The Shift to a Subscription Economy, Part 2

The Shift to a Subscription-Based Economy, Part 1

Marine liability insurer The Shipowners’ Club has signed up to get IT service management from Axios Systems on a Software as a Service basis.

It is going with the subscription solution to remove the cost and complexity of security, backups, implementation and upgrades while retaining full ownership of its data.

That, in a nutshell, is why companies are moving to a subscription-based economy.

Billing, revenue recognition and other financial services are among the growing areas in subscription-based offerings, for good reason: They let companies moving to the subscription model better track what they are doing.

“As companies grow their subscription businesses, they often find that existing ERP and billing systems are not well equipped to handle the real-time tracking of new success metrics, including ARPU (average revenue per user), churn, M/ARR (monthly and annual recurring revenue), recurring profit margin, and customer lifetime value,” said IDC Research Vice President Amy Konary, who specializes in software licensing and provisioning.

Nor can traditional systems handle the management of new processes, such as a single order that creates multiple invoices, an invoice that generates multiple revenue recognition processes, multiple orders on one invoice, and the combination of all orders to create a renewal invoice, Konary told CRM Buyer.

Subscription billing companies include Zuora, Recurly, Leeyo Software, Aria Systems, Transverse, Convergys, MagnaQuest, and the company that used to be Portal Software, now part of Oracle, Konary said.

Zuora: In the Zone

Perhaps the most marketing-savvy of these players is Zuora, whose CEO and cofounder, Tien Tzuo, ensures his company is always in the media’s eye through multiple means including interviews and contributed articles.

Zuora has just raised another US$50 million from major investors to fund its expansion plans. These companies are Next World Capital, Vulcan Capital and Northgate Capital.

“We have a great split between SaaS and brick-and-mortar customers, Tzuo told CRM Buyer. “We have customers across telecommunications, education, financial services, media, healthcare, travel — you name it.”

The company’s more than 600 customers include Fairfax Media, Telstra, Box, Zendesk, News Corp., Dell, HP, Dollar Shave Club, TripAdvisor and Qualcomm.

Zuora has its own conference, “Subscribed,” which will be held in San Francisco Sept. 19-20.

Leeyo Software

Leeyo’s customers include AIO Networks, Brocade and Avaya.

However, Leeyo takes a slightly different tack from Zuora. It addresses revenue recognition required by the Financial Accounting Standards Board and the International Accounting Standards Board, Patrick Glenn, company vice president of marketing and business development, told CRM Buyer.

Leeyo’s RevPro automates revenue recognition and “can utilize data that’s captured in the Zuora billing solution,” Glenn said. “We rely on data that comes from many systems — order management, project management, billing, complex billing, general ledger, time tracking, modules or applications.”

Traditionally, companies download data into an Excel spreadsheet and do calculations in these to recognize revenue.

“All companies recognize the benefit of having an ongoing revenue stream in their business,” Glenn said. “It’s not just the domain of software companies any longer.”

Avangate: The Next Level

Subscription management and billing companies like Zuora “only solve a piece of the commerce problem that companies are facing, where integrating multiple, disparate systems prevent business from keeping up with customer demands,” contended Carl Theobald, CEO of Avangate.

Avangate offers a complete customer-centric commerce solution that includes subscription management and billing; full front office features such as A/B testing; marketing and sales tools; shopping carts; and payments. Back office functionalities include refunds; chargeback management; risk and fraud management; and financial reconciliation.

Companies that focus on a subscription model will have to add on support for value-added tax, risk and fraud management, merchant services and financial reconciliation, and adding these will delay to time to market, Theobald told CRM Buyer.

“While [moving to] subscriptions is one step for those moving to sell their services online or move into the cloud, these subscription model companies are limited when they try to go global, complying with other countries’ tax and compliance laws, as well as addressing local customer preferences for buying,” Theobald elaborated. “Before they know it, they’re in a commerce hairball as they try to manage all the disparately added systems.”

Large corporations can afford systems integrators, Theobald said, “but if you’re the majority of the market, chances are you are struggling to make your commerce systems — including subscription billing and management — work together seamlessly, due to lack of resources.”

A Money Pit?

“As the market matures, subscription model-only firms will face tremendous pressure from larger suite players such as Oracle and SAP and find themselves having to raise copious amounts of capital in order to stay competitive,” Avangate’s Theobald predicted.

Indeed, most of Zuora’s total capital investment of $132.5 million so far has been spent on sales and marketing, according to Denis Pombriant, managing principal at the Beagle Research Group.

However, that’s because sales and marketing “act much more like Capex (capital expenses) versus Opex (operating expenses) in the new economy,” Tzuo explained.

“Because this is a huge and growing market, we are investing to keep up with the demands of the marketplace,” Tzuo continued, “but we’re also investing heavily in engineering to create new innovations, and [in] our network of consultants that help our customers use our tools to be successful.”