The On-demand Economy

by Tien Tzuo

We had an article in the TheDeal.com last week and the same day I read a really interesting post on Denis Pombriant's blog. Denis is a respected analyst and blogger, one of the first to catch on what we were doing at Salesforce, and it's interesting how his post echoed the theme of the article in TheDeal, but in a much more philosophical way. I encourage everyone to check out his full blog post, but here's a snippet:

"The distribution of productive assets is driving and being driven by things like on-demand because on-demand significantly lowers the cost of employing your most productive asset. Need to get somewhere but can't afford a car? No problem, there's Zipcar. Need technology to employ your productive asset and leverage your ideas? No problem, computers are cheap and for everything else, there's on-demand."

Looks like Denis is catching on to the next trend as well...

Subscriptions are everywhere: Sex and the City Movie

by Judy Loehr

Last weekend, I paid my $10 to see the much-anticipated film, “Sex and the City.”

In one scene of the film, the celebrated New Yorker, Carrie, interviews 20-something Louise for a job as her assistant. During the interview, Carrie observes that Louise carries a $1500 Louis Vuitton handbag.

Carries asks Louise something along the lines of, “If you share a 1-bedroom apartment with two other girls how is it you can afford the Louis Vuitton Blue Denim Bowly Handbag?”

Louise grins, “It’s rented – Bag, Borrow, or Steal. It’s like Netflix for purses.”

I almost fell out of my chair. Even the 20-something trend-setters in pop culture embrace subscriptions—they’re subscribing to all of the latest trends instead of struggling to choose and buy just one.

Subscriptions are everywhere. They’re so common that they’re featured in pop culture standouts like “Sex and the City.” Subscriptions are truly entering every facet of our life—software, DVDs, cars, music… and designer labels. What’s next?

Commentary from Launch: Silicon Valley

by K. V. Rao

It’s amazing how many companies are moving to a subscription model! Of course, we already knew this --- but after yesterday’s “Launch: Silicon Valley” conference, where Zuora presented alongside other innovative start-ups, we saw that subscriptions are no doubt the wave of the future.

Something interesting to note is that a number of start-ups feel that a freemium/ad-supported model is not good enough anymore and are offering premium services on a subscription/usage basis. These companies are differentiating themselves by offering innovative pricing and packaging models. Some examples are Grouply and Capzles. Another innovative company that got a lot of attention was TechShop, a company providing manufacturing facilities on a subscription basis, kind of Kinko’s for geeks.

Here’s a link to Rafe Needeman’s Webware article highlighting some of the companies from the show: http://www.webware.com/8301-1_109-9964755-2.html

Pricing & Packaging in a Subscription World

by Tien Tzuo

In this blog, we often contrast the product world, where you purchase items, with the subscription world, where you subscribe to services. One area where the differences really stand out is in packaging and pricing—the way a product or service is sold to you.

In the product world, pricing is pretty straightforward. You’ll pay one set price, like $9.99/widget, perhaps with some volume discount.

But in the subscription billing world, it's a bit more complex. Pricing options for subscriptions are almost unlimited. Price can be set by time, like a monthly or annual fee. Or by usage, like the number of DVDs you plan to borrow. Or by users, like the number of sales reps that log in. The possibilities go on and on.

On top of that, customers want a custom service level that’s just right for them. The occasional movie-watcher doesn’t expect or want to pay for the same service as the die-hard movie-watcher. It’s almost impossible to have a one-size-fits-all model when every customer wants to pay for a different set of features, in different quantities.

Let’s take a look at some examples.

Netflix, the king of entertainment subscription services, offers 5 pricing plans based on the number of DVDs a subscriber plans to watch. This way, Netflix signs up and satisfies both the die-hard and occasional movie-watcher, plus everyone else in between.

Car sharing service Zipcar also offers subscribers 5 plans based on how often they plan to reserve and drive a vehicle. But Zipsters need not agonize between the options. They can switch plans at any time.

When we launched salesforce.com, we thought the simplicity of a single $50/user price option would appeal to customers. While the price was just right for some customers, it priced out many small businesses and actually fell short for many larger companies demanding higher levels of service. Fast-forward 9 years, and we had expanded to 4 price and packaging options: Group Edition, Professional Edition, Enterprise Edition, and Unlimited Edition. This way small start-ups and big enterprise customers alike could get just the right bundle of CRM features to match their size and needs. This chart illustrates the many pricing and packaging options available to salesforce.com subscribers: http://www.salesforce.com/products/editions-pricing/feature-comparison/

Why do these companies offer different price plans? They do it to satisfy different customer needs, capture both new and seasoned users, and to create competitive advantage. How? When two companies offer the same service, one can stand out by offering the best pricing and packaging options. Recall the infamous MCI takeover of AT&T market share in the 1990s.

It’s no accident that successful subscription businesses like Netflix, Zipcar, and salesforce.com embrace flexible pricing and packaging strategies. These companies have set customer expectations high for subscribing to any other service out there. In order to succeed, every subscription businesses must be prepared to meet these high expectations with a flexible pricing and packaging strategy of their own.

AT&T vs. MCI: Subscription Billing as a Competitive Weapon

by K. V. Rao

As we launch Zuora with the vision for creating a new platform for subscription companies, lots of people have asked, why billing? Is billing really the most important thing for a subscription company? To which we emphatically reply: absolutely!

Many of these conversations have centered on how subscription businesses can be difficult to run without a billing system, but the true value of a billing system is not just streamlining operations, but giving you a tool to create competitive advantage. One of the best examples of this is the infamous MCI overtake of AT&T’s market share with the introduction of the “Friends & Family Plan.”

If you were making long distance calls in the early 90s, you probably recall this story. AT&T was still dominating the long distance calling market. Rates were ridiculously high. Remember your mother telling you to “keep it quick” on the phone with grandma? After all, this call was costing her 60 cents per minute.

Enter MCI. They said, “Hey, is grandma an MCI customer? If she is, then you can call her anytime you want and talk as long as you want, for as little as 15 cents per minute.” The nation jumped on this idea. All I have to do is switch to MCI for my long distance service, and then I can call anyone else in the MCI network for a fraction of what I was paying before? Voila! MCI rapidly began to steal AT&T’s market share. And here’s the kicker: it took AT&T nearly two years to build a program similar to MCI’s to compete effectively. Two years. Why so long?

AT&T was functioning on a standard single rate-plan model. In order to make it possible for customers to add a “Friends & Family” type option, or any additional option at all, they would have to completely restructure how these customers were provisioned and billed. They had to establish new systems on the back end to make this happen, and in the time it took them to do this, their competitors won over a large portion of their customer base.

A wise sage wrote “Those who don’t study history are condemned to repeat it.” When I was at WebEx, I guess we did not pay too much attention to history. Business was booming as we went to market with a very compelling product and a subscription-pricing model based on number of concurrent seats, which was very appealing to our initial customers. As a scrappy start-up, we could not afford MCI’s billing system, and built our own. Along came Citrix/GoToMeeting, with a pricing model that appeared to be significantly lower as it was based on number of “named seats.” We recognized the need to create new packaging for our products based on this model, but could not launch them quickly enough as our home grown billing system was not flexible enough. WebEx started losing market share in certain segments to GoToMeeting. Overall, it took over a year for WebEx to catch up!

What a lot of people don’t realize is that running a subscription-based businesses is very difficult from a billing standpoint. The ability to bring new packaging and pricing options to the market, and keep up with competition takes a lot of time, money and manpower, as evidenced by these stories.

Imagine what WebEx and AT&T could have accomplished had Zuora been around during these times?