The Global Transformation to On-Demand
By Tien Tzuo, Zuora
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Running a Subscription Business is Different
However, running a subscription business is very different than running a product business. In talking to many SaaS companies over the last several years, it is clear that businesses are just starting to realize what we learned at salesforce.com on the way to growing a $1 Billion subscription business. Here are the key elements that make subscription businesses different:
- Pricing and packaging options - Different size businesses, in different industries, have different needs and budgets. And these too will change as they grow. The cornerstone of on demand is offering your product as parts, in addition to full packages, and then pricing accordingly.
- Choice around terms - Invoicing and payment handling needs to be just as flexible as packaging. Subscription businesses need to support monthly, quarterly and annual terms, or whatever customers will want.
- Complex quote-to-cash processes - In a product business, a transaction starts with a quote, becomes an order, summarizes on an invoice, and is then passed to accounting. In a subscription business, it's not that simple. The subscription doesn't stop with the original order - frequent changes from customers and sales are a constant. Orders can come from the Web, face-to-face, or through the call center. And invoices are generated on a recurring basis, for as long as the customer is, well, a customer.
- Different metrics - The metrics for running a subscription business are significantly different from a single transaction model. New metrics such as MRR, ACV, Churn, and others are needed. In his February 2008 op-ed piece, Byron Deeter bought this home when he explained how the subscription companies should concentrate on their "Contracted Monthly Recurring Revenue" vs. traditional monthly billings. You can see more here.
Because of these differences, subscription businesses often lack adequate systems to support how they work, which may be the single biggest obstacle to their success and growth. Today's systems were all built for managing and distributing products, not for managing a recurring subscription business. A lack of supportive technology for subscription businesses can result in many setbacks including: an inability to launch new products and pricing models, engineering resources focused on "non-core activities," and revenue leaks due to billing errors.
