Cost Containment is Not a Growth Strategy

by Jeff Yoshimura

Seems like an obvious one doesn’t it? But you’d be surprised how many people we run across in the subscription and SaaS business who still think cutting a few dollars here or there is going to get them through the economic downturn. Those who survive (scratch that) THRIVE, profit, and beat their competition this summer will be those who find new ways to build, manage, and grow their subscription businesses by launching new products, reaching new markets, and finding new ways to package existing product lines. That’s why over 100+ subscription leaders dialed in to learn the secrets to subscription success last week.

Care to learn these secrets for yourself? Check out the recording at http://info.zuora.com/WebinarSeriesJuneRecordingLP.html or check out the next in the series “Top 10 Ways to Improve Cash Flow” on July 16th featuring Zuora’s Chief Financial Officer Gary Hagmueller.

Baby Boomers are Changing the World... and this Time it’s Subscription Style

by Annette Giambroni

Remember the days when everyone was worried the Baby Boomers were all going to retire at the same time and crash the social security system? Well, they are at it again… and this time they are trying to take down one of my favorite pastimes. The Television. It appears that while their retirement may have been delayed due to a down economy this same phenomenon has kept them at the office, and more importantly, on the computer.

I was reading Paul Carton’s Instablog today where he cites some interesting stats on how Baby Boomers are turning away from TV and towards online services and entertainment. I remember hearing the same thing just a few weeks ago at a Shasta Ventures (a Zuora investor) event where Mike Vorhaus, President of research and consulting firm Magid Advisors, provided insights on his last year of research. The gist of it being; the world is moving to online subscription services and if you want to thrive, you’ll need to target consumers where they’re currently spending their time, e.g. social media outlets like Facebook, gaming sites, and online video sites like YouTube.

Most of us think of teenagers as the biggest group to be jumping on the subscription and social media bandwagons but not so according to Carton…in his article "48% of (Baby Boomer) respondents say they’d be willing to pay a monthly fee for a Video-over-the-Internet subscription if it provided the same programming currently available on their TV service."

And while I am far from the Baby Boomer generation (a spry 36) I just may be willing to give up my TV for a Hulu subscription.

Virtual economies need flexible pricing and packaging

by K. V. Rao

Last week I had the chance to meet with a group of very smart folks at a dinner hosted by Canaan partners on virtual economies.

One of the subjects that was discussed was something all of us in 'real' economies understand too well: the importance of pricing flexibility to reach every micro-segment, and the potential loss of economic value when merchants cannot offer variable pricing and packaging targeting different segments.

Atul Bagga from ThinkEquity, who probably knows more about virtual economies than anyone else in the world, offered this very interesting analysis. A gaming company offered recurring pricing to its subscribers and had attained fairly respectable revenues. But the revenue growth appeared to be slowing down. The company, after much soul searching, decided to move away from recurring pricing to a free-to-play model with a pay-to-play option (we at Zuora call this usage pricing).

They were afraid of the revenue drop with the switch and how long it would take for them to get their revenues back to what it was with the recurring pricing. It turns out that the dip lasted only a few months, and in fact usage revenues started accelerating soon after, quickly exceeding the projections with the recurring model.

Why was this? It turns out, in the virtual world, folks are reluctant to commit to a recurring payment each period (I think fear of commitment is true in the real world as well, so maybe there is something here for the socio-economists to analyze). A lot of people are happy to pay usage fees, even if it means they pay more over time. This probably goes to their feeling of control, including the thinking that their expenses will actually be lower - i.e. why pay $10/month if you can pay only $1 per use and you think you will use the service less than 10 times, maybe only once or twice.

This for me brought home a few points:

While the recurring model works for many people, it does not appeal to folks who do not want commitment (sort of like dating), people really want to feel in control, and pay for what they use, i.e. a usage model.

This flexibility is important for almost everyone in a recurring revenue business. But many businesses start with simple recurring pricing because:

• Their financial/billing systems do not support usage charges (or as the industry calls it, their billing systems do not have a rating and billing engine)
• The recurring model yields a more predictable revenue stream
• Usage revenue is usually billed in arrears, while recurring revenue is usually billed in advance - thus the merchant gets money up front with a recurring model

In our business, we see a lot of innovative companies who understand the implications of these pricing models well, and use our flexible billing system to target different segments:

• Offer usage pricing, but bill in advance based on a committed volume, or based on a previous month's (or quarter's) volume, and then "true up" for the actual usage in the next bill cycle
• Offer some products on a recurring basis, and some on a usage basis
• Offer some products on an overage price basis - i.e. charge more if you go over your committed volume

In fact, our subscription management, billing, and payments platform supports 30+ charge models, and a variety of payment options to our merchants, to give them the flexibility to target different segments, optimize for cash flow, or for market share, or for predictable revenue streams.

Our goal is to support a marketer's dream: infinite pricing and payment flexibility, so that merchants can price and package products according to what an individual customer wants to pay - no more one price fits all, but one price per customer!

Our belief is that businesses should only be limited by their imagination and the innovation in their products and services they can offer to their different customers, not by the limitations of their subscriber management and billing system.

Cloud Commerce is alive and well at Structure09

by K. V. Rao

If you weren’t at GigaOM’s Structure ’09 event yesterday you were missing out. While so many events these days are struggling for attendees I was pleasantly surprised at all the activity. The halls were packed with the movers and shakers in the cloud computing industry including Zuora customers like Sun and GigaOM themselves. Of particular interest was HP's Russ Daniels who made the point that we are not living in Henry Ford's time where you could get any color you wanted, as long as it was black! It is about choice, flexibility, and time to market and one size does not fit all! We're excited to see so companies joining in the conversation, in addition to the usual cloud players like Salesforce.com, Amazon, and Microsoft, industry giants like IBM were also roaming the grounds looking for the latest Cloud solution....

Hallmark Embraces the Subscription Model with E-Cards

by Annette Giambroni

As you have probably guessed by now, we spend a lot of time talking about different types of businesses moving towards a recurring revenue model. So far, they fall into 3 categories:

• Industry disruptors - think Netflix and Zipcar
• Large IT companies announcing cloud initiatives - like Sun Microsystems or HP
• And a slightly slower moving group of Traditional Businesses

This week the old time greeting card giant Hallmark leapt into the new world order when it announced its first online subscription service. For just $9.99 a year, you’ll get unlimited e-cards with a free reminder service.

I remember well wandering the aisles of my local Hallmark store in Montclair, CA as a kid, picking out the perfect greeting card to make someone’s day and I’m delighted to see one of my favorite offline brands making a play for this new market.

Makes me wonder where they will take this next. Perhaps special upgraded cards or a tie in with a mail service where cards are ordered on line and delivered to someone's door. Maybe upgraded features for their contact management that tracks the history of what cards have been sent to whom. Or even integration with online photo-sharing site flickr so users can add photos onto a card, or better yet a card embedded with a personal YouTube video. The possibilities are endless… for a small upgraded recurring fee, of course.

Flexible Packaging and Pricing Puts Me in the Mood to Shop

by Annette Giambroni

Recently I’ve noticed a definitive change in the way that companies are marketing to me – as both a consumer and a business decision maker. Whereas last year it was about winning my business, now it seems that companies are focused on keeping it. And they’re using innovative pricing and packaging strategies to do so.

You’ve probably noticed an onslaught of offers from companies to buy now, and pay later. In just one day, I received three such offers:

• An analyst firm not only offered me a discount if I would agree to renew their service, but also offered to defer billing until next quarter, and to spread out my payments over the next year.
• A few minutes later I received a discreet call from a professional interest group to which I have belonged for years offering to delay and spread out my payments if I didn’t cancel my membership.
• But my favorite has to be the email I received from the commercial airline JetBlue. They sent an offer to “Bill Me Later” allowing to me to buy a ticket for this summer but not pay for it until the fall (after using the ticket!). Okay so not exactly a traditional subscription service, but unexpected flexibility in packaging from an otherwise notoriously uncompromising industry.

It seems that these companies are finally getting it... It’s better to have a customer who might pay later verses no customer whatsoever. In order to survive the downturn, companies need to adapt quickly and offer flexible payment options to entice the increasingly discerning customer and build brand loyalty. In the meantime, I’m suddenly feeling inspired to book a flight to Miami...

Have you received any interesting or unusual offers aimed at keeping your business lately? I’d love to hear about them.