It’s hard to believe that I’ve been doing this series for over six years now. And one of my earliest conversations, well over five years ago, was on a relatively new concept at the time called the Subscription Economy. And the company that was evangelizing the term as well as providing a billing platform for businesses to sell subscription services was Zuora.
Tien Tzuo, co-founder and CEO of Zuora, introduced us to what the SE was back then. And last week, I had the opportunity to catch up to Tien at the Zuora headquarters to see where we’re at today with subscription business models. He talks about how far the business model has come in those five plus years, how latest technologies like IoT and machine learning is changing the subscription business, and why he feels that five years from now we may not be buying anything the traditional way.
Below is an edited transcript of our conversation. To see the full conversation see the embedded video below. To hear the full conversation use the embedded player below.
* * * * *
Small Business Trends: What’s happened with the Subscription Economy over the past 5 years? Are we where you thought we’d be with it?
Tien Tzuo: Five years ago we were just really starting off evangelizing this whole idea of subscriptions and we would go out there and talk about how you and I would not have to buy products anymore, instead that we would use services.
Five years ago when we really talked about this it was a lot of skepticism right. People really didn’t necessarily see it coming yet. Uber really wasn’t around. We weren’t picking up our phone to try to get from point A to Point B. Netflix was still a DVD company, or maybe they’re just doing that split all. Blockbuster was still around.
And so fast forward to today. You don’t have to buy a car now; there is Uber, there is Lyft. More and more people are going from a two car family down to one car families or even just getting rid of their cars altogether. And obviously with movies we’re just simply used to pointing our phones and our TV sets to whatever we need to get the music and the movie services we want.
And then five years ago we talked about how the whole technology sector has shifted over where it’s not just startups trying to build the Salesforce.com of this or Salesforce.com of that, but the whole software category has shifted to software services.
You’ve seen Adobe saying we’re going to only offer Creative Suite now has Creative Cloud and you can only subscribe to it. So I would say, today, we truly do live in a subscription economy and, you know, it’s played out exactly as we hoped.
Small Business Trends: Any surprises on the upside or even on the negative side to what’s going on today.
Tien Tzuo: Today we work with a company that actually sells floors. This is a 150-year-old European company that sells tiles, vinyl tiles marble, hardwood floors, concrete, cement and so there it is. We’re actually putting sensors underneath the floors and detecting movement in pedestrian traffic. There’s all these things that we can do now that we have these smart floors versus traditional floors. And so we sit back and think about where IoT has really brought us over the last five years and things are becoming smarter. They’re detecting things or processing stuff or feeding information to the cloud. We’re really seeing that this whole subscription economy thing is just going much further than we ever imagined.
Small Business Trends: So we’re sitting in the midst of Dreamforce. There’s a lot of talk about artificial intelligence, deep learning all these kinds of things. You’re seeing companies like Salesforce and Oracle acquiring these smart technology companies and bringing them underneath the platform. So when it comes to artificial intelligence how is that impacting subscription business?
Tien Tzuo: We’re very used to a very different set of expectations now. Three or four years ago the idea that we had to buy a product and then figure out how to use that product to get the outcome that we want. We want to go to Point A to Point B you don’t want to have to think about well where is the car? Does it have gas? Does it have insurance? You just want to pick up your phone and say look I’m here and I want to go there if something does it for you. Right.
But now the whole idea of personalized/customized we’re used to everything we use. You can customize and you can personalize it to your needs. It’s not this whole idea, ‘Well you can have any color as long as black’. That’s really not not good enough for me when my phone is customized and I need a car customized my needs. My software is customized to my needs.
And then we’re used to things getting better and better. And so because everything is software driven right to use the next push the app on your phone and you use it in the next release of the SaaS application. You don’t have to do anything there’s just all these capabilities. Tesla is now doing it with the cars that are updating themselves. And today the car has self-driving features and that’s pretty incredible that you didn’t have to go buy another car.
What we’re seeing with this predictive, artificial intelligence stuff is just the next step. We will now expect everything that we use to be smart; to be processing our past behavior, processing our preferences. Correlating that with what other similar people are doing, make suggestions for us and just to make it easier for us. I would say two years from now if you’re using somebody that doesn’t have that capability it’s going to feel weird. That’s where the world’s going.
Small Business Trends: Have you seen a change in the way new subscription business model companies are developing? Are you seeing customer service or customer experience at the heart of the business model right from the beginning?
Tien Tzuo: Absolutely. I mean we talked about how the shift from products or services really changes all facets of the company. The old model is to say I created a product and now how do I feed it through different channels. How do I get into the store? How do I sell my salespeople? How do you get other partners to sell it? To let them buy it online? As long as I can ship as many units of these products as I need to I’m good.
But this new model you’re seeing … I’ve got customers that are subscribing to services and they expected to get better and better. But how do I build an agile innovation platform that actually responds to what my customers are telling me? I don’t have to build a hit product from day one. I can get something into the marketplace that people find valuable, and then work with my customers and iterate on that product and go deeper and deeper. And that’s really how you build and sustain competitive energy.
The last thing; when we talk to the CEOs and leaders of these companies they’re saying how do I fundamentally change the culture of my company because it used to be this hit product culture. And we used to be functionally siloed and our focus was on how many of these things we can ship. Now I’ve got to wrap all different departments around the customer because one customer wants a unified experience. So how do we break down the functional silos and put the customer in the middle of everything I’m doing because my goal is to turn that customer into a long term subscriber of the services that I offer.
Small Business Trends: What does it take to be a successful subscription business today compared to five years ago?
Tien Tzuo: Well I think the modern customer has just changed. Maybe just think about the biggest companies in the world. There’s a statistic out there that says half the Fortune 500 companies will cease to exist in the next 15 years. That’s pretty incredible. And so the pace of innovation and the pace of change is so big now. If you look at the Fortune 500 companies are doing well that are transforming. You look at IBM you look at General Electric they’re not talking about themselves as product companies anymore. Right. IBM is talking about selling cognitive data services. They still have a lot of mainframes and PCs but they see the future about these data services that anybody can tap into and use as a service.
You see GE saying we’re not about light bulbs or washing machines. They’re saying we’re about IoT. We’re about GE software we’re about machine learning, we’re about putting sensors on turbine engines and tracking all that information creating better services. And instead of buying engines you can simply use our engines by the mile or by the hour. So you’re seeing these companies truly transform because they know that the modern customer today is simply different.
Small Business Trends: We talked five years ago. We’re talking now. Hopefully we’ll be talking in five years. What are we going to be talking about with regards to the Subscription Economy in five years?
Tien Tzuo: I was at Salesforce for nine years and part of the people building their company and their culture. One thing that we used to say, and Marc Benioff was one of the biggest voices saying this, is people overestimate how much they can change in a year. But they completely underestimate how much change can happen in 10 years. When we started the Salesforce in 1999, when people were still accessing the Internet over dial up modems and when nobody used Google for search. The idea that our world would exist today with mobile phones and always on networks, I don’t know how many would have imagined that 10 years later. So we’re going through this right now. And in five years I truly believe that that you won’t be buying anything.
You won’t be buying cars. You won’t be buying furniture. You won’t be buying clothes you simply subscribe to the services you need and somebody else will take care of these things and all you want is the outcome. In this frees you up to really do what you love and do what you want.
Small Business Trends: And lastly what about small businesses?
Tien Tzuo: Well this is definitely not a big company thing only. This really applies to all sorts of companies and if you just look at you know they call it the subscription box space. And there’s an example around here of a company called Kiwi Crate. And here’s two entrepreneurs that says our skill and talent is do is to craft and curate. these arts and crafts kits for kids. But instead of trying to create these kids who get into the store will just have people subscribe to it and every month will give them a new kit. And they’ve been able to amass thousands and thousands of people that subscribe to these services.
And so the subscription business model is really good for small businesses because it allows you to meet a whole bunch of folks, allows you to engage with them and build a community that lets you build a recurring revenue model that allows you to do to really build your business. So we’re seeing contractors do this. We’re seeing law firms do this. You see a lot of retail stores saying come in and buy my services, or you can sign up for 10 sessions at the spa in advance or become a member. And build a relationship with me where I track usage. I know what your preferences are versus trying to drive you to my store. Every single transaction. And that’s just a much better way to go.
This is part of the One-on-One Interview series with thought leaders. The transcript has been edited for publication. If it’s an audio or video interview, click on the embedded player above, or subscribe via iTunes or via Stitcher.