customer.
(30:54) So how do you think about investment dollars when you’re buying content or producing software right, creating services. Ultimately, your goal is how do I create a better service that allows me to attract the biggest amount of customers. It’s a very different way of thinking.
(31:10) And this is based on data because once you start instrumenting the billing process now you can see that you can get a much quicker handle on what’s going on with your customers, which part of your service are they using, are they not using and that gives greater insight into what your customers want, so maybe talk a little bit about that.
(31:31) Well that’s a great point. So we did our first acquisition in the middle of last year 2015. It was a company that from a technical standpoint, a usage analytics company. Right, they would basically say well let’s set up that subscriber identity record, that customer record, let’s track usage for the customer. Because what our customers said was look if I can marriage the usage information with financial information, that’s how I get deep insight into my subscriber base, right.
(32:03) So I’m a video streaming company, and those users, those subscribers that watched X videos per week, they want to be much more loyal, right. I’m salesforce dot com, these companies that use these type of features are prime for me to go and upsell them from my professional addition to my enterprise edition.
(32:26) So the marriage of user behavior to subscriber behavior with historical subscriber financial metrics, that’s really the magic that I need in order to build these users. Newspapers for example, a year or two ago they realized you know somebody who reads three articles on a tablet or an iPhone right, is a much much more loyal customer than somebody who reads three articles in a browser on thier desktop. The first time you hear that it’s like why would that be, then you realise okay, well you know the person who is reading on a desktop probably you know clicked a link on their Facebook stream, saw an article and wasn’t even quite sure which newspaper it was and then popped right back to what they were doing before.
(33:04) Well the phone or the tablet is an immersive app experience, you’re engaging with the brand right, you’re letting the brand curate what’s going on around the world. So this insight about subscriber behavior becomes really important. Now you are talking about manufacturing companies, these guys selling medical devices, cars, right, phones and you know pens or whatever it will happen to be. They can collect all the usage information now, right they can have all this insight about their customers that they never had before. Their next step is how do I now take those insights and those relationships and turn that into a recurring revenue model that brings me closer to my customers. That’s what’s going on around the world. Every single company is going through this.
(33:45) So anytime a company is undertaking a change such as you’re describing and these are really business model changes, so they’re big changes. It’s difficult, it challenging, so what are some of the challenges companies may face and how can they address those challenges. Or to put it another way, what are some of the strategies that you suggest that companies can use to do this successfully.
(34:09) So this is a big change. It absolutely is and a lot of companies come to us and say well how do you help us with this change. And so what we do is we let them tap into community. Because this is all new, you think about these folks that you know, out of business school right, but everything you get taught in business school and I went to business school as well and it’s all anchored on the old way of doing things right. Invest in the R&D, find a way to build a hit product, sell as many units as you can. Competitive advantage is based on how many units that you sell, and the margins that you make of that unit. That’s basically business school 101 right, that’s the essence of business school.
(34:51) Well, these business models are very different, and they’re new and there’s not a lot of information out there. And in fact the type of companies that are a little bit further along in this thinking are the software as a service companies. There’s a whole crowd of Saastr, they’ve been wrestling with these issues over the last five, six years. And those same issues are wrestling with General Motors is now wrestling with, Caterpillar is now wrestling with.
(35:13) So what we do is we bring them into a community which we call Subscribed. And we hold all these Subscribed events around the world. We do these Subscribed pop-ups; I just came from Milan, I’m doing one in Copenhagen or Stockholm in two or three weeks. We have these regional subscribe events. We have a Subscribed online community right, it’s called the Subscribed Academy. And then we have our annual big Subscribed event where we will bring in a few thousand of these companies here to San Francisco, and what you’ll see is we bring the communities together is this is the stuff they want to talk about, how do I change my culture. How are you pricing packaging, right, what are the ideas that I should think about, right. How are you rethinking about your financial metrics, what is the right investment level for R&D, what is the right investment level for cost in goods that gets sold, what is the right investment level for sales and marketing.
(36:00) So we bring these communities together under this Subscribed umbrella and you just see magic happen, right. They just share a lot of information with each other and it all helps to drive more successful business.
(36:12) So essentially what you’re saying is education is a key part of undertaking digital transformation.
(36:19) Education is a huge part. This is a brave new world that we’re all entering and to an extent we can all help each other with ideas and create the future, that’s what’s really exciting.
(36:30) And if you were to list three, four, five bullet points whatever the number of the laundry list of key elements that companies need to consider when they’re going to undertake a transition from a product to a service company, what would that list be?
(36:55) Let me give you the first three cookie crumbs right to follow. We’ll throw up a picture and it really resonates with companies they say here’s the old model, you have a product and you try to feed it through channels and at the other end of the channel is a buyer, is a customer. The channels could be you know maybe a multiple channel. You have a salesperson channel, you’ve got a reseller channel, maybe you sell it through your call center, you have an online channel, right. You have a distributor channel, whatever it happens to be. Most companies that are a certain size have multiple channels.
(37:20) And your goal is to feed the products through multiple channels, and sometimes to even design a product to be optimized and be fed through that channel. Oftentimes you don’t know who the customer is on the other side. That’s business today. Well, what you need to shift to is the customer right, and these established companies well you have customers. You have 5000 customers, 50,000 customers, 5 million customers, but do you know who they are? So start with that. The chances are you might have put in salesforce dot com or a CRM application over the last five, 10 years right, and every company seems to have done that.
(38:01) So you have got a starting point where you’ve got the CRM system that has anybody who has ever purchased something from you, or maybe you know companies that you hope will buy something from you in the future, right, start at that point. Then ask yourself okay, how do I develop a picture of a customer, right how much have they purchased from me in the past and what are they doing with my application, right.
(38:21) If you’re a product company start putting sensors in your products and start collecting that information, but file all that information back to that customer record, back to that we call it a subscriber identity record. And then look at it, and then you have fundamentally three questions.
(38:34) You know is your growth in the future going to come from acquiring more customers, right and how are you going to do that? Right, then you do that with services and down market and international market. Or is your revenue going to come from increasing the revenues per customer, which means you need to cross-sale, up-sale, redefine your bundles and so on and so forth. Or is your revenue going to come from reducing churn?
(38:59) We were talking to a gaming company and they said you know, we sell a lot of games and when we come up with a new game we know that we can sell 1 million copies of the game and people will pay are $60 for that game. And then two years later we’ll come up with the next version right, before it was version 10 and now it’s version 11 and we know that only 50% of our customers that bought that game you know, the old version 2 years ago will buy the new version; 50%, and so to a subscription company, that’s 50% of your customers churning over two years.
(39:34) And then what the CEO says is you know, if we take that $60 and we take it over time, right we take it over two years but we are forced to keep the customer engaged. Right, than not playing the game for two weeks and forget about it right. We are going to keep them engaged and keep them coming back. We’re going to create new versions. We’re going to create light versions for their phone or whatever it happens to be, and we keep them engaged with the brand, and we know that we can hold on to them a lot more than 50% of our customers over that two-year period and that is a much healthier business.
(40:00) This is how companies need to think. Start with the customer, how do you hold on to the customers. Don’t worry about taking all the revenue upfront for the product sale, but how do you get them engaged with you over and over again, over a period of time and then how do you wrap your revenue model to reflect the value that they are getting from that engagement and experience with you right. That’s the starting point. Now yes there’s huge implications on how you price, on how you design your products, how you go to market. But start with that because that one will inform all the other decisions that you need inside your company.
(40:32) That’s hard though, some of these things you’re describing for company’s because it does involve changing their mindset. I recently spoke to a company and somebody said to me they’re undergoing digital transformation and one of the people there said but this means that during the initial conversation maybe we shouldn’t be trying to sell them anything. And my response was well yeah, educate them, establish the relationship because then you’ll sell a lot more but this is a very different way of thinking.
(41:06) It’s very different right because yeah nobody wants to be sold to right, you don’t really want to buy a product that you deal with, you want an outcome. You want someone on the other side that understands your problems, that’s bringing expertise in and understands your problems better than you do right, that can educate you on it and help guide you through it part of the world.
(41:28) You’re absolutely right, this is a de-transformation and the best companies that are doing it the best it’s a CEO driven thing right. I mean who’s talking about Ford Pass, it’s Mark Fields the CEO of Ford. Who’s talking about the changes you read in the press for Under Armour, well it’s the CEO of Under Armour right.
(41:48) So these changes have to come from the top because they have to be a cross-functional change and they have to reinvent the whole strategy and the whole direction of the company in order to be successful.
(41:59) Wow learned a lot.
(41:56) It’s just amazing how something like billing and subscription has implications and tentacles that reach in so many different directions.
(42:15) Yeah I get that, so people at us and say billing right, how exiting that is. It isn’t about okay, how do I send out an invoice and collect the money. We’re in the middle of what we see is a once in a century transformation of business models. That’s why we’re excited. That’s why we get up in the morning. That’s why we do what we do. We work with our customers, we creat our innovations, our products and to be what I’ll say is a ringside seat to watch these transformations of these industries, that’s really what’s truly exciting for us.
(42:53) It is amazing and infact this company that I just mentioned I said to them, we’re undergoing a generational change right now.
(43:03) Well this has been a fascinating conversation and it sure went by very quickly and unfortunately Tien our time is up.
(43.13) Wow, it’s been 45 minutes. It did go by quickly.
(43:16) We have been talking with Tien Tzuo, who is the CEO of Zuora and this has been episode number 158 of CXOTalk. Tien thank you again for taking your time and your team was great helping us getting this all setup, so we thank them as well. Everybody, come back next time because there’s more CXOTalk. It keeps going on. Thanks so much everybody, have a great day. Bye bye.
Companies mentioned in today’s show
General Motors www.ge.com
HBO Now https://order.hbonow.com
News Corp www.newscorp.com
Schneider Electric www.schneider-electric.com
Under Armour www.underarmour.co.uk
Published Date: Feb 26, 2016
Author: Michael Krigsman
Episode ID: 317