The Subscription Economy's Secret Weapon

You may have never heard of Zuora. But it's raised a whopping $128 million from VCs to help us shift from owners to subscribers for everything from movies to data storage (and maybe even toasters).

Movies used to be something you paid for in one of three ways. You went to the theater, you bought a DVD, or you rented one at the local Blockbuster. Today, though, hardly anyone thinks of paying for movies that way. When most people are budgeting for their monthly movie expenses, they might factor in a theater visit or two, but mostly they're thinking in terms of a monthly subscription to Netflix for $8 (and maybe a comparable amount pitched in for Hulu Plus, for TV junkies).

In the sharing economy, people's identities as consumers are shifting—and not just for movies. As the Internet enables new ways of distributing things—and new ways of connecting services to physical objects—the identity of "subscriber" may soon occupy the majority part of your brain you use to pay the bills.

This is the insight at the heart of Zuora, a subscription commerce company founded in 2007 by Tien Tzuo, who was employee #11 at Salesforce. While Netflix itself isn't a Zuora customer, other heavyweights like Dell, Box, News Corp., and Dollar Shave Club are. Each of them leans on Zuora to help manage their subscription billing services.

It's a task more complex than you might think. Managing subscriptions could be a real headache without Zuora, claims Tzuo. How exactly should you price your product? How do you build a payment infrastructure to allow for price changes? How do you process payments internationally? How do you manage the legal issues that surround storing credit cards? Though other payment companies—Braintree, for instance—tackle some of these problems, Zuora professes to tackle all of them, in a way tailored for the subscription economy.

Can't companies just handle all this themselves, I ask? "Sure, you can tell your developers to build anything," says Tzuo. "But then you realize that 10%, 20%, or more of your engineering capacity is spent doing this stuff, versus working on innovations, improving your service."

Venture capital, at any rate, sees big business here, having poured $128 million into the company to date (most recently, in September, a $50 million round). That might seem a ludicrous amount of money, but Zuora's value proposition has become all the more convincing with the rise of cloud computing, in which just about everything could be subscribed to, in one way or another.

Even the most unlikely businesses are shifting their identities, as they move away from selling stuff and toward selling services related to that stuff. One of Tzuo’s clients, for instance, once sold a medical scanner to hospitals for $200,000. A few years back, it was necessary to house a lot of high-tech equipment directly on the device. But now, most of the image-processing can be done in the cloud, using services like Amazon. The company now sells the device for $50,000, and charges a monthly service fee for data processing.

A vast array of devices are similarly becoming connected—you may have heard of the so-called “Internet of things”—which opens up a subscription pricing model for each of them. Tzuo lists other clients: a company that once merely sold car-mounted cameras, but now can offer monthly data and analysis about what those cameras capture. A copier that figures out how much paper you use, and orders replacements automatically. Even an ankle bracelet company (of the variety used on felons, not tweens) uses Zuora, charging a buck a day or so for GPS and other services. It’s something like “given ’em the razor, sell ’em the blades” for the cloud-computing generation.

As an end user, this raises questions. When my toaster is Internet-enabled, will I really want to pay a nickel per use? Tzuo quickly counters, and his mind soon spins to places mine never would have gone. First he wonders if a freemium model might work—most people don’t pay anything, but “high-value toasters” (restaurants, perhaps?) do. Then he hits it: “Or maybe someone comes along and says, it doesn’t make sense to pay five cents a toast, but we’re a home automation company, and if you pay us $20 a month, we take care of all your appliances and you don’t have to think about it anymore.”

It all comes back to the idea of identity—whether consumers are ready to shift their identities from “owners” to “subscribers.” When a company makes their lives easier, the answer is invariably yes.

[Image: Flickr user Tekke]

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2 Comments

  • Zuora doesn't tackle all of the problems around managing subscriptions because they don't handle payments. While they can integrate with lots of gateways, they leave the onus of establishing relationships with payment gateways on the merchant. Often times these merchants don't understand that they should be working with multiple gateways domestically and internationally to maximize transaction success rates. So they typically only setup with one gateway like Auth.net instead of multiple ones. Which means they probably aren't able to accept local payment methods internationally, like iDEAL in the Netherlands or Giropay in Germany and they are therefore missing out on additional subscribers.

    The only types of companies that tackle all of the problems with subscriptions are companies that offer all-in-one solutions that do subscription management and payment processing.

    [Disclaimer: I work for FastSpring, which is one of the all-in-one solution companies referenced here]