Tail (Zuora) Wags Dog

Last Monday at Demo, Zuora CEO and cofounder Tien Tzuo introduced Z-Commerce for Facebook — a significant announcement that might be looked back on as a turning point in the evolution of on-demand technology.

Zuora, if you don’t know, provides an on-demand billing and payments suite for companies that sell Software as a Service (SaaS). You might think that these companies don’t need specialized billing systems, but you would meet many objections from the companies involved. Selling SaaS is intricate and difficult to do. It requires perfection throughout the customer life cycle because the customer base votes on retaining you with every billing cycle. Screw up and your customers could easily migrate to someone else. That is both the beauty and the terror of on-demand business.

Forgive me if you have read this far and said the equivalent of, “So?” Hang on, there’s a little more to so about.

Smoothing Out the Billing Process

You already know Facebook, which is in part an application development platform for small, personal applications related to social networking. People who develop applications for Facebook do not have many options for monetizing their investment in products. They can post ads or give their product away. The ad model of monetizing the Web doesn’t work very well here. You doubt that? Have you ever read the words ‘Facebook millionaire’ in a sentence that was not about the founders? OK.

Let’s just say that for Facebook application developers, the low revenue potential is frustrating and may be holding back innovation on the platform. How big is the frustration or potential? Some simple math helps here.

There are about 660,000 Facebook applications and 150 million active users, numbers that will only grow. If 10 percent of the users subscribed to an application at $1 per month, collectively there would be a revenue stream of $15 million per month, or $180 million per year. If you ratchet up the user count, monthly fee, or both, the numbers get big quickly.

But how do you process a bill and make money on a dollar or two per month? Tzuo and his partners are betting that this revenue stream doesn’t exist yet because there has been no way to efficiently capture it. The premise of Zuora is that developers of small and large on-demand applications can monetize their applications better through on-demand billing than more traditional means, and the evidence so far is that they are right. The Facebook venture is an extension of that logic.

Innovations and Operations

Consider what this means for a moment. Innovation at the product level is bottlenecked by something other than the typical reasons — breakthrough technology is needed, capital requirements, lack of ideas. Instead, the raw products exist, but innovation at the secondary level –making a business model that works and charging the customer appropriately — is the barrier.

I have thought hard about this, but I cannot come up with an analog — a time or a situation where innovation was held up by operational considerations like this. Furthermore, if Zuora had not stepped up and said there is a potential market in Facebook applications, we might not have even noticed. But they did, and we have. So what does this mean in a big-picture way?

Are there other markets where subscription billing could improve business models? The first and perhaps most natural place to look is where your mind naturally goes to think about subscriptions: publications. Why do we renew magazine subscriptions for one or more years at a time and why through the mail? It must be expensive to send out all those reminders and bills. And why is a magazine subscription time limited? Newspaper subscriptions aren’t. With a modern on-demand billing infrastructure, what could a traditional magazine save over its conventional billing system?

And speaking of newspapers, maybe you’ve noticed they’re in trouble in the U.S. Newspapers are thriving in many other countries, but not here. Around the world, 1.4 billion people read a daily paper, according to a study published in December 2008 by Jack Miller, president of Central Connecticut State University. Has the U.S. consumer tired of news or of the newspaper business model of hand-delivering information on squashed trees?

A Budding Disruption?

At first blush, none of this billing talk looks like a CRM issue at all, but it is. When your customers abandon you because of your business model, it’s a CRM issue. When a business fails to thrive or can’t even get started, there is a CRM component involved. When we make our businesses easy to do business with, we are engaging our customers at an operational level that is every bit as important as customer intimacy. In some ways, it is the relationship.

What is truly fascinating to me is that we are at a stage in many markets where innovation is turning from product and relationships to operations. Zuora’s instincts about this are spot-on, and I think we might be witnessing a disruptive innovation with on-demand subscription billing that is every bit as important as the on-demand innovation that started the ball rolling downhill just one decade ago.