The Subscription Economy’s Maturation

A lot happens in a decade. Bill Gates once said that we overestimate what we can do in two years and underestimate what we can do in 10.

2017 is a particularly good time to stop paddling and look back at what’s been going on in the last decade. While we will all have our favorite memories, there’s one in CRM that stands out more than others for me.

After all, 2007 was the year of the iPhone, as well as the year before everything in the financial world began going down in a big way. There was barely any social media to speak of — Facebook was founded in 2004, but only in 2006 could anybody over the age of 13 join. Twitter was founded in March of 2006, but while social was making waves in 2007, the introduction of the iPhone helped make it the huge part of our lives it is.

The Billing Dilemma

For one who has been writing about CRM — and especially SaaS — 2017 marks the 10th anniversary of Zuora’s founding. You might think that isn’t significant, but just as the iPhone made social networking a big deal, Zuora had a similar effect on the SaaS business. Sure, by 2007, there were already big companies in the space, like Salesforce.com, which had gone public a few years before.

Still, there was a looming problem in SaaS that either was being ignored or avoided, and it was creating drag on the whole industry. The problem was that although SaaS businesses were successful, they were scrambling each month to get their billing out.

In 2007, even the best SaaS companies were using a combination of spreadsheets and archaic enterprise resource planning systems that couldn’t fathom the idea of a recurring charge. ERP could do services, but not the recurring part — and spreadsheets aren’t systems. At best, they’re the equivalent of life vests for business processes.

So along came K.V. Rao, Cheng Zou and Tien Tzuo, veterans of WebEx and Salesforce, to tackle the problem. I am not certain if Zuora was the first company of its kind, but it certainly put a floor under the industry in a way that competitors didn’t.

That floor looked a lot like Salesforce. When Salesforce got started, subscriptions were thought to be just another delivery mechanism for software rather than the revolution they turned into.

New Approach

Zuora didn’t approach the subscription billing problem as, well, a billing problem. Zuora saw a revolution in the making — and not just in Software as a Service. It saw subscriptions as a new economic entity, a way to bend the cost curve downward that would expand markets by vastly increasing demand.

Importantly, though, the subscription difference has been that while markets expanded, they did not necessarily commoditize, which might have been the first time in history that’s happened.

Under more normal conditions that have prevailed throughout history, commoditization involved elements of mass production, as well as finding ways to cheapen a product. Mass production takes labor out of making something, reducing costs.

Cheapening products can take many forms. For instance, you can remove features or substitute materials or components in the process, shortening the product’s useful life. You also can curtail services, which are expensive to provision when using employees rather than systems.

Until subscriptions, that was the reality of commoditization — but by their nature, subscriptions do none of that. The same grade of product delivered as a service is available to all, though the current reckless actions by the FCC to degrade Net neutrality may be a retrograde step in the direction of cheapening the Internet.

Everyone also pays the same base price, though there’s still opportunity for creativity when it comes to volume discounting.

The Revolution Goes On

Most importantly, development and maintenance in many subscription industries are ongoing. If they aren’t, like when you subscribe to a car through a lease, at least the service level remains high. The reasons are all the same: Subscription vendors are always in the hunt for the renewal.

Zuora saw subscriptions as the revolution they are, and that’s one reason they’re one of Silicon Valley’s unicorns — a startup worth more than a billion bucks on paper. Undoubtedly, we’ll see that valuation tested at some point through a public offering, but for now it’s worth recalling that the revolution is continuing.

U.S. and international financial accounting boards that set standards for how businesses report their financial activities recently (after more than a decade) have announced standards for how businesses report on recurring revenue, which goes to the heart of the industry.

The new rules, ASC 606 (U.S.) and IFRS 15 (Europe), begin going into effect next December. As I’ve written previously, Zuora has acquired Leeyo, a revenue recognition specialist company, to prepare its customers for the transition. It’s not the first acquisition for Zuora, which steadily has been innovating and acquiring businesses as needed to build out its platform and support the subscription economy.

Zuora has come a long way since its founding 10 years ago, but so has the industry — so have we. Gates’ original insight probably should be amended, because we not only underestimate what can be done in a decade, but also absorb new technologies so fast that a decade can cause amnesia about the way things were just a short while ago.