An Espresso Shot for the Subscription Economy

by Jeff Yoshimura, VP of Marketing

 

Just in case there weren’t enough Starbucks cafes near you, Starbucks has gone one better. To continue to serve the make-at-home crowd, Starbucks just introduced automatic delivery of its coffees and teas by subscription.

 

The Zuora team went crazy when we saw this! When we started Zuora in 2008, we had all these ideas of how we thought the Subscription Economy would grow in traditional product categories. Our CEO Tien would say, “I think you’ll one day see Starbucks by subscription. Why not?”

 

It wasn’t an accident that Tien chose Starbucks. Subscriptions are the obvious next step for a company that is masterful at retaining customers. It’s the idea that you are giving the customer MORE, and that the relationship shouldn’t end with the swipe of a credit card.

 

Starbucks laid this groundwork with its Gold program, offering loyal customers 10% off every purchase, free Wi-Fi use, free beverages on their birthday, exclusive discounts, and more.  Rather than continuing to chase customers, they wanted to solidify recurring customer activity. And the benefit of the long term engaged customer pays off in increased revenues and profits.

 

This is precisely what Zuora means when we talk about the shift from the “Buy Here” button of the 20^th century to “Subscribe Now” button in the 21^st century. It’s not just about mail order. It’s about providing customers what they want, where they want it and how they want it, which each customer may view as unique to them. Quoting the Starbucks email campaign:

 

Want to be sure you always have your favorite coffee on hand? Simply subscribe online to have your coffee or tea sent to you automatically, as often as you like. You can easily modify your order, rearrange your shipments or pause when you go on vacation. We're flexible for you.

 

Start your subscription now. 

 

What does this mean for other companies as well? Who else is amazing with customers? Who will be next to shift to the Subscription Economy? What other retailers? Maybe clothing companies? Who knows? And, again, why not?Whoever is that next big brand to make the shift, the Starbucks example itself should serve as a warning to companies who think the Subscription Economy is only about digital goods. As we’ve seen over and over, it’s about a fundamental change in the way you serve your customers. If you want to sit and think about that any longer, companies like Starbucks will come eat your lunch and have a tall half-skinny half-1 percent extra hot split quad shot (two shots decaf, two shots regular) latte with whip while they’re at it.

 

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.

 

 

Reader’s Digest Files for Bankruptcy While Hundreds Join JOL’s Paid Online Content Mission

by Tricia Reilly

Another one bites the dust: last week the publisher of Reader’s Digest, filed for bankruptcy, joining a long list of media outlets battered by the recession and an ineffective ad-supported revenue model. The struggling industry is ripe for a new business model.

On the heels of the Reader’s Digest announcement comes news from Journalism Online LLC, a new venture spearheading journalism’s transition to a paid online model. Publishers representing more than 506 newspapers and magazines will join JOL as affiliates. Their goal? To generate new revenues from readers and distributors for their digital content.

JOL’s co-founder Gordon Crovitz, who for over a decade ran the Wall Street Journal Online, explains:

“Every publisher we have met with is now seeking to generate revenues for online access, which is a huge shift in strategy. The interest shown by our affiliates and many other publishers with whom we are intensely engaged confirms the need for a sophisticated commerce platform to meet the challenges facing the media industry.”

We at Zuora believe that subscriptions might just save the publishing industry. Earlier this year, we blogged about how subscription revenue models are taking center stage, and noted that News Corp Chairman Rupert Murdoch hinted at moving toward paid content. This month, when Murdoch announced plans to roll out paid content on all News Corp websites, we highlighted the power of subscriptions at Zuora customer GigaOM Network, which successfully launched a premium content service for its annual subscribers this year.

Although the publishing industry seems to be coming around to the idea of paid content, the information-must-be-free crowd stands its ground. Nearly 300,000 Facebook users have joined the group to “Keep Facebook Free,” with the threat of signing off the site.

Paid content providers will have to find a way to differentiate themselves in order to justify the premium. In his new book, Free: The Future of Radical Price, Chris Anderson argues that the most effective price is no price at all. He highlights how savvy businesses use “freemium” business models to get subscribers to pay for premium features, like Flickr does with its Flickr Pro account. The Wall Street Journal is a great example of a successful “freemium” business model in journalism. Paying subscribers can read The Wall Street Journal online, with navigation. Non-subscribers have to settle for reading the occasional Wall Street Journal story when they happen to encounter it—indexed in Google, or referenced from another site.

We’re excited to see the publishing industry rally around subscriptions to overcome its challenges. Despite the naysayers, we’re on board with JOL’s subscription model for content, and we’re thrilled to see more supporters join the ranks.

Kim Kardashian's Designer Shoes As a Service - One Haute Subscription

by Megan Golden

If you’ve been keeping up with the Kardashians, you know that Kim recently launched ShoeDazzle, a subscription service for designer shoes! While the name reminds me of a costume accessory from my 5th grade jazz recital, the idea is genius... and let’s be honest, a little bit sexy.

For decades, celebrities have stepped outside their "talent" to jump on the latest bandwagon - from checking in to rehab, to having a baby, to launching their own personal brand of the latest must-have. If a female celebrity doesn’t want to pop out a baby and name it after a fruit (sorry Apple Paltrow), she’s most likely to go the fragrance or clothing line route. With her recent break-up from Reggie Bush, Kim Kardashian had no choice but to go the apparel route.

Here’s how it works. You take a series of short quizzes; think Cosmo meets Vogue.

• Who do you think is better dressed? (Btw, the correct answer is the model from the Zac Posen Summer ’10 show.)
• Which brand do you like best? (L.A.M.B. over Coach and Bebe.)
• Which celebrity style do you most admire (I stayed loyal to my longtime girl-crush Reese over Sienna & Rihanna.)

Suddenly I was funneled into a this-type-of-girl-likes-these-types-of-pumps bucket... and I liked it! After a couple of days, Kardashian’s shoe stylists sent me an email with 5 shoe suggestions for that month. After much debate (Tien, I promise I did this on my lunch break) I went with the platform suede pump in slate (so Fall 09!) that will carry me from the office to SF night life - for the month of August!

What’s so haute about this? It’s just another industry moving from the traditional buy model to the subscribe model. This is especially reflective of our current economic climate; most women are more apt to spend $39/month for the in shoe rather than paying hundreds of dollars to own them outright; especially when they have the potential to be out before they’re even paid off. You’re keeping with the trends without breaking the bank!

So for the Zappos, Piperlimes, and Shoes.coms of the world - consider a move to subscriptions to cater to the Shoe Lovers on a budget.

As for you, Kim, thank you for allowing me to go from a designer shoe ogler to a prancing stiletto trendster.

PS: And Kim - Reggie has just been removed from my fantasy football draft. You’re welcome.

More textbooks-as-a-service: Lessons from a successful subscription start-up

by Tricia Reilly

Back in August 2008, we blogged about Cengage Learning, an innovative subscription business that offers digital textbooks as a service to college students. Now, another company is making headlines with a new spin on an old problem – the high cost of college textbooks and the difficulty with which they are resold at the end of a given semester or term. I personally recall the hassle trying to sell my massive Economics textbooks while the entire Cal campus was busy celebrating at the Bear's Lair. But I digress...

In a recent NYTimes article, Miguel Helft describes how Chegg.com, named for a “chicken-egg” question, has built a multi-million dollar company by renting textbooks to college students. Inspired by Netflix, the founders have essentially exploited inefficiencies in the college textbook marketplace.

I see a few key lessons in this bootstrapped startup success story:

• Test, measure, refine. The chegg.com team initially launched with a ‘college campus craigslist-like offering’ but a review of their website traffic revealed that the bulk of their visitors went to used textbook listings. These insights sent them back to the drawing board. I recently heard about a company that creates fake landing pages to test the market's appetite for products and features at various price points. The orders fail at the point of credit card authorization and consumers are none the wiser, however the vendor is gathering valuable data about what the market will actually pay for. I don't necessarily endorse this approach but the concept of testing and monitoring trends holds true.
• The ability to experiment and iterate pricing and packaging options in a timely manner is critical to survival. Chegg.com's initial idea didn't really take off as expected, and their ability to transform their business based upon data and metrics enabled them to grow dramatically. We at Zuora believe that the same holds true with pricing and packaging. What this means is that if you’re going to be successful, you’ll need a subscription management service that enables you to launch new products quickly, and change pricing and packaging on the fly.
• Subscriptions are challenging the status quo in traditional markets. We’ve seen a ton of traditional companies – from Hallmark cards to United Airlines and Starbucks – embracing the subscription revenue model. Expect to see a lot more bricks and mortar industries embrace the subscription model to drive new and improved ways of doing business - for the consumer and the vendor.

Noticed any traditional markets where subscription businesses are exploiting inefficiencies in an old model? Drop us a line and let us know.

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.

Subscription Revenue Models Take Center Stage

by Tien Tzuo

Open Table’s success is a feather in the cap of subscription businesses and tangible proof that ad-driven revenue models are rusting. The New York Times really hit the nail on the head when it wrote: “Now advertisers have cut back their online spending. So Web start-ups are searching for new ways to make money, like selling real, or virtual, goods or asking customers to buy subscriptions.”

But, it’s not just Web start-ups that are moving to subscriptions. Traditional ad-supported businesses like newspapers with online content are offering more subscription pricing and packaging as well. Ads don’t work anymore and companies are moving beyond them. Subscriptions, tiered pricing and premium content are taking center stage.

Wired Magazine is talking about "raising the price or straying from the traditional magazine business model with ideas like tiered pricing with different benefit.”

Even Rupert Murdoch is distancing News Corp from ads. As Murdoch recently said to CNN.com, "the challenge for media organizations (is) finding a balance between advertising and subscription revenues and figuring out how to charge for content without alienating existing users–which could lead to Web sites offering tiered levels of free and paid-for material."

It’s exciting to have subscriptions in the national spotlight. Of course, here at Zuora, we and our 100+ customers already know that subscriptions are the way to go. We trust that more companies will begin to evaluate subscription-based revenue streams, especially in light of OpenTable’s success.

A big congratulations to our friends at Open Table (a fellow Benchmark company). Jeff Jordan and his team have built a great company and the market certainly agrees with us.

Subscription Businesses Thrive in a Downturn

by K. V. Rao

This past week was filled with news about subscription businesses thriving in the downturn. Everything from socks by subscription(!) to the iPhone to Netflix.

In particular, last week’s news about Netflix is another feather in the cap for subscriptions. Since January of this year, in this dicey economic environment, Netflix has seen its subscription base grow by more than 600,000 to reach more than 10 million subscribers. With this in mind, we think it’s safe to say that we expect to see an increase in the number of companies looking to optimize their services via subscription.

Naturally, we’re a fan of subscription-based businesses for many reasons. As a consumer, subscriptions are cost-effective and efficient. You use what you need, when you need it. Same goes for the service provider - subscriptions are efficient, predictable, profitable.

Back in January, Ray Wang of Forrester Research was quoted as saying "I think SaaS has an element of being recession-proof." So far, that certainly seems to be the case. SaaS and subscription companies like salesforce.com are reporting strong earnings and customer growth.

This is all good news. If you’re a service provider and aren’t offering a subscription option to your customers, don’t you think it’s time to take a serious look at subscriptions?

Netflix for Toys - Baby Plays Offers Toy Subscription

by Jenny Dixon

The other day, I stood in disbelief as I surveyed what was once the formal dining area of my home. My son is barely 2, but already his toys overtake the room. A pile of puzzles lay forgotten in one corner. A bead maze he couldn’t keep his hands off 6 months ago collected dust in another. The dump truck he begged for at Target last month sat forgotten on a shelf. Been there, done that. No amount of bins, crates, caddies and other storage solutions could hide the simple truth: toddlers get tired of their toys-- quick. There had to be a better way. A way to inject novelty into my child’s play without breaking the bank or adding to the mountain of plastic in my dining room.

Turns out the answer is out there—in a company called Baby Plays, the “Netflix for Toys.” It works like this: instead of buying new toys that get forgotten in a few weeks, I subscribe to Baby Plays and create a “wish-list” of toys for my son. For about $30/month, I get 4-6 toys Fedexed to my home. After 30-60 days, or longer if I want, I simply return the toys via Fedex, and the next set of toys on my wish-list gets delivered to my door. No time lost shopping for toys that lose appeal after a few weeks. No stress over finding toys that will last until my son’s next birthday. No square footage lost to clutter in my home.

With Christmas approaching, I’ve decided that Baby Plays is the ultimate gift. Why buy a single toy doomed for the dusty corner, when I can subscribe to a constant stream of new toys from Baby Plays? Sorry Santa.

Better Place to Offer Electric Car Subscription Service

by Tien Tzuo

As many of our blog readers know, I'm an avid New York Times reader.

In Tuesday’s issue, I read an interesting article on a promising company called Better Place—otherwise known as "Shai Agassi's electric car venture." Several years ago, Shai Agassi famously left SAP to head up this new, ambitious venture to bring electric cars into the world.

Hawaii Endorses Plan for Electric Cars

Given all the buzz around the collapse of the American auto industry and the future of electric cars, Shai's initiative is quite timely. Better Place already has endorsements from Israel, Denmark, Australia, California's Bay Area, and now Hawaii to roll out his electric car initiative. In addition, he has over a billion dollars in committed venture funding for these large scale rollouts.

What’s so intriguing about the Better Place vision? How does it stand apart from the vision of Tesla or GM's Volt, or the new electric Mini Cooper from BMW?

Shai isn't just producing cars. He's envisioning an entire network of thousands of recharging stations in every region where Better Place is rolled out.

And it's more than just new technology. It's a new business model. And guess what? It's subscription-based! On their own Website, Better Place compares its business model to that of mobile phones. Here’s the excerpt:

Think of it like this: we pay mobile providers for minute-by-minute access to cell towers connected together in cellular networks. Truth is, we pay comparatively little—or next to nothing—for the phones themselves. After all, what you're really buying is air time, not a box with buttons.

The same model works for transportation. Just replace the phone with an electric car, replace the cell towers with battery recharge stations, and replace the cellular networks with an electric recharge grid. Now you're buying miles, not minutes.

When you think of it in those terms, suddenly a seemingly revolutionary business model becomes something a lot more proven—and more than a little appealing.

Why pay for an addictive, expensive and harmful substance like oil when you can simply pay for transportation as a sustainable service? Why produce pollution when you can bring your emissions to zero and produce economic advantage as the only by-product? The proposition sells itself.

In Shai's vision -- you don't buy cars -- you buy miles! You pay based on how many miles you expect to drive, just like you pay only for the minutes you use on your cell phone. It's brilliant!

In fact, in the NY Times article, Shai talks to the superiority of the subscription model, especially in this economy:

On Tuesday, he said that he was optimistic about his project despite the dismal investment and credit markets because his network could provide investors with an annuity. Users of his recharging network would subscribe to the service, paying for access and for the miles they drive.

Given the downturn in the mortgage market, he said that investors are looking for new classes of assets that will provide dependable revenue streams over many years. "I believe the new asset class is batteries," he said. "When you have a driver in a car using a battery, nobody is going to cut their subscription and stop driving."

In this blog, we’ve shown that subscriptions are everywhere—from Sex in the City to alternative transportation systems. What was once a revolutionary idea is now mainstream.

Companies like Better Place are proving that business model innovation is just as important as product innovation. Especially in our economic downturn. We’ll definitely be watching out for Better Place’s next move.