Free is Toast

by Tien Tzuo

For years, consumers have enjoyed access to a world of free online content. Some industry experts thought the model would somehow last. But I’d like to declare what’s overwhelmingly obvious: the age of free is over.

Want proof? There were two stories this week that have effectively sealed the coffin on “free”:

First, Fox announced that it will only offer next day Hulu screenings to cable subscribers. Everyone else has to wait 8 days. This follows recent moves from ESPN and CNN to do the same, with some calling it “authentication.” Authentication is just the step before a full paywall. Media players now know that customers want their programs and they will pay for them, so long as you deliver them in every format and device that they carry.

Second, the New York Times announced its first quarterly results since launching its paywall. In just three months, the Grey Lady attracted more than 280,000 paying subscribers. And that directly led to the Times’ first quarter of Y-o-Y quarterly growth in almost 3 years! To quote Ryan Chittum at the Columbia Journalism Review,

“It proves that, contra the naysayers, readers will pay good money for quality news.”

But this isn’t about writing the “free” obituary. The “free” movement has always deflected the conversation form the real issue, which is how do you own the customer. In the above example, does Hulu own the customer in the above example or does Comcast? That could explain why formally hot Hulu is seeking a buyer.

The companies that succeed in the Subscription Economy are those who understand the customer better, deliver the services they want, on the devices they want, and at the right price. It’s about putting the customer at the center of your business model by delivering valuable services today (and more tomorrow) that people are loyal to and will pay for. And it’s about adopting a family of pricing plans, tailored to unique customer needs. And those needs might include a free trial, which is great, so long as it’s part of a larger pricing strategy.

It’s time for the industry to wake up. It’s never been about “free” as a strategy. It’s about the customer.

Zillow’s IPO and its Transformation to a Subscription Model

by Jeff Yoshimura, VP of Marketing

If you ever bought or searched for a house, chances are you went to Zillow.com to find homes for sale, comps of homes or condos matching your buying criteria, or just plain real estate advice. The same goes for sellers, you probably used Zillow.com to get an Zestimate on what your property is worth, and the relative value vis-a-vis recently sold homes.

Seems like a simple business model. Zillow puts content on a site, attracts millions of users to the site, and makes money from selling ads. Well, little did most people realize (embarrassed, I sure didn’t) that there was much more to Zillow’s business model.

It was to sell subscriptions. To get loyal, repeat customers with real estate brokers, mortgage bankers, and other real estate professionals. Genius idea, why not? With subscriptions, Zillow got revenue predictability, a loyal customer base, and an opportunity to upsell and cross-sell new innovative service offerings for these customers. If they just stuck with an ad revenue model, who knows where Zillow would have been, but I’d bet not a public company as Wall Street wants predictability which is why they love the subscription model.

To back this up, revealed in Zillow’s S-1 and summarized by Erin Griffith at AdWeek:

“In three years, online real estate marketplace Zillow has transformed its revenue model from a heavy reliance on display advertising to a stronger position as a broker of mortgage deals and a seller of subscriptions. The success of that pivot, apparently, is what positioned the company to go public.”

“Zillow’s prospectus shows a clear shift in its revenue mix from one primarily based on advertising to a more mixed model where fees and subscriptions are taking over as the major revenue streams. In 2008 the company began offering Zillow Mortgage Marketplace, a subscription-based product connecting borrowers with lenders. In 2009, Zillow earned 22 percent of its revenues from the marketplace and 78 percent on display advertising. Last year the chunk earned on display dropped to 57 percent; marketplace revenues more than doubled. That ratio is likely to continue to shift away from display.”

Zillow’s pivot is indicative of a larger trend that publishers and e-commerce providers are recognizing. First, the debate over display ads vs. subscriptions is dead. No one can survive on display ads alone today, if they ever could, and these are not mutually exclusive choices. For many companies like Zillow, the smart play is a hybrid approach that benefits service providers and advertisers while better engaging customers, or do what Ning did, completely move from an ad-based model to subscriptions.

And second, be a platform for providing add-on subscription services that align with your customers and builds loyalty. Think about it this way. The genius of the iPad is that it’s not a tablet. It’s a vehicle for productivity, apps and entertainment that is a pleasure to use. Can your service be more like that?

Congrats to Zillow for making the shift to the Subscription Economy.

And congrats on a great IPO yesterday!

Who’s next?

Chargebacks – Prevention Beats the Cure Any Day

 By John Banks, Sr. Director, Product Management

 

Operating a subscription-based business imposes unique challenges on different types of businesses.  For our customers who often deal with a high volume of transactions, one of the biggest issues they run into is chargeback management.

 

“Chargebacks” are the reversal of a prior sale transaction between a merchant and a consumer when a consumer contacts their credit card issuing bank to dispute the charge. 

 

Subscription merchants have the most significant challenge as a single customer can easily dispute multiple transactions through a single phone call to their card issuing bank, quickly increasing chargeback volumes.  That’s why I often hear questions like: “Should I fight the chargeback?” and  “What happens if I don’t fight chargebacks?”

 

There are plenty of reasons to invest in managing the chargeback process, but what if you could preventthe chargeback from ever being created?  It’s this line of thinking that has been driving our new partnership with Verifi, which we announced this week.

 

Preventing chargebacks can bring huge cost savings:

 

• Merchant banks assess chargeback fees per chargeback received; sometimes greater than $50 per individual chargeback
• Card associations (Visa, MasterCard, American Express, etc.) maintain monitoring programs to monitor EVERY merchant’s chargeback volumes and ratios
• Merchants with excessive chargebacks will be fined (as much as $100 per chargeback) and potentially   disqualified from accepting credit card payment

That’s why I’m so excited about our new integrated solution that combines our Z-Payments solution with Verifi’s payment management technology.  Together, we help clear one of the biggest roadblocks for high-volume businesses moving into the Subscription Economy.

 

 

Subscription Commerce Goes International

By Kyle Christensen, Senior Director of Product Marketing

 

We’ve been saying it for years:  “The world is moving to the Subscription Economy.”  And we mean the world.  There’s no better example than our customer Jimdo, who started their website-building platform out of Germany, and who have since expanded across the globe into 11 languages while taking payments in 20 different currencies.  Or the communications behemoth Tata, who launched their InstaCompute cloud service to 32 different countries.

 

To help other companies around the world, we opened up our European offices last year.  And as of this week, some great new features in our June ’11 product release have made it even easier to take your subscription business to just about any country.  We’ve partnered with two great payment service providers and processers:  GlobalCollect and Moneris.

 

With GlobalCollect, Zuora customers can now take advantage of an entirely new crop of local payment method under the sun:  Direct Debit, ELV, Automatisch Incasso, Lastschrift, Orden De Domiciliacion, Rapporto Interbancario Diretto (R.I.D.), Demande De Prelevement and Domicilaition/Domiciliering.

 

Quite a mouthful.  But what it means is that whether you are a US based merchant wanting to offer local payment methods to your International customers or you are a merchant based elsewhere, like our friends Jimdo in Germany, and you need to accept local bank transfers, the Zuora/Globalcollect integration gives you that option and helps take the friction out of the customer acquisition process.

 

Finally, as more Canadian businesses like Barrett Xplore make the move to the Subscription Economy, we wanted to give them access to their payment processors of choice. Moneris solutions processes over 3 billion credit card transactions a year and is the go-to choice for Canadian merchants. Now they’re a choice for Zuora customers as well.

 

With these new partnerships, Zuora customers now have the flexibility to use multiple gateways, optimizing the benefits of popular choices like Authorize.net, Chase Paymentech and Litle & Co., with those focused on global markets.

Forbes: HomeAway – Add-On Services Enhance Great Revenue Model

by Jeff Yoshimura, VP of Marketing

Tom Taulli recently blogged about another subscription economy success story, HomeAway, which had its IPO this morning, rising more than 40% over its opening share price. HomeAway helps subscribers market their home for a vacation swap – think of trading a home in Southern California for an apartment in Tokyo for a month. Like the ZipCar model challenges the automotive industry, the HomeAway model has the potential to challenge the hospitality industry.

In his post, Tom points to HomeAway, Zuora and salesforce.com as examples of subscription revenue models that investors like so much. Subscription Economy IPOs have been some of the highlights of the resurgent IPO market, with LinkedIn and Pandora debuting strong in recent weeks. Why? Because Wall Street loves recurring, predictable revenue streams and strong cash flows, especially from businesses that can expand on this formula through add-on services.

That is one of the key advantages of subscription commerce – delivering value-added services on top of your core offering that help engage subscribers for the long term. For example, HomeAway offers subscribers related services, such as credit card/check acceptance, property damage protection, travel insurance and tax planning. By adding services, HomeAway becomes a trusted partner which keeps renewal rates high and opens up new revenue opportunities. And HomeAway is part of a growing number of subscription commerce companies that are combining online convenience with high-touch, in-person connections to help on-board new subscribers and build loyalty from existing ones.

Don’t believe me that HomeAway could challenge hotel chains? Try staying in a home next time you vacation and tell me what you think. And then look at how the hospitality industry has teamed with New York, Paris and other top locations to ban apartment rentals to tourists. Like I have said before, if the service trumps the product, consumers are going to flock there.

Pandora: Shifting from Ownership to Membership

by Jeff Yoshimura, VP of Marketing

Congratulations to our friends at Pandora for a successful IPO!

Not only are we huge fans of Pandora’s service here at Zuora, we love the shift it represents. People’s musical tastes are no longer confined to certain artists and albums (if they ever were). We now want more options, a constellation of artists and songs, and we want help discovering new music as often as possible. Oh, and we want this at a reasonable price.

Think about it: we can either by a single album a month for $10 - 12 new songs by one artist. Or we can pay Pandora $36 a YEAR and get access to millions of new songs, free of advertising. And by “we” I mean the 90 million users they had as of the end of April, adding a new user every second. Now if that’s not a sign of a monumental change in how music is consumed, I don’t know what is.

What worked so well for Pandora – and has major potential going forward – is how they have managed their freemium offering. Pandora starts off users for free with an ad-supported model and then works to transition them to subscribers over time. And that’s just the start. Over time, Pandora can work on launching a whole series of new services and premium offerings to entice customers to subscribe or spend more on their subscriptions.

For example, Ford just announced Pandora availability through its Ford Synch system. That’s great. But if I’m a Toyota owner and listen to Pandora for free, I would absolutely pay for the premium service if I could get Pandora in my Toyota.

Looking at opportunities like this creates a whole new competitive playing field where Pandora or the likes of Rdio are directly taking on Sirius.

This is the Subscription Economy. It’s about rethinking everything we know about how goods and services are consumed, and looking at things through the broad lens of membership, experience and ongoing participation vs the narrow confines of a one-time interaction.

So to our friends at Pandora – we can’t wait to see where this leads you, and we hope others follow your lead.

Tata Communciations : Evolving and Thriving Amidst Industry Turmoil

by Shawn Price, President

"It is not the strongest of the species that survives… but the one most responsive to change"
— Charles Darwin

There are several established industries experiencing earth shattering shifts, but few are as abrupt as the changes happening in the Telco world. Ten years ago, life was good for Carriers. If you were a carrier, you completely owned the customer, the devices. You had complete control over what apps and services went on those devices. You packaged up voice plans and charged for minutes used. And customers couldn’t leave you! There was no such thing as number portability and regulations locked people into long term contracts.

Fast forward to present, and a very different situation is playing out. Today, carriers are under siege. These days, people want iPhones, or an Android phones, or a Motorola Xoom, and they could care less which carrier sells them. People are talking less, texting less, and the bread and butter revenues for Carriers are starting to shrink in meaningful ways.

In the face of all this change, most carriers are flailing, unable to adapt. And worse yet, even if they wanted to make changes and offer new services, their billing structure is so brittle and expensive, it can take years and literally hundreds of thousands of dollars to make it happen.

But Tata Communications is not “most carriers.” Tata, the number one international voice carrier, (in fact the second largest carrier in India) saw the writing on the wall, and three years ago began the journey of offering a completely new set of services to customers called InstaCompute. InstaCompute provides businesses with a fully automated, self-provisioned pay-per-use computing and storage solution that provides enterprise-scale cloud computing to businesses worldwide. This allows Tata to offering a hybrid solution of cloud, networking and hosting services that no other provider in the market can match.

But what to do about the god awful legacy billing problems? Today, we announced that Zuora is providing the subscription commerce platform for Tata’s InstaCompute cloud offering initially across the Indian and Asian markets, and soon to follow in Europe and North America.

Just to put that into context: What it would normally take years, Zuora did in 2 months.

Now that’s something Darwin himself would have applauded.

For more information about the Tata Communications success story, see our customer showcase and videos.

Apple Blinks on Subscriptions

by Tien Tzuo

As was widely reported late last week, Apple quietly changed some of its draconian Subscription Service policies right on the eve of their going into effect. Previously, publishers were forced to point all of their sales to Apple's App Store, even if they had their own commerce infrastructure. But now, publishers are allowed to forego Apple's system and avoid paying 30% of their royalties to Apple.

Since day one, we have been outspoken critics of the Apple Subscription Service policies, and we are thrilled to see Apple responding to the plight of publishers. We even protested their iPad 2 launch, with which "ASS" is bundled.

But Publishers, while this is a big step forward, now is not the time to let down your guard.

To put things into context: the media industry is in big trouble. There is plenty of blame to go around, but the reality is that for media companies to survive and thrive, they must own their customers -- the reader -- and they must have the flexibility to bundle, package, and price for their content in ways that allow them to reach different customer segments.

Apple still doesn't get this. Despite caving to publisher's initial demands, Apple's subscription service is still based on the premise that they own the customer, not the publisher. And in an industry whose revenues are in decline, Apple continues to try to squeeze every last cent from an already impoverished industry.

And for what? As the New York Times reported, “the iTunes store accounts for just a sliver of its own revenue, and the company has said in the past that it generates virtually no profit from the store. In the most recent quarter, Apple said the sale of apps, music and content combined brought in just $1.6 billion of the company’s $24.6 billion in revenue.” In other words, Apple has bigger fish to fry than the very publishers that make iPads and iPhones so full of rich experiences.

We all know that a functioning democracy needs a strong, independent, free press corps, and the ad supported model is clearly not enough to make the math pencil out.

If a group of committed citizens can topple a decades old repressive Egyptian regime in just a few short months, surely a group of smart, experienced publishers can get Apple to play fair.

Best of Breed Just Got Better

by Kyle Christensen, Senior Director of Product Marketing

When we talk to our customers about their strategy for business applications, it’s clear that no matter what app we’re talking about, they want the best. It sounds obvious. Why would you settle for an app that isn’t up to par? Unfortunately many companies find themselves in exactly that situation.

You buy an ERP suite because it’s got great accounting features, but then you’re stuck with whatever expense tacking system they threw in as an after thought. You buy a billing platform to automate your invoicing, but then you’re forced to use the bare bones CRM functionality that they built out in their spare time. The only alternative is to integrate various best of breed applications on your own. Suddenly you’ve spent too much money and too many resources just getting your systems talking to one another. Wasn’t cloud computing supposed to reduce the burden on your IT team?

At Zuora, we’ve taken a different approach. We believe we’ve got the best subscription billing and commerce platform in the world. Lucky for us, our customers tend to agree. We also think that when it comes to CRM, salesforce.com does it best. And for accounting in the cloud, we’re seeing NetSuite emerge as best of breed. If you are a subscription business in today's Subscription Economy, you want best of breed, and want your best of breed apps like Zuora, Salesforce and Netsuite connected seamlessly together.

We want our customers to have it all. And we want it to be dead simple to get all of these apps working together, with no integration effort. That’s why we’ve created a set of dedicated applications that unite these best of breed apps. Earlier this month, we announced Z-NetSuite. You just turn it on, and Zuora is working seamlessly with NetSuite as your general ledger on the back end.

And today we’re announcing a huge improvement to our Z-Force application. Z-Force lets you bring Zuora’s subscription commerce capabilities right into Salesforce CRM, Salesforce Customer Portal, or Salesforce Partner Portal. And it’s all 100% natively built on force.com, so it just works. No further integration required. There are dozens of new capabilities to take advantage of with this new release. If you want to learn more, you can also check out how customers like Xactly are using it today.

For subscription businesses, this best of breed triple-play of Salesforce plus Zuora plus Netsuite allows them to manage the lead-to-cash-to-renewals process entirely in the cloud, with no software required. And now with Z-Force and Z-Netsuite, there’s also no integration required.

LinkedIn's IPO - Wall Street Loves the Subscription Economy

by Tien Tzuo

The tech IPO market is back, and more and more Wall Street is favoring the Subscription Economy business models. Two of the best performing stocks in the last few years are salesforce.com (CRM) which innovated the SaaS model and Netflix (NFLX) which revolutionized the at-home entertainment market. Netflix went public at $15/share. Today? $242!

Today, LinkedIn went public with the biggest initial offering ever for a Subscription Economy player and began trading at $83 per share, topping a near $8 billion market cap. LinkedIn shares have skyrocketed, trading at about $107 a share, and at a high of $122.70 a share, as of 9:30 AM PT today.

To many, LinkedIn is where you go to create a free profile so that you can network with business contacts, search for jobs, recruit employees and find industry experts. The turning point in its business though was in 2005 when LinkedIn shifted to a subscription model that allowed it to monetize its social network.

LinkedIn introduced paid subscriptions to give recruiters more access to job candidates and members additional ways to communicate with one another. Then the company ramped up its subscription ad model as membership reached over 100 million worldwide. Last year, LinkedIn reported $243 million of sales.

And while social networking is clearly red hot, LinkedIn’s subscription model enabled it to do two important things: build a scalable, renewals-based business and focus on member loyalty. LinkedIn recognized that one-time, single-interaction sales models were obsolete for its business.

So don’t go start a Subscription Economy business because you want to have a huge IPO or or to please your current investors. Do it because you want to change the way that you engage with your customers, enable you to provide more value and participate in the greatest shift in consumer spending in the last 30 years. And if you have a multi-billion IPO, I’ll be there to invest.