Zuora CEO Tien Tzuo: Philosopher of the Subscription Economy

I had a fascinating interview Monday with Tien Tzuo, CEO of Zuora, a company that intends to be the ERP system for what he calls the subscription economy. Tien (prounounced “teen”), was present at the creation of Salesforce.com. The business logic that is driving Zuora forward builds on the lessons of Salesforce.com. The talk covered a variety of topics that will lead to several stories. Here are the highlights.

The Subscription Business Model

Salesforce.com didn’t just pioneer the SaaS model. A major distinction between pre-SaaS enterprise software and SaaS is the subscription business model. Under this model retention, churn, and customer acquisition costs are of vital importance. The more you can know about the customer and how they are using the product, the better.

Zuora is a SaaS-based software system for running this model. The system takes inspiration from the sort of billing systems used in the Telco industry rather than from ERP, which was focused on a product-centric business model.

“We contrast the subscription economy with the product economy of the twentieth century,” said Tien. “Our claim is that when we look back 60, 70 years from now, the twenty first century will be viewed as a century where we had a very different business model than we did in the twentieth century. We created a customer-centric business model that wasn’t about shipping units and trying to get the best margins per unit, but it was about acquiring customers and having the greatest revenue per customer.”

What Tien realized after almost a decade at Salesforce.com, was that the subscription business model was a huge opportunity for a software company. Salesforce.com had to build its own subscription management system. Tien built Zuora to do for the subscription economy what ERP did for the product economy.

“We realized that if the whole economy’s going to shift to a subscription economy, then everyone’s going to need new plumbing,” said Tien.

How is Software Different in the Subscription Economy

I have long argued that the second order effects of the SaaS model have been hugely beneficial to Salesforce.com. Multi-tenancy is great from an engineering efficiency point of view, and for hat reason some people argue that it is not important to customers. I say no. Multi-tenancy forced Salesforce to reach a higher standard of configurability because, under the SaaS model, Saleforce.com was responsible for upgrades, which had to be as painless as possible.

The most interesting part of the discussion with Tien was his view of the the second-order effects of SaaS model on his software. Here are the ways the subscription model changes software.

• Messy, flexible, adaptive, customer-centric marketing processes are the core paradigm for the software for the subscription economy, not the rigid routings of a manufacturing firm.
• Information abundance replaces information scarcity as the characteristic of the surrounding environment.
• The software must be able to collect and correlate information from multiple channels.
• Processes must be both high volume and high complexity.
• The systems must be real time. There is no waiting for a daily, weekly, or monthly close.
• Pricing models are vastly more complex, such as the sort of models used in cell phone plans are a typical example.
• The software must be able to support multi-channel delivery of offers and the ability to transact.

In other words, the subscription economy forces one system to solve the challenges that were previously separated into the worlds of B2B and B2C.

Balancing Agile Development

Tien pointed out that agile development processes contain a danger: too much incrementalism. He recommends taking time twice a year to set forth the big hairy audacious goals for substantial changes to software.

Scorecard vs. Dashboard Metrics

Tien also pointed out that he uses two types of metrics to run his company. Scoreboard metrics are how you determine success. These measure the results you want at the end of the game. Dashboard metrics measure the operational state and help you make decisions while you are playing the game. Tien says a lot of confusion can be avoided by thinking in these terms.

This is just a portion of what we talked about. I’m looking forward to spending time writing up some of these thoughts for the various publications I write for.