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THE LEADER IN SUBSCRIPTION BILLING & PAYMENT SOLUTIONS

THOUGHTS ON RUNNING A SUCCESSFUL SUBSCRIPTION BUSINESS

April 15, 2014

How Customers Win in the Freemium Age

Joe blog pic

Joe Andrews

Sr. Director, Marketing

 

In the Subscription Economy, there are many recurring pricing and freemium models in play. As a result, customers have a lot of choices and tough decisions to make. Freemium is a great no-risk opportunity for customers to try out a new service and can be a powerful lever for businesses to rapidly acquire new customers. Freemium models lower the bar to start using a service, but the offerings typically come with fewer capabilities.

 

Ultimately, freemium models are not about the product, but about the path to enage with prospective customers and the process to educate them and get them comfortable enough to trust in making a purchase decision much faster than they would without the freemium offer.

 

How do subscription companies optimize the use of freemium models in their business? In this post, we share learning from recurring revenue businesses that are using freemium and make suggestions for how to best apply them to your business.

 

Be Clear About Your Value Prop

Michael RileyOriginally from Los Angeles, Michael Riley is a serial entrepreneur now based in Philadelphia. His latest startup initiative, Simplpost, was recently accepted into the Philly Startup Leaders Accelerator program. He believes that in order to convince customers that they must pay for a service, you must demonstrate that your service offers more value than any competing service.

 

It's definitely a challenge to compete in a market full of free and freemium services. Our strategy is to provide more value than our competitors so that it makes sense for our customers to pay for this extra value. It's a win-win situation for both sides. I recently wrote a blog post on sustainable pricing that has more information about this topic.

 

By offering free services, other companies are unable to provide any high quality support because it would be cost prohibitive. Instead we focus on differentiating by offering unmatched value. We provide the best total solution and have direct interactions with our customers. We get to know their specific needs and customize our service for them.

 

Educate Your Customers on the Value of your Premium Services

Freemium services seem like a great deal on the surface. However, many of them compromise on features, performance and customer service in order to justify making the free and differentiate them from their premium paid services.

 

Gabriel MaysGabriel Mays is the self-funded, sole founder of Just Add Content, LLC, a website builder for small businesses. Mays also served as a Captain in the US Marine Corps for eight years.

 

In many cases, it's difficult to compete with a free product or a product that has a “the first one's on me” model. There are a number of well-funded SaaS website builders that offer free websites via the freemium model by charging for specific features. It may sound like a good deal, but it comes with a considerable mark up and compromised quality, security, customer service, and performance.

 

Paying customers on freemium sites are often not aware that they're receiving the same infrastructure as the millions of free customers, which means that essentially they're subsidizing them. Even those who are aware still don't know what to look for or what to expect. As more people understand what they need and why they need it (i.e. SEO optimization), they are more willing to pay for it.

 

There are several key things that all SaaS businesses should be doing:

  1. Charging enough to be able to deliver the value that the customers deserve        
  2. Educating customers on the kind of value that they should be receiving and why it matters while also pointing out the questionable strategies of the freemium businesses        
  3. Focusing on the things that you can provide because you charge what the freemium businesses cannot provide (i.e. customer support).

 

Fill Specific Market Gaps With Your Premium Offerings

Prasad guptePrasad Gupte is a software product manager of a computer software company. One effective method for increasing value proposition that he champions is to offer services that the Freemium companies do not offer, such as vertical/horizontal integration.

 

Are you are in a space that is flooded with free and paid subscriptions? Are you craving market share? If so, you can elevate your value proposition and gain a share of the paid market by offering the following services and features.

  • Vertical / horizontal integration (with some investment) via features          
  • Partnerships  
  • Complimentary services that cannot be offered free

 

Grayson CarterGrayson P. Carter is a software entrepreneur and lead generation expert. After spending several years in the business, he saw the need for industry specific software and developed his first paid SaaS business website, BirdDogLead. One reason that companies develop new software is to solve an industry-specific program, which is what Carter has done with his business.

 

The value we provide is that the software solves a problem specific to that industry. When you create a niche for a specific set of users, you get to develop to their specific needs. Consequently they feel like they're having custom software build just for them at a significantly lower price. If people won't use your product unless it's free, then the problem that the software solves isn't so painful.

 

Be Disruptive by Being Transparent

Michael CarterMichael Carter is the CEO of BizEquity, the first leading online business valuation service. He believes that many consumers want SaaS companies to be transparent so they can understand what they are getting and why they should pay for it.

 

As an SaaS business, you can gain market share from competing SaaS businesses by scaling your company. Assuming that the weaponry of both businesses is the same (technology and service offering), the game becomes all about distribution and most importantly, the customer experience.

 

At BizEquity, we do provide a value for any business online that freemium SaaS businesses cannot offer. We refer to our model as “VaaS” or Valuations as a Service. We are big fans of what TurboTax and Intuit did early on with their freemium model. We offer a business as a free online “estimated business value,” which is transparent to the user. At the end of our seven step online process, users have to subscribe to our SaaS service in order to get a 22-page customized report and access to the online dashboard. Transparency is key here. We think that free works if you are trying to take a billion dollar offline industry and put it online.

 

Using freemium models as part of a subscription SaaS offering did two things for us. The first is that is showed transparency to the user. The second is that it proved truly disruptive, creating fans for our product and service.

 

 

The bottom line of building a successful subscription business is that you have to do more than offer an excellent product. While your product quality is critical, it is not enough to set you apart from your competition. You must be innovative with your pricing and packaging strategies – and freemium is one effective lever for a lot of businesses.  

 

The key is to focus on the path from free to paid. It’s about educating, building trust, and making your value so clear and compelling that it’s a no-brainer to step up and pay for it.

April 11, 2014

SAP, Welcome to the Subscription Economy

Blog_tien_bwBy Tien Tzuo, CEO

 

The WSJ reported this week that SAP will start to sell its core and most popular Business Suite product line via a subscription model. “It’s very, very clear that a cloud offering as a subscription is what customers want,” said Steve Lucas, SAP’s president of platform solutions.

 

What a difference a decade makes.

 

SAP

The software industry has been on an inevitable path to subscriptions since 1999, when Salesforce was founded.  But just a few years ago, the software giants including SAP and Oracle were operating in denial.  “The Cloud is just a fad,” Larry Ellison famously said.  Even last year, SAP's and Oracle’s “strategy” was to simply buy a few small SaaS players, while sticking with tradition in their core offerings.

 

But then, something happened.  Leaders such as Adobe bravely went “all in” on subscriptions and shifted entirely from a perpetual license to recurring revenue model. Their stock has been on a tear since.  I was talking with someone at Autodesk in Asia, who said all focus inside the company is now about showing recurring revenue.  “Our stock was flat for years, but since we announced our subscription strategy,” he said, “all of a sudden it’s taking off.”

 

But now, even mighty SAP is capitulating.  SAP said its revenue from traditional purchased software rose 3% last year, while revenue from online software and related services (e.g. Hana cloud offering) jumped 53%. That’s a tale of two cities.

 

Salesforce’s President and Vice Chairman, Keith Block, proclaimed last week that they’ll be passing SAP as the largest enterprise applications company in the world.  On a trailing twelve month basis, Salesforce is a $4B company while SAP is $20B.  So how can Block so confidently make his assertion?  It’s all about growth. Salesforce, who just cracked Gartner’s list of top 10 largest software companies, has the highest growth rate by far in that list.  SAP’s subscription revenue may be growing by 53%, but it’s a miniscule part of the business today.

 

So, by announcing a shift to a subscription model for its bread and butter ERP business, SAP is finally saying that the shift to Subscriptions is very real, and there’s no turning back.

 

SAP will share more details on their new Business Suite subscription model on next week’s earnings call. In the mean time, those of us thriving in the Subscription Economy: say welcome aboard SAP, and enjoy the ride!

 

 

April 10, 2014

Do You Know How Your Subscription Business is Performing?

Dave Key Photo

Dave Key, Cloud Strategies

 

Guest author, Dave Key is Managing Director of Cloud Strategies, where he helps software companies transform to SaaS and SaaS companies perform at their highest possible level.  Dave has built and supported large enterprise systems with both on-premise and Software as a Service (SaaS) platforms.  

 

 

Why are high growth Subscription companies often unprofitable? 

Screen Shot 2014-04-10 at 11.08.55 AM

High-growth recurring revenue-based companies are often unprofitable, yet financial institutions value them highly. The median net income for Public SaaS companies is negative 4.5%. 

 

Yet, despite these losses, the Price to Enterprise Value ratio for SaaS companies is 7.3x compared with 3.2x for Software companies, according to a 2014 Software Equity Group report. 

 

Investors are looking beyond profitability. They see the value in SaaS businesses that isn’t reflected in traditional GAAP-based financial statements. That value is the ongoing revenue stream, which provides future value (and profits) not shown by GAAP financials.

 

We need a quantitative method to assess the outlook for SaaS companies that takes into account the value of future revenue against the cost of rapid growth. These financials should show the underlying profitability of the core business separately from the cost of growth. 

 

Why doesn’t GAAP show the value of Subscription companies that investors see?

Product companies realize their revenue when the product is sold. SaaS companies realize the revenue as the product is used; it generally takes approximately three years of SaaS subscription revenue to equal the revenue from a product sale.

 

GAAP gives no accounting of the value

of the ongoing SaaS subscription –

not even a footnote of its predicted value

of the future revenue stream.  

 

What makes Subscription companies successful?

The objective is to augment GAAP with additional metrics that reveal the actual long-term value of the recurring revenue stream relative to the cost of obtaining these revenue streams. There are three primary drivers of very successful SaaS companies:

1)     Growing revenue

2)     Growing the long term recurring revenue stream annuity

3)     Growing efficiently

 

As Zuora has consistently advocated, the key 3 metrics that matter in assessing a SaaS company’s growth are:

1)     Retention Rate – keeping the customers who were so expensive to acquire

2)     Recurring Profit Margin – making money to fund new sales after taking care of customers

3)     Growth Efficiency Index – having a prudent cost of Revenue Acquisition relative to the cost new revenue

 

By excelling in these three key metrics, SaaS companies can grow efficiently increasing their aggregate Customer Lifetime Value of their customers, which is a significant driver of the company’s value. 

 

So when will Subscription companies become profitable?

For the successful SaaS company, the answer is “when they want to be.” Grow faster with low profits or even a loss. Grow slower, boost profits, but potentially lose the market opportunity.

 

Screen Shot 2014-04-10 at 11.00.49 AM

 

The company can trade off profitability for growth since the revenue acquisition costs for growth occurs immediately while the SaaS subscription annuity stream is realized over years.  

 

So what should Subscription companies do?

Grow if you can grow efficiently. Near term profits are not so important if you’re growing efficiently.

 

Growing efficiently means that the core business (without the cost of growth) is profitable and the cost of growing the business is substantially less than the future value of that business.

 

With a goal of maximizing shareholder value, the equity markets sensibly value growth over profits.

 

Screen Shot 2014-04-10 at 11.04.06 AM

 

 

How to assess if you are growing efficiently

1)     Separate the P&L from maintaining your existing revenue from the cost of growing to show the profitability of your core business

2)     Evaluate the return on investment of adding new revenue from the net present value of the subscription revenue stream

3)     Ensure your churn is low so you are not losing the future revenue stream that drives your ultimately success

4)     Benchmark key metrics against your peers, and watch your cash

 

The bottom line is this: now metrics outside of GAAP are needed to assess the outlook for SaaS companies. These businesses should be taking into account the value of future revenue against the cost of rapid growth and ultimately showing the underlying profitability of the core business.

 

Join me on Wednesday, April 23rd for a webinar with Zuora’s VP of Finance, Iain Hassall, to continue the conversation. We’ll walk you through the techniques and benchmarks that will help you measure, analyze, and understand your subscription business. Register today.

 

April 04, 2014

Five Reasons Why Online Learning Rocks

Joe blog pic

Joe Andrews

Sr. Director, Marketing

 

Maybe it's not immediately apparent, but rock ‘n’ roll and online education have something important in common.

 

You see, much like the musical phenomenon that changed the course of popular music in the ‘50s, online learning is proving to be a major disruptor. It's changing how students learn.

 

Evidenced by a growth rate in online enrollments that far exceeds overall enrollment growth in higher education, many would agree that online learning rocks. Rather than making the trek to the classroom, millions of students are now taking to their computers, tablets and smartphones to get their courses in. Students and educators alike are finding that, compared to the digital model, traditional education is ... well, just plain old-school.

 

Online learning is a fast growing industry in the Subscription Economy. As the popularity of online learning continues to grow the innovators in the field will continue to build new, refined models for educating online. It leaves one asking, just what is it about the digital format that makes it such an attractive choice?

 

Well, based on the perspectives of some industry innovators, here are five of the top reasons:

 

Making Time for Time Management

Historically, anyone wanting to take a course would need to be available at the time that course was offered and physically present for its duration. Aside from dedicated students going to campus full time, people ran into serious conflicts with this model, which is essentially set at odds with the demands of their busy day-to-day lives.

 

Online education is changing all that, allowing anyone to complete the coursework on their own time, and from the comfort of their own homes.

 

Bryan WetzelBrian Wetzel is the COO of Skubes, an online learning startup that aims to be the top provider of educational videos and interactive books for students in grades K-12. Even with his younger demographic, Wetzel sees convenience as being one of the online approach’s top benefits:

 

Online content is there 24/7 allowing parents with very busy work and children schedules to use the content when it best works for them. We have received emails from moms who allow their kids to use the iPad in the car while they are driving to ballet or baseball practice, so their kids can study.

 

Availability of Remote Accessibility

Aside from the time constraints of standard education, there has always been the issue of location. Traditionally, would-be students either had to settle for a school in their immediate vicinity if they wanted to stay close to home, or relocate. However, with top universities making courses and even whole degree programs available online, students have a range of options they previously never had.

 

Jonathan_Ezor_High_Res_PRINTJonathan Ezor is the Director of the Tuoro Law Center for Innovation in Business, Law and Technology. With a background in both law and tech, Tuoro has been a part of his institution's successful approach to combining the two, offering Internet-based law courses from a regional institution:

 

[One] benefit is access to institutions far beyond one's own local community -- although Touro Law is a regional law school, our online courses and seminars may be attended by students from anywhere in the world, and we are expanding our educational offerings to appeal to that broader audience.

 

Penny- and Dollar-Wise

Even though the rate is slowing, the cost of tuition has continued to rise. And it's no secret that student loan debt continues to be a cumbersome financial burden on young individuals and families. So it shouldn't be a big shock that many people are looking toward more cost-effective options than traditional higher education. Online courses can be an absolute steal in comparison.

 

Brooke FranksBrooke Franks is the communications manager of ed2go, an online education company that partners with schools to enable their extended campus and online learning programs. With schools like Rutgers and Oregon State on her company's client list, Franks sees the online option as offering cost savings for students attending any institution:

 

Online learning can be more affordable than traditional continuing education. By cutting out the cost of transportation (and print textbooks), students can cut the costs of continuing their education.

 

Fred HurstFred Hurst, Senior Vice President for Extended Campuses at Northern Arizona University, agrees that affordability represents a major benefit for online learning. Under Hurst's direction, the NAU extended campus program has developed a Personalized Learning approach that is competency-based. This means students are able to learn at their own pace, get credit for material they already know, and ultimately save time and money:

 

Personalized learning is particularly attractive to students because it is a flat-rate subscription ($2,500 for six months) for unlimited access to the program courses. Students are able to earn a high-quality degree more efficiently and at a lower cost, so they can advance both personally and professionally.

 

Efficient and Effective

In addition to showcasing the financial benefit of online learning models, Hurst's NAU extended campus program highlights another unique capability of online education. Namely, by personalizing the learning experience, the technology platforms driving online education can provide a more efficient way of educating students. Hurst elaborates on this capability in the context of the NAU extended campus model:

 

… Students receive credit for what they already know. This allows for a student to bypass certain core, or basic, classes if he or she already possesses that knowledge, so they don’t spend time doing unnecessary coursework, thus creating a more efficient program for the student’s learning. While online learning isn’t necessarily new, competency-based education is the next evolution in this kind of learning that helps many students finish faster than they would in a traditional program.

 

Mike EcholsMike Echols, the Executive Vice President of Strategic Initiatives and the Human Capital Lab at Bellevue University, finds significant potential in new, technology-driven education models such as these. Working regularly to help adults make difficult life decisions, Echols understands the psychology driving choices, and he sees plenty of reasons for students to choose online programs:

 

Online technology (which is much more than content on a computer screen), when deployed effectively to take advantage of the technology potential, is already superior to traditional classroom lecture-and-test. And my prognosis is that very soon (within a few years) the new will be far superior to the traditional face-to-face lecture-and-test in producing superior learning outcomes. This is particularly true in the areas of critical thinking, problem solving, synthesis, analysis, team collaboration, innovation and communications.

 

Unique Opportunities for Engagement

More effective learning models driving superior outcomes sounds great. But what about having a little fun? Well, with the Internet offering all kinds of interactive and engaging possibilities, educators are able to introduce lots of ways that are more exciting than the standard, hour-long lecture.

 

Kate salvanKate Salvan is an eLearning specialist at JoomlaLMS (the LMS stands for learning management system). An expert in interactive, online learning, Salvan emphasizes the ability for online programming to engage:

 

New technology makes it possible for instructors to create exciting new ways to learn online that engage students in ways that are more effective than a lecture hall with hundreds of students.

 

In his work with the K-12 age group, Bryan Wetzel also finds this to be a critical concept:

 

Teachers often tell us that getting kids to read is very difficult these days. They have grown up with not only TV, but computers, tablets, iPods, video games and more. When they turn on their smart boards, the kids perk up and pay attention no matter what’s on the screen. Online content is seen through a technology that most kids are now more comfortable with. While an older generation might think of consulting a book to find out how to fix a mechanical problem, today’s generation consults YouTube.

 

Just a Fad, or Something More?

So with all of these benefits and features much more in tune with modern lives, will the younger generation take to online learning models to a degree that is on par with (or greater than) traditional education?

 

Well, there are still those that would say it's just a fad. But remember ... that's also what they said about rock ‘n’ roll.

 

Tell us what you think. In future posts, we'll dig deeper into online education and the creative use of recurring revenue models.

April 01, 2014

Marc Diouane’s Z-Vision for Subscription Success

Marc - blog pic 2

by Marc Diouane

EVP, Global Field Operations, Zuora

 

Today I’m thrilled to officially join the Zuora team and am incredibly fortunate to be a part of a company that is transforming the way companies do business. The world is shifting to new consumption models and in response, companies are re-inventing their entire business models to better serve customers by delivering services to them in whole new ways and building valuable long term relationships with them. To make this transition successfully to a World Subscribed, enterprises need a trusted advisor and solid technology. Zuora is in prime position to be that partner to companies around the globe.  

 

We’re seeing this shift to recurring revenue models impacting businesses of all sizes across every industry sector. It’s already familiar to many people in media and software – e.g. Adobe flipped their entire business from perpetual license to subscription model. Even the manufacturing industry that I served for many years at PTC is shifting from selling hard goods to sell products as services. The Internet of Things and smart connected products and devices are proliferating across all industries. From Zipcar to Nest, there’s no need to acquire them any more, you have just to subscribe to them.  

 

But this shift is not easy. Enterprises now have to deal with millions of subscribers and the complex systems behind it all. CRM solutions help to provide visibility to business pipeline / forecast and ERP systems manage physical inventory and transactional accounting.  

 

But there’s a new system that’s needed for a new world of subscription services, a solution that helps companies build, manage and optimize the revenue relationships that are the lifeblood of subscription businesses. We call this solution Relationship Business Management and it’s designed to manage the business operations of customer-centric subscription companies as ERP has done for manufacturing companies.

 

This is where Zuora comes in. We provide a proven, scalable solution that’s designed to help your business manage the lifecycle of the relationships with your subscribers. For some, adopting a Business Relationship Management solution seems daunting. But there are lots of companies who have successfully done it to learn from. We’ve worked with these companies to help develop an experience-based framework called the Nine Keys to Subscription Success.

 

And, Zuora is a key ingredient in the success of these business transformation stories. This is a company that is not only the leader in the market, but also created it. With $24 billion contracted under management and over 600 live customers representing all major industries, a top 25 CEO in Tien Tzuo, and established success in enterprises like HP, Dell, News Corp, Tata and IBM – Zuora is not just enterprise-grade. It’s enterprise-proven.

 

There is a strong fit between my global field operations experience and where Zuora is today. Our focus this year is to help more global enterprises successfully transform their businesses to serve the World Subscribed. This is a massive opportunity and at Zuora, we are well positioned. Our market has no limits.

 

Every industry, every company, every product, has the potential to drive this change. I look forward to helping our customers be successful. And having lots of fun along the way.

 

Follow Marc on Twitter.

March 31, 2014

Marc Diouane’s Z-Vision for Subscription Success

Marc - blog pic 2

by Marc Diouane

EVP, Global Field Operations, Zuora

 

Today I’m thrilled to officially join the Zuora team and am incredibly fortunate to be a part of a company that is transforming the way companies do business. The world is shifting to new consumption models and in response, companies are re-inventing their entire business models to better serve customers by delivering services to them in whole new ways and building valuable long term relationships with them. To make this transition successfully to a World Subscribed, enterprises need a trusted advisor and solid technology. Zuora is in prime position to be that partner to companies around the globe.  

 

We’re seeing this shift to recurring revenue models impacting businesses of all sizes across every industry sector. It’s already familiar to many people in media and software – e.g. Adobe flipped their entire business from perpetual license to subscription model. Even the manufacturing industry that I served for many years at PTC is shifting from selling hard goods to sell products as services. The Internet of Things and smart connected products and devices are proliferating across all industries. From Zipcar to Nest, there’s no need to acquire them any more, you have just to subscribe to them.  

 

But this shift is not easy. Enterprises now have to deal with millions of subscribers and the complex systems behind it all. CRM solutions help to provide visibility to business pipeline / forecast and ERP systems manage physical inventory and transactional accounting.  

 

But there’s a new system that’s needed for a new world of subscription services, a solution that helps companies build, manage and optimize the revenue relationships that are the lifeblood of subscription businesses. We call this solution Relationship Business Management and it’s designed to manage the business operations of customer-centric subscription companies as ERP has done for manufacturing companies.

 

This is where Zuora comes in. We provide a proven, scalable solution that’s designed to help your business manage the lifecycle of the relationships with your subscribers. For some, adopting a Business Relationship Management solution seems daunting. But there are lots of companies who have successfully done it to learn from. We’ve worked with these companies to help develop an experience-based framework called the Nine Keys to Subscription Success.

 

And, Zuora is a key ingredient in the success of these business transformation stories. This is a company that is not only the leader in the market, but also created it. With $24 billion contracted under management and over 600 live customers representing all major industries, a top 25 CEO in Tien Tzuo, and established success in enterprises like HP, Dell, News Corp, Tata and IBM – Zuora is not just enterprise-grade. It’s enterprise-proven.

 

There is a strong fit between my global field operations experience and where Zuora is today. Our focus this year is to help more global enterprises successfully transform their businesses to serve the World Subscribed. This is a massive opportunity and at Zuora, we are well positioned. Our market has no limits.

 

Every industry, every company, every product, has the potential to drive this change. I look forward to helping our customers be successful. And having lots of fun along the way.

 

Follow Marc on Twitter.