Tien Tzuo - Subscribed: Why the Subscription Model Will Be Your Company’s Future - and What to Do About It

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SUBSCRIBED, SUBSCRIPTION ECONOMY, and SUBSCRIPTION ECONOMY INDEX are trademarks owned by Zuora, Inc.

Copyright 2018 by Tien Tzuo

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ISBN 9780525536468 (hardcover)

ISBN 9780525536475 (ebook)

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To my wife, Mariana, for encouraging me to take the plunge

And my daughter, Ciana, for giving it all meaning

INTRODUCTION

A couple of years ago I wrote an article for Fortune advising people not to go to business school. I argued that it was a waste of time, that for the past hundred years, business schools basically taught one idea: The fundamental goal of every business is to create a hit product, and then sell as many units of that product as possible, thereby diluting fixed costs in order to compete on margins. I said that this model was over, that the situation has changed.

Instead, I argued, the goal of business should be to start with the wants and needs of a particular customer base, then create a service that delivers ongoing value to those customers. The idea was to turn customers into subscribers in order to develop recurring revenue. I called the context for this change the Subscription Economy.

Oh man, did I get a lot of crap for that article. There were comments like: Do you really think we dont get it, Tien? That we dont understand the difference between a product and a service? That they dont talk about this stuff in business school? My situation wasnt helped by the fact that I still work with my old business school a lot. I go back every year to give talks and help teach courses. I got some sideways looks.

Okay, some of these people had a point. I graduated from business school in the late nineties. Im sure some curriculum topics have changed since then. But I bet a lot still hasnt changed, particularly in those 101 classes. In fact, I know it. Every day I see companies run by bright young MBAs going down in flames trying to chase after magical hit products. They cant compete because theyre built backward: product first, customer second. That order needs to flip. None of these companies has any idea who it is trying to sell to.

Heres a question: How many of the charges on your last credit card statement were made without you ever having to pull out your credit card? There are probably monthly charges on there for your Netflix and Spotify Premium accounts. Theres a charge for Dropbox on there, if you keep your files in the cloud, like the savvy reader I know you are (youre reading this book, after all). Maybe you get a meal or a snack box, or have a MoviePass subscription, or support a podcast on Patreon. Youre not as interested in owning stuff so much as accessing services to meet your needs.

What about your computer desktop at work? Does it still start up with the chime and the rolling green hill and half a dozen slow, cranky applications scrolled along the bottom of the screen? I sincerely hope not. It probably looks a lot simpler: a log-in, a few light desktop apps, and a browser. Maybe your company has switched over to Gmail for all its email hosting, so you dont have to delete all your old Outlook files every six months. Maybe they use Box to handle all their file storage now, and the old server room got converted into a ping-pong lounge.

Everything feels different right now. Why? Because I think were in a pivotal moment in business history, one not seen since the Industrial Revolution. Simply put, the world is moving from products to services. Subscriptions are exploding because billions of digital consumers are increasingly favoring access over ownership, but most companies are still built to sell products. Theyre not set up correctly for the next hundred years of business. As a result, huge opportunities are up for grabs. If youre not shifting to this business model now, chances are that in a few years you might not have any business left to shift.

Ten years ago we were already starting to see the signs. Netflix was still delivering monthly DVDs in the mail, but it was already killing Blockbuster and changing how we consumed media. Online streaming was just around the corner (as many people have pointed out, Reed Hastings called it Netflix for a reason). Zipcar was also a really interesting new concept. It was initially seen as an hourly competitor to Hertz and Budget, but you could already see new ideas opening up around cars and transportation, which Uber and Lyft capitalized on later. And of course the iPhone had just come outat the time it was more of a fun, plug-and-play app container, but there was the potential for geolocation, identity, messaging. As bandwidth increased and platform costs decreased, there was a logical progression going on toward on-demand, digitally enabled services. And it was happening everywhere.

Thats when we decided to start a new company called Zuora. We wanted to build a brand-new subscription billing and finance platform. Like a lot of companies at the time (Zendesk and customer support, Okta and passwords, Xero and bookkeeping), we were trying to solve a big, boring, pain-in-the-ass problem. To an entrepreneur, any business process that is universally hated, hopelessly complex, and massively expensive constitutes a huge opportunity. Keep in mind this was all happening in the midst of the Great Recession of the late 2000s. On-premise software got hit hard. Retail got decimated. Car sales went off a cliff. Advertising evaporated.

After the rug got pulled out from beneath them in 2008, a lot of businesses and investors realized that they were playing their own version of Hollywood economics: Pour tons of money into developing a product, then pray for a hit. If it doesnt work out, youre out of luck. These companies had no visibility into their finances. They had no predictability in their forecasts. They started every quarter with nothing in the bank and had to crawl all the way up to hit their number. Thats not how it works with subscription revenue. A $10 million company with 80 percent subscription revenue starts every year with $8 million in the bank. If stock valuations are forward-looking predictions, then subscriptions are forward-looking revenue models.