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.

Adopting Cloud Computing to Green Your Enterprise

by Tricia Reilly

At a recent Zuora board meeting, one of our board members, unable to find a paper cup in the kitchenette, returned to the board room mug in hand noting how ‘green’ a company we are.

At Zuora, we take a hands-on approach to efficient resource management and reducing our environmental impact. And although we strive to reduce waste, encourage recycling, and carpool as much as possible, making your business environmentally friendly can be a bit of a challenge.

The good news for us is that leveraging cloud computing services, running a subscription business, and implementation of SaaS projects all offer great ways to green your IT department.

But what’s good for the Earth can also be good for business:

• New “green” data centers equipped to handle cloud computing are finding ways to operate better, faster and more efficiently than in-house operations because it’s all they do. Better energy efficiency means a reduced carbon footprint.
• Subscription services delivered online are inherently green because you only pay for what you need as capacity is shared across multiple customer instances to reduce overall power, hardware, and software components.
• By leveraging services in the cloud, you free up valuable internal resources to focus on developing solutions that you can actually sell. And that means the kind of green you can take to the bank.

These points prove that greening your company can be an amazingly lucrative business option. If we are aware of the possibilities, we can make environmental consciousness an everyday reality of our corporate culture.

We are making progress but it’s really important to understand that everything from printing, faxing, and paper waste to use of computer hardware, data centers, and electricity impact how green your business is.

I can think of some innovative ways Zuora uses the cloud to reduce our carbon footprint: Google Docs, WebEx and eFax are just a few. What are some ways that your company uses cloud computing or SaaS projects to make your company greener?

What subscription services would you pay for?

by Tricia Reilly

In a recent interview with Kara Swisher at the WSJ's D7 Conference, Arianna Huffington proclaimed that "subscriptions are for porn."

Unless you’re selling porn, and especially “very weird porn”, you shouldn’t sell subscriptions.

We obviously think this view is incredibly short sighted. But we're happy to see it's not just us who are challenging the conventional view that people won't pay for things on the Internet.

In a recent TechCrunch article that explores the whole concept of freemium services, MG Siegler lists the services that he would gladly pay for, and the list is interesting:

      Facebook
      Twitter
      Gmail
      YouTube
      Digg
      Friendfeed
      Instapaper

In fact, MG Siegler goes on to compare these services to the $2000/year that he forks over to Comcast:

“I would rather pay a bunch of hard working start-ups (and yes some bigger services like YouTube — owned by Google — and Flickr — owned by Yahoo) all that money” [than pay Comcast] for “mediocre content and shit service.”

We did a quick poll around the office, and here’s a list of some of the subscription services that Zuora employees are willing to (and in some cases do) pay for:

• FREE & PAID Skydeck – Back up your cell phone address book, read your voicemail as email, read and reply to your text messages online. Beautiful.
  
  
• FREE & PAID Box.net – Upload, store, and share up to 1GB of data – great for large creative files or graphics heavy presentations. A number of Zuora employees have accounts – some free, some paid.
  
  
• PAID – Club Penguin - Virtual world for kids, owned by Disney (clearly this one of our employee’s kids).
  
  
• PAID – match.com – Especially matchmobile, for the busy, on-the-go, Zuora singles.
  
  
• FREE (but we’d gladly pay for):
  
  NPR podcasts
  Hulu – television episodes
  Online News Services – this came up a few times, e.g. New York Times
  Food Network – especially if they had a premium content only version
  Fit Sugar – fitness and health tips from the people who bring you the “insanely addictive” PopSugar

What free services would you be willing to pay for if premium features were available?

Seattle Web 2.0 Community is Brewing

by Megan Golden

Yesterday, Zuora packed our bags and headed north to Seattle for our fourth Z-tour event this year.

Our luncheon was held at The Dahlia Lounge--fit for foodies and known as the epicenter of Northwest Cuisine featuring flakey crab cakes and steaming doughnuts.

Once the room was packed with a very engaging Seattle crowd, our CEO, Tien Tzuo spoke on how the world is moving to subscriptions. Everything from Netflix to Salesforce.com to ZipCar. The interesting point here is that while the subscription model enables greater flexibility for consumers, the need for a robust packaging and pricing model is key to subscription success.

We were thrilled to welcome local customer TalentSpring, who gave a testimonial on how they came to choose Zuora as their subscription billing platform and their results to date.

TalentSpring is a SaaS solution for candidate sourcing utilizing semantic search technology. Rather than focusing their time on company infrastructure, it was key for TalentSpring to direct all their resources to product development and candidate sourcing. It was also critical that they build their business processes quickly and seamlessly through salesforce.com. That's where Zuora came in!

The solution for TalentSpring was Zuora's suite of Subscription Management tools. With Z-Billing & Z-Payments, they have been able to build, test, quote, close, invoice, and collect cash through Zuora's integration with salesforce.com with no additional IT resources required; all implementation and testing was completed by the VP of Sales!

In fact Mike Hayes, VP of Sales at TaletSpring said, "Every part of Zuora we’ve touched from the sales cycle to the post sales team to support has been fantastic!"

In the early planning stages for this event, we had expected this to be an intimate event with a handful of SaaS companies. However, despite the massive and unforeseen road construction blocking the entrance to the restaurant (thank you Seattle Department of Transportation. not.) we had an amazing turnout. Standing. Room. Only.

After getting to know some of our attendees and visiting with our customers, we realized that the Saas community in Seattle is more than just brewing; it's here to stay. Coming from the mecca of the Web 2.0 community here in Silicon Valley, it's so exciting to see other subscription communities evolve and create their own story in other cities.

Seattle, we will definitely be back!