by Tien Tzuo, Founder and CEO of Zuora
When we founded salesforce.com almost a decade ago, we thought we were only inventing a new technology model for delivering software. “Software shouldn’t be trapped on a CD,” we said. “Software should live in the Internet, where anyone can easily consume it.” We didn’t realize that we would actually create a whole new business model for our industry as well: subscription services– the idea that you shouldn’t buy software, you should subscribe to it as a service.
Over the years, it’s been interesting to see why consumers have preferred subscribing to software verses buying software:
• Lower upfront costs. Why pay millions up front when you can pay for what you want as you go. When we’re all required to do more with less, software-as-a-service is the golden ticket. With no software or hardware to buy, install, maintain, or upgrade, SaaS requires minimal upfront cash and the path to success is exceptionally short.
• Long term savings. About two thirds of IT time and budgets is spent on maintaining infrastructure and dealing with updates. And because of all these hidden costs, the TCO of an on-premise software solution is 2.5 times as high as that of a SaaS solution. With SaaS, IT gets that time and money back, freeing them to focus on the “real” projects.
• Low risk and freedom. At a time when multi-million dollar software installations gathered dust, the pay-as-you-go terms for SaaS attracted quite a following. The flexibility was unprecedented: for the cost of a printer, companies could start immediately, add more users whenever they wanted, and cancel at anytime.
• Better alignment between vendor and customer. SaaS providers are highly motivated to make subscribers successful. How so? With the threat of a service cancellation looming each month, everyone from sales to product development will jump through hoops to ensure that subscribers continue with the service. Since subscribers aren’t locked in, any mistake–from a service outage to poor adoption– is cause for cancellation. That’s why SaaS providers are so focused on customer success. At salesforce.com, we even invented a special post to own customer success and adoption: the Chief Success Officer.
Recently, I’ve started to ponder an interesting question: what if we weren’t alone in discovering the power of subscription services? What if the shift to subscriptions was not a trend limited to software, but one that is going on in many industries?
Take Netflix, for example. In 1999, Netflix pioneered the idea that subscribing to entertainment was much better than buying or renting a DVD from the store. Instead of buying a single DVD, Netflix subscribers choose from over 100,000 DVDs. And instead of driving back the store to avoid late fees, they get the freedom of no due dates. It’s no wonder Netflix is now the world’s largest entertainment subscription service.
And take ZipCar, the world’s largest car sharing service. “Zipsters” don’t pay for car maintenance, insurance, or gas, and they don’t even have to deal with parking. Instead, they subscribe to ZipCar so they can reserve a car whenever, and wherever they want. I was sold. Instead of buying a 2nd car that just sits around most of the time, my wife and I became ZipCar members, and I seem to find every excuse I can to take out the Tacoma pickup.
Recently, I came across yet another example: handbags, quite the opposite of software. Bag, Borrow, or Steal loans subscribers their dream luxury handbag, for as long as they want—a special occasion, or several months. Then subscribers can change their look, exchanging the handbag for the latest style. Instead of spending hundreds, or even thousands of dollars on one purse, Bag, Borrow, or Steal subscribers can always carry the latest trend.
Software, DVDs, cars, handbags. What if subscriptions make sense for anything?
What if subscriptions are not just the future of software, but the future of our entire economy?