It is nearly ten years since the Taiwan-born, Brooklyn-raised Tien Tzuo founded the ‘subscription economy’ startup Zuora. It has been a wild ride, with the company’s business focused on an area that sits at the centre of digital-based economic transformation.
Mr Tzuo calls it “the grand-daddy of all trends” for business. That is the move by corporations and businesses from product-focused economy to a service-focused economy.
“This is a new business model that is completely wrapped around the customer,” Mr Tzuo said.
The notion of a ‘subscription economy’ is not widely understood in this country. Most people will reference their subscription to behind-the-paywall content of the local digital newspaper.
But how does the subscription model work for a manufacturer of bulldozers or wooden flooring? How would do you subscribe to earth-moving equipment? And who would want to subscribe to a floor?
In Zuora’s world, the shift from product thinking to service thinking is the fundamental change that is driving digital transformation today. And it changes everything.
In this podcast, Mr Tzuo talks about the subscription model, and what companies need to be thinking about to transform their businesses. He also discusses his departure from Salesforce.com – where he had been employee number eleven – to start Zuora with the backing of Salesforce CEO Marc Benioff.
In fact, Mr Tzuo says there is a kind of Karmic circle that came with the Benioff blessing. Just as Marc Benioff – as an employee of Oracle – had been given support and ultimately investment dollars from Oracle CEO to start Salesforce, he was open to supporting Tien Tzuo when he first discussed leaving to start Zuora.
It was 2007, Mr Tzuo was Saleforce.com’s Chief Marketing Officer and Chief Strategy Officer. He had an epiphany about subscriptions during a Salesforce.com strategy meeting. He pitched the idea to Benioff over lunch, thinking his then boss would shoot the idea down.
“But he liked the idea, and I think there is something karmic [in that], from Larry letting Marc go to start Salesforce and I think he responded to that,” Mr Tzuo said. “He became a big supporter and ultimately investor – and he still is.”
In 2008, Zuora was launched. The iPhone was only just being launched. There was no app store. Cloud computing was nascent. The company has remained true to its original subscription economy vision, even as these different parts of digital infrastructure accelerated its uptake.
Which doesn’t mean the process has been simple.
“The problem we are trying to tackle from a software perspective is hard,” Mr Tzuo said.
“It’s one thing for a company to build an infrastructure for their specific company. But for us to build a big business, we need to build a software app that is customisable for all types of business,” he said.
“That means companies that sell to consumers, and companies that sell [to other companies. Anything from Caterpillar selling tractors to the Wall Street Journal selling online newspapers,” he said.
Mr Tzuo references Zuora customer Caterpillar and how instead of only selling bulldozers and diggers, the company now offers customers subscriptions to earth moving services.
He also references a 100 year old hardwood flooring company that installs sensors to measures foot-traffic in retail applications and transportation hubs, or can register a patient falls in aged care facilities. It then sells the data back to the customer as part of the subscription service.
“That’s really the core of the subscription economy – to stop thinking about your business as shipping product, but as a lifetime relationship with a customer,” Mr Tzuo said.
The digital transformation of businesses – and specifically shift from product focus to service focus – will have a huge impact on the finance function in businesses, and even lead to a degree of uncertainty about valuations while the transformation is underway.
It is not hard to see why, and Mr Tzuo much of this podcast discussing these changes. If you sell someone a product, you are able to book the revenue from that sale into your revenue column whether you’ve received the payment not.
“If you look at finance, [subscription services] change everything: You’re delivering a service over time,” Mr Tzuo said. And this changes how you invoice, how you translate usage and how you collect. The area it changes most is in revenue recognition.
There have been accounting rule changes introduced to better reflect value in new digital models.
Mr Tzuo says the product to service changes – the digital transformation of companies – is exactly where Zuora is focused.
“We believe there is an opportunity to build a multi-billion dollar business. Obviously on the path to doing that we will have to go public [IPO] at some time and we are evaluating our options to do that.”