The Definitive Guide to Subscription Commerce
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The Definitive Guide to Subscription Commerce

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Just as the Internet rocked the bricks and mortar world of business 15 years ago, the burgeoning Subscription Economy™ ...

Just as the Internet rocked the bricks and mortar world of business 15 years ago, the burgeoning Subscription Economy™
is forcing today’s enterprises to change how they do business.
Subscriptions used to be just for newspapers and magazines, but not anymore. The last 10 years have seen a dramatic
increase in companies using the subscription model to offer everything from music, movies, and textbooks to cars for a
monthly fee. Every day, more traditional players are joining the Subscription Economy in response to changing consumer
habits. For most companies, this shift means relearning a lot about selling, pricing, packaging, and building customer loyalty.
Companies need to move away from a manufacturing-oriented, product focused way of thinking, and embrace a world of
services that fundamentally change customer relationships.

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The Definitive Guide to Subscription Commerce The Definitive Guide to Subscription Commerce Document Transcript

  • The Definitive Guide toSubscription CommerceJanuary 2012
  • The Definitive Guide to Subscription Commerce  —  January 2012 © Zuora Inc. 1 / 8The Subscription EconomyJust as the Internet rocked the bricks and mortar world of business 15 years ago, the burgeoning Subscription Economy™is forcing today’s enterprises to change how they do business.Subscriptions used to be just for newspapers and magazines, but not anymore. The last 10 years have seen a dramaticincrease in companies using the subscription model to offer everything from music, movies, and textbooks to cars for amonthly fee. Every day, more traditional players are joining the Subscription Economy in response to changing consumerhabits. For most companies, this shift means relearning a lot about selling, pricing, packaging, and building customer loyalty.Companies need to move away from a manufacturing-oriented, product focused way of thinking, and embrace a world ofservices that fundamentally change customer relationships.Speeding Time to MarketWhat does it take to succeed in this new world? Right now, business leaders need to gain a more nuanced understandingof the strategic, financial, and operational implications of a subscription-based model, or they risk losing ground in the time-to-market sprint. Customers can now get nearly anything, anytime. Companies need to understand that the competition isgoverned by new rules, and if you can’t provide the right service at the right price, your competitors will.Rethinking the “What” and “How” of SellingConsider BMW versus Zipcar. BMW’s leasing business already operates much like a service. You pay a one-time set up fee, andthen you pay a monthly fee over the life of the contract. Oil changes and maintenance are all included in that price. In fact, in2008, 60 percent of BMW’s sales came from its leases. But compared to Zipcar’s pay-as-you-drive subscription membership,BMW’s leasing service falls short. With Zipcar, you might drive a Toyota Matrix one day and a Mazda the next. What if a BMWcustomer wants to try a 3 Series for a few weeks, and then switch to an X5? Zipcar’s fees even include the gas!Pricing Based on Customer DemandForget fire sales, seasonal specials, and other brute-force price promotions. Armed with better insight into how prices affectdemand, subscription companies can lower prices in a more rational, granular way to manage inventory while maximizingyield. For example, when the iPhone 3G was introduced, AT&T dropped the price of the iPhone by $100 and simultaneouslyraised monthly fees by $10. In doing so, they were able to sell more iPhones (lower entry fee) but earn more money over thelife of the two-year contract.Subscription-based commerce is spreading like wild fire across industries including software and high tech, cloud computing,media and publishing, telecommunications and wireless, and consumer services. The reality is in any industry, companiesneed to stay one step ahead of customer demand to remain competitive. Subscription commerce gives companies theflexibility and agility to achieve this—whether they sell a physical product, a service, or combination.The Old Model: Linear TransactionsCommerce used to consist of simple, one-time transactions. This process began with the initial customer acquisition process.This might involve a direct sales force using a customer relationship management (CRM) tool to get the deal closed, or it could
  • The Definitive Guide to Subscription Commerce  —  January 2012 © Zuora Inc. 2 / 8be the result of marketing campaigns driving traffic to an e-commerce website. Customers pick their products, each with asingle SKU and a single price. A simple quote and invoice, or a one-time online payment completes the transaction, andyour general ledger system takes care of the accounting.While this lead to cash process is straightforward, it’s also limiting. To keep your business growing and revenue flowing, youneed to close additional transactions with new customers. Even generating additional revenue from an existing install baserequires a new sales cycle.The New World: Subscription CommerceThe Subscription Economy introduces an entirely different commerce process. It’s no longer just about lead to cash. It’s aboutlead to cash to renewal. This new process not only offers several advantages to end customers, demonstrated in the ZipCarexample, but also to companies delivering the service.Subscriptions deliver a steady recurring revenue stream that will compound over time. For established vendors, it’s notunusual to see renewals account for 70-80 percent of annual revenue. Unlike the world of one-time transactions, thesubscription model also offers the opportunity to start your customers small and grow their usage and spend over time.New software-as-a-service (SaaS) and Cloud Computing vendors have become experts in this process. A common strategy isto hook initial customers with a “freemium” offering, and then to up-sell that customer to a premium “bronze”, then “silver”,then “gold” package. If you have the right type of service, you might get that same customer to adopt that service at work,delivering an “enterprise” package.Transaction Economy: Lead to CashSalesProcessFlat PricingSimple QuotingSingleInvoiceSinglePaymentLead CashFront OfficeApplicationsBack OfficeTransactionApplicationsNew revenuecomes fromthe next deal
  • The Definitive Guide to Subscription Commerce  —  January 2012 © Zuora Inc. 3 / 8For this strategy to be successful, companies need to identify the right product packaging, prices, and bundles to drivecustomers up the chain. Since every market, customer segment, and service is unique, there is no one-sizefits-all model forsuccess. Companies can experiment in the following five areas to find the mix that maximizes customer value: frequency,add-ons, usage, upgrades, and international markets.FrequencyHow often should you bill your customers? Is a simple monthly charge the most attractive model? Or can you drive moreloyalty and improve cash flow by offering a pre-paid yearly solution?Add-On’sYou may start with a single product line, but find adjacent products or services that are complimentary. Like a cable companythat now offers Internet and voice services as well as television. Salesforce.com started with a sales force automation serviceand now offers customer service and support applications as well as collaboration tools.UsageBeyond simple recurring payment models (i.e. per user per month), it’s likely that you’ll find ways to measure customerusage. How many gigabytes are customers using? How many emails are they sending? How many miles are they driving?The possibilities are endless, but usage charge models open the door to a whole new world of pricing and packaging options.Subscription Economy:Lead to Cash to RenewalSalesProcessComplexQuoting?Change Orders?Bill Repeatedly?Add usersAdd productsUpgrade tiersSuspend serviceRenew & Upgrade?Setup ChargesUser ChargesUsage ChargesPricing TiersSubscriptionProducts &PricingNew revenuecomes from existingcustomersWho’s using whatWho’s up for renewalWho’s most valuableCo-terminationAlign chargesRevenue recognitionStore payment info
  • The Definitive Guide to Subscription Commerce  —  January 2012 © Zuora Inc. 4 / 8UpgradesOnce you’re tracking usage, you likely have a means of upgrading your customers from one tier of service to another.Cell phone plans are a great example: a customer starts out with a 400 minutes a month plan, then later upgrades to the600 minutes a month plan if they have gotten rid of a land line at home.InternationalFinally, international markets offer tremendous growth opportunities. Though beware, buyers in different markets mightrespond differently to your domestic pricing strategies. You’ll also need the right systems in place to manage currency andtaxation issues.The Middle Office GapCompanies need to manage all aspects of subscription commerce including pricing and product catalog management, quotingand order management, billing and payments, up sells, cross-sells and renewals, and revenue and customer value metrics.In the front office, there’s a need for new marketing automation tools, like Marketo, and proven CRM applications, likeSalesforce CRM. These are great for bringing new customers to the table. Once customers are in the door, the differencesbetween the old world and the new subscription commerce world become clear.Traditional back-office systems, like order management, ERP and accounting systems, as well as custom, homegrownbilling solutions, were designed for simple, one-time transaction commerce, not recurring billing and payments that defineCASE STUDYXactly Corporation Meets Rapid GrowthChallenges with Subscription-Based BillingChallenge:Relatively new company experienced rapid growthNo automation tools or processes for handling invoices and customer billingNeeded accurate and timely customer invoice processes to support complex billing scenariosRequired fast implementation with relatively no IT resourcesSolution:SaaS-based subscription billing and management platformIntergration with CRM system and partner systemsMinimal IT resources and upfront investment requiredResults:Clear financial payback through improved customer billingBetter insight and visibility into sales data and metricsImplemented within one monthAbility to manage customer subscription changes due to upgrades, renewals, cross-sells and upsellsUsage: Beyond simple recurring payment models (i.e.customer usage. How many gigabytes are customers uare they driving? The possibilities are endless, but usagpricing and packaging options.Upgrades: Once you’re tracking usage, you likely haveservice to another. Cell phone plans are a great exampthen later upgrades to the 600 minutes a month plan iInternational: Finally, international markets offer tremdifferent markets might respond differently to your doplace to manage currency and taxation issues.ChallengeRelatively new comNo automation tooNeeded accurate anbilling scenarios.Required fast impleSolutionSaaS-based subscriIntegration with CRMinimal IT resourceResultsClear financial paybBetter insight and vImplemented withiAbility to manage crenewals, cross-sellXactly Corporation Meets RapiSubscription-Based BillingCASE STUDY
  • The Definitive Guide to Subscription Commerce  —  January 2012 © Zuora Inc. 5 / 8subscription models. As a result, companies have had to deal with manual processes and highly customized, inflexiblesolutions that introduce errors, drain critical resources, and hold back pricing and packaging innovation.Subscription commerce (lead to cash to renewal) also requires the concept of a “middle office” not found in transactionalbusiness. Companies need to manage an ever-changing product catalog while keeping finance and sales in sync on the latestpricing. They need quoting and ordering tools that account for not only initial orders, but upgrades, add-on’s, or downgrades.Front office employees, like sales reps or customer support agents, need access to customer invoice and paymentinformation, usually locked away in back office applications.Companies that fail to consider this “middle office” gap and base their subscription business on billing and paymentsplatforms designed for one-time transactions will run into roadblocks that will impede future growth. As new customers,product lines, and pricing strategies are introduced, these challenges become more pronounced.Subscription Commerce RequirementsZuora®has helped hundreds of companies in industries like media, telecommunications, SaaS and cloud computing, deliverthe missing piece to monetize the entire Quote-to-Cash-to-Renewals processes. Companies like Reed Business Information,Coremetrics, InsideView, Marketo, Ricoh, Box.net, Xactly, Cloud Central, Open Range Communications, and Ning have alreadyseen the benefits of subscription commerce.Four themes arise again and again. These requirements are critical for any company planning for and managing asubscription commerce business.Complete Subscription CommerceFront Office Back OfficeSubscriptionMiddle OfficeCampaignsLeadsOpportunitiesAccounts &ContactsSupport CasesPricingQuotesOrdersRenewalsAnalyticsProduct CatalogSubscriptionsAmendmentsInvoicesPaymentsUsageTaxation
  • The Definitive Guide to Subscription Commerce  —  January 2012 © Zuora Inc. 6 / 81. Product and Pricing StrategyHow do you want to price and package your offerings? What is the right structure today, and in the future as yourcustomers, marketing, and sales demand new product packaging? What is your mix of one-time fees, usage fees, andrecurring fees? How quickly can you roll out pricing changes? Can you do it on your own, or are you dependent on aback-logged IT department?2. Customer Subscription ManagementCustomer subscription occurs over the lifetime of that customer. What is your strategy to progress a customer from free orlight usage, to premium and heavy usage? Do your sales reps have visibility into customer subscription details to help themcross and up-sell and manage renewals? Do they have the right tools to not only create a new quote, but a renewal, upgrade,add-on, or downgrade quote? If you don’t have a direct sales force, how do you manage subscription changes on your websiteand through your channel partners? What is the back office impact of a change in subscription?3. Subscription Billing and PaymentsA payment gateway or a general ledger application may work for simple one-time transactions, or even basic recurringpayments for a single product. As customers change their subscriptions, it’s important to consider how you’ll be able tomanage things like co-termination, charge alignment, and revenue recognition. Can you handle all of this in an automatedfashion, or does each customer change result in hours of manual work? Can you generate invoices that reflect what’s reallygoing on with a customer’s subscription?4. Subscription AnalyticsOnce you have these pieces in place, what mechanisms do you have to measure the success of your subscription business?Can you track your monthly recurring revenue (MRR) in real time? Do you have insight into how metrics are changing overtime? Can you tell what each customer’s total contract value (TCV) is? What are your days sales outstanding (DSO) and whatcan you do to get that number down and improve cash flow?When you add new products or dramatically increase your customer base, you need to be ready to handle these challenges. When youmake a strategic pricing and packaging change, can you quickly change your systems accordingly, or are you limited by what IT can deliver?One of the biggest roadblocks that companies run into is a rigid back office application. This prevents them from executing a growthstrategy. Consider how to keep the front office (sales and service) in sync with the pricing and packaging changes you roll out. Orderscreated with out-of-date pricing can take hours to unwind and strain a new customer relationship.You need to make sure everything flows through to the billing system automatically so small changes on the front end don’t result in anincrease in work for the finance and accounting department.
  • The Definitive Guide to Subscription Commerce  —  January 2012 © Zuora Inc. 7 / 8Selecting the Right Subscription Commerce PartnerSelecting the right subscription commerce partner is a significant decision, and any technology you implement will likelybe in place for years to come. It’s important to consider not only the functional needs your business has, but also thecharacteristics of the company behind the technology.Compliance and SecurityYour partner should have the highest level of accreditationsuch as Payment Card Industry (PCI) Level 1 for paymentprocessing, the worldwide standard set forth by thePCI Data Security Standard (PCI DSS) and SAS 70 TypeII certification, the internationally recognized auditingstandard developed by the American Institute of CertifiedPublic Accountants (AICPA) for internal controls andprocesses.Scalability and ReliabilityAssuming that you are selecting a SaaS provider, yourpartner should have a multi-tenant architecture thatallows for scalability, growth and capacity planning, justlike Salesforce.com. Be sure that any partner you chosehas true disaster recovery measures in place, like multipleredundant data centers.EcosystemWith cloud computing today, multiple touch points arerequired with various systems and applications suchas CRM, payment gateways, and back-office accountingsystems. Your partner should have a strategy that involvesproductizing common integration points to reduce yourrisk and eliminate the burden of maintaining multipleintegration points and upgrade cycles.OpennessAn open system should be a requirement for any businessoperating in the cloud. This means that applicationinterfaces (APIs) are publicly available and releases aremade available instantly to all customers and partners.InnovationYou don’t want to be stuck with a vendor who is notinnovating, as your business requirements will changeover time. Innovation means having a standardizedapproach to product development, engineering and releasemanagement providing consistent new features, upgradesand long-term benefits to adapt your business over time.Billing CareAs billing is mission critical, your partner should have anexperienced billing care team and support system in place24x7.LeadershipYou want a mission critical partner who will be there for youfor years to come. Choose a partner that has the resourcesto support you now and in the future as well as a trackrecord of a committed focus on customer success.About ZuoraZuora is the leader in on-demand subscription commerce solutions changing the way that subscription businesses manageand sell to customers, allowing them to bring new products to market in less time, with more flexibility and less hassle. Builtfrom ground up by SaaS industry visionaries and veterans from today’s leading technology companies such as Salesforce.com,WebEx, eBay and Netsuite, Zuora provides a complete solution to manage all aspects of your subscription business from leadto cash to renewal.
  • www.zuora.com3400 Bridge Pky, Suite 203Redwood City, CA 94065Phone: (650) 641-3777Fax: (650) 551-1500Copyright © 2012 Zuora Inc. The Zuora logo, Zuora and Subscription Economy are registered trademarks of Zuora, Inc. All Rights Reserved.Designated trademarks and brands are the property of their respective owners.“To meet the diverse needs of our customerswhile maximizing revenue, we need theflexibility to negotiate renewal terms, up-sells,and other deals on a case-by-case basis.”—Mary Collerton, Corporate Solutions Director, Reed BusinessInformation (a division of Reed Elsevier Group PLC)