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SUBSCRIBED / FALL 2017

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THIS IS THE 21ST CENTURY. WE’RE ALL IN THE RELATIONSHIP BUSINESS.

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SUBSCRIBED / FALL 2017

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MEET THE TEAM

FEATURED

Executive Editor Gabe Weisert Managing Editor Aarthi Rayapura Sr. Staff Writer Erika Malzberg

Tien Tzuo Co-founder and CEO of Zuora

TABLE OF CONTENTS

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Fender: Reinventing Guitar for the Digital Age

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Husqvarna: The 328-Year-Old Startup

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Goodbye Security Lines, Hello CLEAR

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Hive: Helping People to “Get Living”

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Revenue Recognition ‘Doomsday Clock’ Is Ticking

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Subscription Economy Index™ 2nd Edition

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The Business Logic Of LTV: Why Amazon Gives Things Away For “Free”

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The SaaS Era of Digital Journalism

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Pricing & Revenue Recognition: Two Sides of a Very Valuable Coin

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The 2017 State of the SaaS-Powered Workplace Report

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The Secret Behind Dollar Shave Club’s Billion Dollar Success in One Graph

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Bringg It On!

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Air: Putting Customers in the Driver’s Seat

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A Nation Subscribed : 2017 State of the UK Subscription Economy

Creative Director Shaun Middlebusher Brand Lead Lauren Glish Visual Designer Peishan Li

Nikhil Basu Trivedi Principal at Shasta Ventures

Copy Editor Emily Aradi

Published By Zuora, Inc. 3050 S. Delaware St., #320 San Mateo, CA 94403

(800) 425-1281 editorial@zuora.com

David Skok Strategist, Technologist, and Editor

Ken Cornick President, Co-founder, and CFO of CLEAR

Want to subscribe? Send an email to editorial@zuora.com © 2017 Zuora, Inc. Proprietary. All Rights Reserved. Zuora is a trademark of Zuora, Inc.

Monika Saha GM of the Finance Product Line at Zuora

Printed on 100% recycled paper Issac Buahnik SVP Operations and Growth at Bringg

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SUBSCRIBED / FALL 2017

p08 “I don’t want to just sell people guitars and then hope they play it.” — Ethan Kaplan, Chief Product Officer of Fender

p18 “It’s less about products, and much more about the services that they can enable.”

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“People are already sharing homes and “CLEAR is a very logical subscription cars. To share products that are only business model and we never really used occasionally, like a hedge-trimmer, considered anything else.” makes a lot of sense for some users.” — Ken Cornick, President, Co-founder, — Pavel Hajman, President of Husqvarna and CFO of CLEAR

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“Scaling a company isn’t an easy task but it’s one of the most exciting and rewarding challenges.”

“Thanks to our algorithm,we can better understand and satisfy the needs of our customers.”

— Isaac Buahnik, SVP Operations and Growth at Bringg

— Igor Valandro, CEO of Air

—Jo Cox, Commercial Director of Hive

“What many people may have over“The new accounting standards looked about the power of Dollar Shave are arguably one of the biggest Club is the power of subscription.” compliance changes for business since Sarbanes-Oxley.” — Nikhil Basu Trivedi, Principal at Shasta Ventures — Tien Tzuo, CEO of Zuora

“The shift from advertising to subscription models is a revolutionary moment for our craft.” — David Skok, Strategist, Technologist, and Editor

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LETTER FROM THE EDITOR By Aarthi Rayapura

We travel east with our Fall 2017 issue to New York, London, and Paris where our annual Subscribed conferences are being held this September. And we bring you an issue packed with compelling business success stories from both sides of the Atlantic. We begin by looking at the fascinating journey of legendary brands such as Fender (71 years old) and Husqvarna (132 years old) as they transition into the Subscription Economy. The role that digital transformation and changing customer expectations are playing in this global shift cannot be ignored. Fender Play, the company’s new subscription-based online video teaching service, is the core of Fender’s strategy for keeping beginners engaged. It’s also the hub of Fender’s digital ecosystem, which includes Fender Tune, a free mobile app for guitar tuning; Riffstation, a learning tool for more advanced players; Fender.com; and the world’s first Bluetooth and WiFi-equipped guitar amplifiers. Sweden based Husqvarna is a multi-billion dollar outdoor power tools manufacturer which just launched a first-of-its-kind Toolshed-as-a-Service pilot program to promote the Husqvarna Battery Box. The program allows homeowners to access payper-use power tools for the garden, eliminating the need to maintain and store gardening tools that are not frequently used. All these initiatives underline the fact that customers no longer care just about the products, but are more keen on the outcomes. These changing consumer expectations require businesses to adopt a whole new way of thinking and operating. While many are struggling to make the

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switch, there are a few that are already delivering on the Subscription Economy promise of exceptional customer experiences — Hive with its smart home technology, Bringg with seamless deliveries to your doorstep, and CLEAR with easy access at airports and stadiums, to name a few. We also take a close look at two direct-to-consumer industries in transition — media and retail. While this sector has in many ways been the leading face of the Subscription Economy with memberships and e-commerce, there are still no blueprints to follow. And fortunately (or not!), this means lots of experimentation and evolution. No business publication can be complete without acknowledging the impending changes (and havoc!) caused by the new accounting standards. We consider the ramifications of the new ASC 606 and IRFS 15 revenue recognition standards — what it means for business and what you can do about it. And then, we go to the back office and explain why it’s critical for Pricing and Finance teams to play together. Subscriptions don’t just build relationships between businesses and customers; they also build relationships inside companies and rely heavily on the cohesiveness of an organization for success. And finally, we hope you’re inspired by the latest numbers from Zuora’s proprietary Subscription Economy Index™ — from January 1, 2012, to March 30, 2017, subscription businesses grew 8 times faster than S&P 500 company revenues and about 5 times faster than U.S retail sales. Let’s continue to transform, experiment, and grow.


FROM THE CATALOG

SUBSCRIBED / FALL 2017

By Erika Malzberg

In a variation on the theme “everything old is new again,” we take a peek into “the catalog” to find old world products “subscriptionized” for the digital age, in the ongoing shift towards services over products.

MEDICATION

UNDERGARMENTS

FUNERAL SERVICES

DIGITAL AGE

www.pillpack.com

www.jockey.com

www.meundies.com

www.passare.com

www.capsulecares.com

www.adoreme.com

www.bootaybag.com

www.funeralone.com

www.mailmyprescriptions.com

www.dailyjocks.com

www.join-eby.com

www.assurant.com

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FENDER: REINVENTING GUITAR FOR THE DIGITAL AGE The world’s largest guitar maker joins the Subscription Economy. By Dan Mullen

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SUBSCRIBED / FALL 2017

Since its founding more than 70 years ago, Fender has become the world’s largest, and perhaps most iconic, guitar maker. Its instruments have inspired generations of artists and shaped entire music genres; its brand appeals to pros and hobbyists alike. But sales of electric guitars, industry-wide, have fallen by about a third in the last decade, and Fender’s own revenues are down since 2011. Almost half of Fender’s sales are to brand-new guitarists — but 90 percent of them quit the instrument within a year. That’s largely because guitar is “a hard instrument to learn,” explains Ethan Kaplan, Chief Product Officer­-Digital for Fender. But if it can keep people playing, Fender knows that most will remain customers for life. Cutting abandonment rate became a key priority. Solving that meant thinking beyond guitars. 9


Fender Play, the company’s new subscriptionbased online video teaching service, is the core of Fender’s strategy for keeping beginners engaged. Launched in July 2017, Play equips guitarists to perform their first riff or song in a half-hour or less. After a free 30-day trial, Play costs subscribers $19.99 per month. Everything about Play — from its focus on songs, to its pedagogical approach, to its high production value — was designed with Fender’s customers in mind. “We did a segmentation study to really understand our audience, and we used that as the nexus point to develop the digital strategy,” Kaplan explains. The success of Lynda.com, the subscription-based training website, also helped convince Fender there was a market for Play’s premium content. Fender Tune, a free mobile app for guitar tuning, was Fender Digital’s first product offering released in August 2016. Tune helped clear the way for Play — and helped Fender get up to speed on harnessing vast amounts of consumer data. “I can see minutes spent [on Tune], how many people are tuning, what they’re tuning, if they’re successful,” Kaplan says. Before launching Play, Kaplan’s team spent a year building its data analytics and dashboards for real-time insight across Fender’s digital products.

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Play users begin by selecting acoustic or electric guitar and their preferred music genre; Play then creates a personalized learning path through levels of increasing difficulty. This fall, Fender will begin adding more instruments, genres, levels, and instructors; Play’s song base, which numbers well into the hundreds, expands continually. To Fender, Play isn’t just a product offering — it’s an ever-evolving platform for learning, Kaplan says. It’s also the hub of Fender’s digital ecosystem, which, besides Tune, includes Riffstation, a learning tool for more advanced players; Fender.com; and the world’s first Bluetooth and WiFi-equipped guitar amplifiers. “Having a continual dialogue with our customers through learning is really key,” Kaplan says. “I don’t want to just sell people guitars and then hope they play it.” Fender knows it makes great guitars. But that isn’t enough. Play is the centerpiece of a digital strategy that, in less than two years, has helped the company influence how — and how often — people use its products. It’s also opened up entirely new ways for Fender to develop and own its customer relationships. Fender CEO Andy Mooney, who closed Zuora’s 2017 Subscribed conference in San Francisco, is bullish on Play. Simply reducing abandonment rate by 10 percent, Mooney points out, could double the size of the industry.


SUBSCRIBED / FALL 2017

“To Fender, Play isn’t just a product offering — it’s an ever-evolving platform for learning.”

Fender’s digital offerings are a far cry from the guitars that founder Leo Fender started building in 1946. But Kaplan says that throughout its storied history, Fender has always innovated and pushed itself forward. “Leo Fender was always trying to reinvent the electric [guitar], and that’s how we got some of our most beloved products,” Kaplan says. Leo might have rested after the success of his first guitar, the Telecaster. “But he continued,” Kaplan says. “And we continue, and we keep that legacy.” Now, that legacy includes Fender’s evolution from products to services, and its bold entry into the Subscription Economy.

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HUSQVARNA: THE 328-YEAR-OLD STARTUP You’ve heard of SaaS, PaaS, and perhaps even IaaS. But, what about TaaS i.e. Toolshed-as-a-Service? By Aarthi Rayapura

Meet Husqvarna, the over 300 years old, multi-billion dollar outdoor power tools manufacturer that just launched a first-of-its-kind TaaS pilot program to promote the Husqvarna Battery Box. The program allows homeowners in Stockholm to access pay-per-use power tools for the garden, eliminating the need to maintain and store gardening tools that are not frequently used. It is also a great opportunity for people to try out tools before committing to a purchase. “People are already sharing homes and cars. To share products that are only used occasionally, like a hedge-trimmer, makes a lot of sense for some users,” says Pavel Hajman, President of Husqvarna. The Husqvarna Battery Box is located at a shopping center in a suburb 15 minutes west of downtown Stockholm. An 8x3m offline and unattended storage unit, the box can hold 30 cabinets, each one containing professional battery-operated garden tools such as hedge trimmers, chainsaws, trimmers, or blowers. The tools are serviced daily to ensure that they are always in good condition and fully charged before customers take them home. 12

Consumers use a mobile app to book, pay, and open the locker to retrieve their tools. It also includes “how-to” films to explain how the product works. Communication between the Husqvarna Battery Box and the app is via Bluetooth. To verify identity, the customer uses the Swedish ID app BankID. Payments are charged to the registered credit card at the end of the month. The project is the result of cooperation with Telenor Connexion, Flex, Zuora, and HiQ. Flex builds the connected box and reports its status on events handled through a cloud solution with Telenor Connexion. Zuora supplies the subscription payment solution, and HiQ builds the app and the system needed to bring everything together. Husqvarna is using the pilot to test the application of the solution, understand the market, and assess the subscription/sharing model as a potential revenue stream. “This is a way for us to test drive innovations. If all goes well, we see an opportunity to develop this in other areas”, says Petra Sundström, Director of Innovation Management at Husqvarna.

The box is also a part of Husqvarna’s strong commitment to contribute to the UN development goals by driving the shift from petrol powered products to silent battery products with no direct emissions in urban areas. “The Husqvarna Battery Box is proof of our commitment to explore new solutions that merge innovation and sustainability, benefitting the homeowner, the community, and our distribution network,” says Hajman. The company took the project from paper to execution in a record time of six months. How has the pilot fared so far? “It’s already a success from a brand and awareness point of view, internally, as well as externally. From a customer perspective, we need more time to understand their preferences and experiences. We have contracted a number of pilot users to give us more in-depth feedback on the service. And it will be exciting to learn about their user experiences,” says Margaretha Finnstedt, Co-creator of Husqvarna Battery Box and Global Director of Public Relations and Communication at Husqvarna. This isn’t Husqvarna’s first foray into the digital era. A few years ago, it launched the My Automower app, followed by Automower Connect,


SUBSCRIBED / FALL 2017

“Husqvarna has entrepreneurship in its DNA, so exploring trends that can meet new customer needs is in our genes.”

for its robotic mower, which allows owners to mow their lawn without even being home. Customers can set timers instructing the automower when to start and stop mowing, and can also monitor progress. The device also has a built-in GPS, which allows users to track its location — so there’s no need to worry about it going rogue and cutting your neighbor’s grass by accident! Now, why would a company that’s so successful and established enough to have its own museum (for real!) want to switch to services? “Husqvarna has entrepreneurship in its DNA, so exploring trends that can meet new customer needs is in our genes,” says Finnstedt.

Husqvarna has manufactured everything from rifles to sewing machines to motorbikes. Today, it’s a world-leading manufacturer of products for forestry, lawn and garden maintenance, and cutting equipment and diamond tools for the construction and stone industries. Its brands include Husqvarna, Gardena, McCulloch, Poulan Pro, Weed Eater, Flymo, Zenoah, and Diamant Boart sold in more than 100 countries. Hajman sums it up well when he says, “We have been a company of great change constantly since it was formed in 1689. Innovation and entrepreneurship have always been part of our business. We’ve been called “the world’s oldest startup.”

In its three centuries old history, 13


GOODBYE SECURITY LINES

HELLO CLEAR By Aarthi Rayapura

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SUBSCRIBED / FALL 2017

Who among us doesn’t hate the long security lines at airports and stadiums that make travel and watching games and concerts an ordeal? What if there was a way for people to skip to the front of the line without compromising public security? Enter CLEAR. The New York-based biometric identity service CLEAR offers its members expedited access to the front of the security line at airports and stadiums. From two airports in 2010, the company has grown to offer services at more than 30 airports and stadiums across the country.

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CLEAR uses biometrics to create a unique ID that unlocks any experience powered by their technology. In airports, this means you confirm your identity with just the touch of a finger or blink of an eye, allowing you to skip the document check and move to the front of the line for screening. If you’re enrolled in TSA’s PreCheck program, CLEAR will provide you with fast access to PreCheck screening for eligible flights. Members span the gamut of people who travel, from business travelers to retirees. “Anyone who values their time and who travels can use CLEAR. Having the ability to sleep in and not having to go to the airport stressed out is truly game-changing. Our customers love the speed, the predictability, and the service that we give them through the airport experience,” says Ken Cornick, President, Cofounder, and CFO of CLEAR. An annual membership costs

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$179 ($15/month), and one family member can be added on for $50. The company also provides membership options for corporate clients. “CLEAR is a very logical subscription business model and we never really considered anything else. I don’t want anyone to have to think about using CLEAR. It should be a part of your everyday life,” says Cornick. The company is strategic in its experiments with the length of their trials, price points for initial and renewal terms, and offers various pricing combinations to its members. Cornick explains that “the best way to educate a member is to let them try it. We have a unique business in that we have this physical presence in the airport and also have digital touchpoints, so we call ourselves “phygital” i.e. physical and digital. You can learn about us and enroll online but we also have trained ambassadors on the ground to help you to enroll at the airport and try the service

“CLEAR is a very logical subscription business model and we never really considered anything else. I don’t want anyone to have to think about using CLEAR. It should be a part of your everyday life.”


SUBSCRIBED / FALL 2017

immediately. Our acquisition strategy is really to let people try it, and to try CLEAR is to love it. Once you experience traveling without waiting in line, you never want to wait in line again. “ Like most successful subscription businesses, CLEAR is singularly focused on their customers. “We are completely obsessed with the end-to-end customer experience — a seamless sign-up experience, a seamless payment experience, a seamless on-theground experience —are all really important. Being able to really tend to our members’ needs, no matter what, and having a flexible backend that allows us to do so is really important as well,” says Cornick.

can do for our members is to add new touch points to our network and deliver additional value. From a future growth perspective, we have several priorities. One is to complete our airport network domestically and we are also exploring international expansion. There are growth opportunities for biometrics around the world and we have an entire strategy for building a biometric ecosystem. We want to create a frictionless consumer experience any time that identity matters, whether it’s healthcare, payments, or building access. There are a number of use cases that we’re looking at and trying to develop,” says Cornick. The future looks bright and clear.

So, where does the company go from here? “The best thing we

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HIVE

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­HELPING PEOPLE TO “GET LIVING”


SUBSCRIBED / FALL 2017 By Erika Malzberg

You’re working late and worried about your newlylicensed teen driving herself home from school. Then your phone pings with a notification that your child has just pulled into your home driveway. Ahhh. This peace of mind, control, and comfort is what Hive, a leader in smart home technology, is all about. Most Hive customers likely aren’t concerned with the fact that the connected home market is predicted to be worth £117B globally by 2020 (according to PwC). And that’s fine. Hive customers don’t need to care about the internet of things as a concept and industry. They just want their daily lives to be made easier. Towards this end, Hive delivers a wide variety of accessible and affordable smart home products and services. “Let’s get living” isn’t just a marketing slogan flashing across the home page of www.hive. com. It’s a vision that serves as the foundation for everything that Hive provides. Hive (whose British parent is the multinational utility Centrica, which also owns British Gas) launched in 2013 with a smart thermostat. Since launch, they’ve displayed year-on-year growth and expanded their offering to encompass a suite of smart products intended to adapt to their customers’ lifestyles. The Hive smart home brand has installed more than 660,000 smart home hubs and sold more than one million products. In 2017, Centrica Connected Home launched its first Hive subscription service, Hive Welcome Home., which packages a selection of its core product line with its most essential services to build a series of Hive Actions triggering heating, lighting,

and electronic functions. Hive Welcome Home costs just £5.99 a month in the UK and comes with Hive Active Light bulbs, a Motion Sensor, one Hive Active Plug and the Hive hub which connects to a router acting as a central control unit. “The key benefit of connected home services is that they give you the ability to live your life and enjoy experiences supported by truly intuitive technology. Hive is the next logical step in home utilities, to turn the home into an even more comfortable, secure and valued place for consumers,” said Jo Cox, Commercial Director of Hive. Hive customers are in control of their smart homes. And this control extends to how Hive customers manage their subscriptions. Hive offers a “bolted on” services model and self-service system, through which subscribers can scale up their connected services when and how they need to, with sign-ups, upgrades, and downgrades. “We are trying to move the market.” says Roy Vella, Centrica Connected Home VP. “The market as it stands is about buying equipment...Hive is much more about service provisioning and the constituent parts of our subscription plan.” Hive is now set on bringing their holistic experience to global markets, as evidenced by the fact that Centrica has invested close to $650M in an initiative to launch Hive in North America. The promise of the Subscription Economy is to transform the way consumers live their everyday lives. Hive is indeed delivering on that promise with services that provide security, comfort, and delight.

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SUBSCRIBED / FALL 2017

REVENUE RECOGNITION

‘DOOMSDAY CLOCK’ IS TICKING By Tien Tzuo, CEO of Zuora

“Hopefully, fear is what you’re feeling now.” — Josh Paul, Head of Technical Accounting and SEC Reporting at Google. If you’re a subscription-based company or have any recurring revenue in your business, I have some good news and some bad news. Let’s start with the good: Congratulations. You have arrived. Your business model finally has some concrete accounting guidelines. I’ve been banging the drum for years about how revenue recognition standards need to change to keep pace with the global explosion of digital services. Today’s accounting rules were written for

the Spice Trade (literally — Luca Pacioli invented double-entry bookkeeping in the 15th century), and they simply don’t apply to the modern world of recurring digital services. Well, apparently someone listened — not just to me, but to almost everyone in the rapidly growing Subscription Economy. Accounting changes indeed are coming, and very soon. Compliance deadlines for the new ASC 606 and IFRS 15 revenue recognition rules are just around the corner, starting with fiscal years that begin after December 15, 2017, for public companies and a year later for private ones.

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This is arguably one of the biggest compliance changes for business since Sarbanes-Oxley. Bloomberg reports that “public companies — including Amazon.com and Microsoft — are gearing up for the most historic accounting changes to hit U.S. capital markets in decades.” Denis Pombriant of Beagle Research writes, “We have before us a perfect accounting storm, the likes of which has not been seen since the late 1990s.” Yes, this is like Y2K, except this time you should believe the hype. It all goes down in six months. So what’s going on, exactly? In 2014, the Federal Accounting Standards Board and its European counterpart, the International Accounting Standards Board, issued new standards for recognizing revenue from contracts with customers. The goal was to simplify and harmonize revenue recognition practices. Given three years to do something about it, most finance departments did nothing. And with a few exceptions, today they’re either panicking to very little effect, or being willfully ignorant. Some corporate valuations are going to tank as a result. Still, these are welcome changes. Right now the requirements for reporting recurring revenue — a critical metric for evaluating a company’s financial performance — vary across all sorts of different industries and markets. These discrepancies create incongruent accounting results for economically similar transactions, rendering broad comparisons nearly impossible. Investors and analysts simply don’t have a standard framework. The problem is particularly acute for software-as-a-service (SaaS) companies 22


SUBSCRIBED / FALL 2017

“Make no mistake: These new standards will result in winners and losers.”

As Redpoint Ventures analyst Tomasz Tunguz notes, “If you sift through the 40+ public SaaS businesses, you won’t find mention of annual recurring revenue, churn, account expansion, or cash-collection cycles in most of them — even though these are the metrics the management teams employ to evaluate and steer their businesses.” The new standards are based on one overarching principle: companies must recognize revenue when goods and services are transferred to the customer, in an amount that is proportionate to what has been delivered at that point. That’s pretty easy to do when you’re selling widgets but poses problems in the digital economy, where service relationships can change drastically over time. For starters, subscriptions change frequently. When a company adds a few Salesforce seats, for example, contract changes are the norm. In my company’s experience, subscriptions contract undergo an average of four mid-term changes. These changes can make the most basic compliance obligation — identifying a contract — a matter of some debate. In some circumstances, contract changes are handled as a modification to the existing contract, while in other situations, a separate contract is created. Additionally, subscriptions are complex and rolled out over time. The handling of common subscription characteristics — e.g., evergreen subscriptions, nonrefundable upfront fees — becomes tricky when companies have to decide whether to recognize revenue right away or defer it. For example, usage-based pricing, which is great for customers of Twilio or New Relic, can

make determining your transaction price more complicated. And with any change to your service (adding, subtracting, or changing the type of service), your finance team will need to assess the accounting treatment.

about them. Smart, progressive companies like Zendesk, SurveyMonkey, and Dell EMC are already automating their finances, educating investors, and recasting revenues. Others, not so much.

Now for the bad news: I mentioned that these changes are right around the corner, didn’t I? The big public companies have about six months to get their act together, hence the opening quote from Google’s head of technical accounting.

This isn’t just a back-office issue. For subscriptionbased companies, this has the potential to impact sales commissions, go-to-market strategies, compensation plans, product roadmaps, everything. The doomsday clock is ticking.

The latest PricewaterhouseCoopers survey on the topic, which came out just two months ago, is not reassuring: 75 percent of public companies surveyed were currently assessing the impact of the new standard but had not yet started implementing it. Just over half of the companies had not even chosen a method of adoption. Make no mistake: These new standards will result in winners and losers. Right now, lots of finance departments are either panicking to no effect or being dangerously ignorant 23


THE SUBSCRIPTION ECONOMY INDEX ™ 2ND EDITION | JUNE 2017 The Subscription Economy Index™ (SEI) is based on anonymized, aggregated, systemgenerated activity on the Zuora service. It reflects the growth metrics of hundreds of companies around the world, and spans a number of industries including SaaS, media, telecommunications, and corporate services. The breadth and depth of the billing reflected in the index speaak to the rapid ascent of the Subscription Economy. The study was conducted by Zuora’s Chief Data Scientist Carl Gold.

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SUBSCRIBED / FALL 2017

The SEI is still growing at around 80% of its peak growth rate of 21.6% in Q3 2016, while the GDP is now growing at just around 30% of that Q3 2016 peak of 3.5%.

180

160

140

1 Q

Q

4

20

20

16

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20 3

2 Q

Q

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15 Q

1

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20 4 Q

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20 3 Q

15

20 2 Q

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20 1

4 Q

S&P 500 Sales Index

Q

14

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14

20 3 Q

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20 2 Q

13

20 1

4 Q

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20 1 Q

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1

1/

SEI

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100

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120

US Retail Sales Index

Quarterly levels of the Subscription Economy Index™ (SEI), in comparison to indices of the S&P 500 Sales per Share and U.S. Retail Sales. All indices take a base value of 100 on January 1st 2012, and grow in proportion to the quarterly increase in the one year trailing total sales that they measure. Over a period of just over 6 years (January 1, 2012 to March 30, 2017), the SEI grew at an average annual rate of 15.2%. The S&P 500 Sales grew at an average annual rate of 2.0%, while U.S. retail sales grew at an average annual rate of 3.4%.

SUBSCRIPTION ECONOMY VERSUS U.S GROSS DOMESTIC PRODUCT

25%

4.0%

3.5% 20% 3.0%

2.5%

15%

2.0% 10%

1.5%

GDP Growth (Annual Rate)

More recently, the U.S. GDP peaked in Q3 2016 at 3.5% and then sank to just 0.7% in Q1 of 2017. At the same time, the SEI growth rate also peaked in Q3 2016, and in the last 6 months the SEI has cooled slightly to an average annual growth rate of 16.1% from a breakneck pace of 21.6% in the previous six months.

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Q

The slowest period of growth for the SEI, in late 2012 and 2013, aligns with a similarly challenging time for the American economy during the gradual but tepid recovery from the Great Recession of 2008. According to the Federal Reserve Bank of St. Louis, growth in nonresidential fixed investment suffered a discrete deceleration from $2,016 billion in Q2 of 2012 to $2,011 billion in Q3 of 2012.

SEI compared to S&P 500 Growth

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1/

Subscription business sales have grown substantially faster than two key public benchmarks — S&P 500 sales and US retail sales. Overall, the Subscription Economy Index™ (SEI) reveals that subscription businesses grew revenues about 8 times faster than S&P 500 company revenues (15.2% versus 2.0%) and about 5 times faster than U.S. retail sales (15.2% versus 3.4%) from January 1, 2012 to March 30, 2017.

THE SUBSCRIPTION ECONOMY INDEX ™ VERSUS S&P 500 SALES GROWTH

SEI Growth (Annual Rate)

KEY FINDINGS

1.0% 5% 0.5%

0%

Q2 2016

Q3 2016 SEI Growth (Left Axis)

Q4 2016

Q1 2017

0.0%

GDP Growth (Right Axis)

A comparison of SEI growth (left axis) versus American GDP growth (right axis). Note that the SEI generally tracked with the overall GDP slowdown at the end of 2016, but has since accelerated.

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SUBSCRIPTION REVENUE GROWTH BY BUSINESS MODEL 230 220 210 200 190 180 170 160 150 140

B2C

130

B2B

120

B2Any

110

SEI Main

100

Q1 2017

Q4 2016

Q3 2016

Q2 2016

Q1 2016

Q4 2015

Q3 2015

Q1 2015

Q2 2015

Q4 2014

Q3 2014

Q2 2014

Q1 2014

Q3 2013

Q4 2013

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

90

Recurring revenue grows through either charging subscribers more (Average Revenue Per Account (ARPA)) or charging more subscribers (Accounts). The teal line and the left axis show cumulative growth of the SEI in percentage terms. The red and blue lines show the cumulative percentage changes in ARPA and Accounts respectively, both scaled on the right axis. Accounts have grown more or less continuously over the measurement period, while there have been times when ARPA growth slowed and even reversed.

For B2B companies, growth rate is the leading indicator of a company’s success. In the software sector, for example, a company that grows less than 20% annually has a 92% chance of failure (McKinsey). Successful B2B companies must scale sales teams, add new product editions and upsell paths, pursue international markets and larger enterprise accounts, and optimize their business models by taking on usage-based pricing. Their biggest challenges include systems constraints and conflicting systems of record. For B2C companies, net user growth is the key metric. Successful B2C companies increase subscriber acquisition rates with rapid pricing experimentation, increase retention and ARPA (Average Revenue Per Account) by tailoring offerings based on behavioral insights and willingness to pay, and increase capture rates by

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taming the complexity of electronic payments. Their challenges include relatively high churn rates owing to poor pricing and packaging decisions, fickle consumer behavior and/or lost revenue owing to poor payment and acquisition systems. The B2C companies in our study had the fastest growth rate in 2015, but have tapered more recently. Over the past year (ending in March 2017), B2B and B2C companies in the SEI have growth rates of 20% and 9% respectively (this is a slight cooldown for B2C companies over the previous year). Growth in the B2A space, which in this index comprises many companies in the media and telecommunication industries, is currently at 14%.


SUBSCRIBED / FALL 2017

SUBSCRIPTION CHURN RATES BY BUSINESS MODEL AND INDUSTRY B. Average Annual Churn Rates: Industries

A. Average Annual Churn Rates: Business Model 38%

40%

36%

38% 36%

34%

34%

32%

32%

30%

30%

28%

28%

26%

26%

24%

24%

22%

22%

20%

20% SEI Overall

B2C

B2B

Overall Average Since Jan 2015

Q2-Q3 2016

B2Any

SEI Overall

Telco

SaaS

Q2-Q3 2016

Media Q4 2016-Q1 2017

D. Average Annual Churn Rates: Region

C. Average Annual Churn Rates: Revenue Band 38%

32%

36%

30%

34% 32%

28%

30%

26%

28% 26%

24%

24%

22% 20%

Corp. Services

Overall Average Since Jan 2015

Q4 2016-Q1 2017

22% SEI Overall

<$01M

Overall Average Since Jan 2015

$1M-$20M

$20M-$100M

Q2-Q3 2016

$100M+

Q4 2016-Q1 2017

20%

SEI Overall Overall Average Since Jan 2015

EMEA Q2-Q3 2016

NoAm Q4 2016-Q1 2017

Comparison of average annualized churn rates from the SEI subindices for 2015-2017. A: Business Model Sub-Index. B: Industries Sub-Index. C. Revenue Band Sub-Index. D. Region Sub-Index. Among the churns in each category, it is highest for B2C, media, $1M-$20M, and EMEA. Churn has risen in most segments over the last 6 months, though it is only a return to historically normal levels from unusually low churn in Q2-Q3 2016. At its most basic level, churn refers to the proportion of total subscribers who leave during a given time period. Churn can result from any number of reasons: weak customer service, a poorly upgraded product, a better offer from the competition, business failure, etc. In order for revenue to recur, customers must renew at a rate that outpaces churn, which can effectively determine the size of a company. Therefore, reducing churn by investing in high-quality services, sticky features, and customer success is fundamental to every subscription-based business strategy. Average annual churn rates in the SEI are generally between 20 and 30 percent. Among the business models, churn is highest for B2C and lowest for B2B companies. For industries, churn is highest in media and lowest in SaaS. Over the past six months, B2C churn rates have lowered, while other verticals have seen their churn rates edge up slightly.

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GROWTH BY REGION: EMEA AND NORTH AMERICA

The 2017 SEI includes EMEA and North America specific sub-indexes, beginning in Q1 of 2017 with one year of history dating back to Q1 2016. In the last year EMEA and North America indices grew almost exactly the same amount: around 22%. However, in North America growth was faster in the first six months and cooled somewhat in the second 6 months. In EMEA, the first 6 months were extremely slow, followed by a much faster period in which it caught up with North America. This acceleration in growth corresponded with generally higher growth rates across the Euro zone, as evidenced by a rise in Euro area GDP growth rate over the same period.

EMEA vs. NoAm, Last 12 Months 125

Relative Growth Index

120

115

110

105

In short, the Subscription Economy in Europe is clearly on the ascent. Over the past six months, European subscription companies (a new SEI category) have caught up to their American counterpartsâ&#x20AC;&#x2122; growth rate of 22%. This is remarkable because European economic growth rates overall have lagged US growth rates for much of the past decade.

100 Q1 2016

Q2 2016

Q3 2016

EMEA

Q4 2016

Q1 2017

NoAm

The figure shows the relative growth in recurring revenue for the EMEA Sub-Index of the SEI (Blue) and the North America Subindex of the SEI (Orange), starting from a base value of 100 at the end of Q1 2016. In each quarter the index is increased by the same percentage as the percentage growth in each region. North American growth started high and slowed somewhat over the course of the year, while EMEA growth was initially slow but completely closed the gap in the second part of the year.

EMEA SEI SUB-INDEX AND EURO AREA GDP GROWTH

EMEA SEI Sub-Index Growth and Euro Area GDP Growth 2.5%

60%

50%

2.0%

40% 1.5% 30% 1.0% 20%

0.5%

10%

0%

Q2 2016

Q3 2016

EMEA SEI Index Growth at Annualized Rate

Q4 2016

Q1 2017

0.0%

Euro Area GDP Growth Rate

Quarterly growth in the EMEA SEI Sub-Index (Blue Bars and left axis) and the Euro Area GDP (Gray Bars and Right Axis.) GDP Growth was slow in early 2016 and accelerated in 2017, as did the growth in the EMEA SEI Sub-Index

Download the entire index and our analysis at www.zuora.com/resource/subscription-economy-index 28


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PAPER TO PIXELS By Gabe Weisert

As a global provider of news and business information, Dow Jones & Company has been delivering quality content for over 100 years. Dow Jones combines technology with news and data to support business decision-making and power the most ambitious companies and professionals. With their online subscriptions to The Wall Street Journal and Barronâ&#x20AC;&#x2122;s, subscribers have real-time access to award-winning coverage and in-depth analysis of global markets. www.dowjones.com

The Economist offers authoritative insight and opinion on international news, politics, business, finance, science, tech and the connections between them. After 174 years in business, the media house is focused on transforming into a modern media company. Their goal is to wow readers with a truly cross-platform immersive content experience. And their loyal subscribers are happy to pay for The Economistâ&#x20AC;&#x2122;s analysis and editorial integrity. www.economist.com

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SUBSCRIBED / FALL 2017

Time Inc. UK is Britain’s leading publisher of print and digital magazine content. With more than 60 iconic brands, tailored to the interests of a wide variety of audiences, Time Inc. UK creates content for multiple platforms, across print, online, mobile, tablets, and experiences. As a result, consumers interact with Time Inc. UK brands more than a quarter of a billion times a year — that’s over 10 meaningful interactions per second. www.timeincuk.com

Since its founding in 1888, The Financial Times (FT) has transformed from the London Financial Guide to a global 24-hour multichannel news organization serving a growing audience of internationally minded professionals. Today more than 70% of the FT’s circulation is digital. With a team of almost 600 editorial staff in 40+ countries, it continues to be one of the world’s leading news organizations, recognized for its integrity and independence. www.ft.com

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The Guardian has had a rich history on its journey from The Manchester Guardian of 1821 to the trusted international news source it is today. In 2011, they announced plans to become a digital-first organization, placing open journalism on the web at the heart of its strategy. They continue to build on this strategy by significantly developing and expanding digital operations with the launch of new applications, platforms, and membership programs. www.theguardian.com

Telegraph Media Group (TMG) is a multi-media news publisher of the world-renowned, agendasetting content found in its titles: The Daily Telegraph, The Sunday Telegraph, The Telegraph website, and The Telegraph weekly world edition. The Daily Telegraph is the UKâ&#x20AC;&#x2122;s best-selling quality daily newspaper with a long established history of over 150 years. Itâ&#x20AC;&#x2122;s also one of the most visited British newspaper websites. www.telegraph.co.uk

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THE BUSINESS LOGIC OF LTV: WHY AMAZON GIVES THINGS AWAY FOR “FREE” By Kevin Suer, Senior Product Manager at Zuora

It seems like every day Amazon is adding some new “free” benefit into its popular subscription membership service Amazon Prime — free videos, free music, free book rentals. The list goes on and on. The same goes for lots of other vanguards of the Subscription Economy. Google launches a few free apps that make living your life and work just a bit easier; Netflix ships a brand new batch of kids movies that would’ve cost thousands of dollars in Blockbuster rentals back in the ‘90s; Tesla pushes a few wireless updates and suddenly your car just got better at driving itself. These Subscription Economy companies are the envy of entrepreneurs everywhere who want to surprise and delight their customers with new and unexpected features and benefits, seemingly with a spirit of unbounded generosity.

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Such “free” customer benefits are not limited to the most innovative Subscription Economy companies either. Look no further than cellphone providers like AT&T and Verizon and their inducements of the newest and most high-tech smartphones at free or near-free prices when you agree to sign-up for their service for two years. What is driving this endless string of giveaways by subscription companies? The answer can be summed up in a single, very important metric: Customer Lifetime Value or LTV. Sure, it goes without saying that all of these companies care about the experience they provide to their customers, but they offer these wonderful benefits as part of the experience through a lens grounded in a set of financial facts around how much value a given customer can create for their shareholders.


SUBSCRIBED / FALL 2017

Why does Amazon give things away? A search through Amazonâ&#x20AC;&#x2122;s Investor Relations website, or published interviews with its CEO Jeff Bezos, turns up few detailed numbers about the Amazon Prime program. Amazon keeps secret the real numbers driving Amazon Prime, but a few analysts have, however, taken a close look at Amazon and uncovered some very interesting information about the customer lifetime value of a Prime Member. At the time of this writing, Amazon Prime is an annual subscription priced at $99/year with a 30day free trial option.

acquire new Prime members, that spend relative to the roughly $2000 lifetime value of a member, looms large in the calculus. How to Measure Customer Lifetime Value LTV is a measure of how much profit you expect to make from any given customer in the future. It conceptually comprises of four key factors: LTV Key Factors

Life Expectancy

Revenue Expectancy LTV

LTV of an Amazon Customer

Cost Expectancy

$2,500.00

Risk Expectancy $2,000.00 $1,500.00 $1,000.00 $500.00

Prime Subscriber

Non-Prime Subscriber

Brendan Mathews, a research analyst at Motley Fool, has published his research on Amazon, concluding that the average Prime subscriber has an LTV of $2283, more than twice the LTV of a non-subscriber, which he estimated at $916. So while from a customerâ&#x20AC;&#x2122;s viewpoint, it seems like Amazon is giving an unlimited number of benefits away, persuading someone to convert and become a subscriber to the service drives an incredible amount of value for the company. It is nearly certain that whenever Amazon makes investment decisions about spending money to

1. Life Expectancy The first element that goes into an LTV calculation is the life expectancy of your customer. Each of your customers will stay with your service for a different amount of time. Those who are dissatisfied and exhibit account health risk factors may churn this renewal period; others, who are healthy and happy, will go on to renew for many renewal periods to come. In order for customer lifetime value to have real meaning, I recommend you estimate churn rate individually for each of your customers, based on their unique behaviors, demographics, pricing, packaging, billing, and payment histories. At Zuora, some of our most sophisticated customers have moved beyond simple predictions based on a few intuitive factors to sophisticated statistical models that predict individual account churn rates by modeling the top factors responsible for past churns. 35


Once you have established a churn rate for your customers, you can then estimate life expectancy according to the following formula: Life Expectancy = 1 / Churn Rate For example, a customer whose renewal period is annual with an estimated annual churn rate of 32 percent will have a life expectancy of 1 / 0.32 or approximately 3.1 years. As you estimate life expectancy, you will want to express your life expectancy using a consistent time period that corresponds to your subscription renewal cycles. For example, if your business has contracts that renew annually, then your LTV calculation will estimate how many years you expect to keep each customer. 2. Revenue Expectancy It goes without saying that how much value you think you will earn from your customer in future periods is largely dependent on the revenue you expect from your customers. To estimate this, you not only need to look at current bookings (or revenue under contract), but you also need to estimate how the revenue you get from your customers is expected to change over time. Do you expect your customer to buy an upsell, continue to pay the same amount, or downsell? A good way to estimate future changes in current subscription revenue is to use your Net MRR Retention rate. Net MRR Retention is defined as the dollar amount of your renewals divided by the dollar amount up for renewal. It gives you an

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aggregate measure of upsells relative to downsells and churns across your entire customer base. In an attempt to find better alternatives to using Net MRR Retention in the revenue expectancy element of LTV, Zuora is currently experimenting with a few new methods aimed at improving the state-of-the-art, by attempting to estimate revenue expectancy individually, by customer. These methods attempt to go beyond using just standard Net MRR Retention to a more personalized estimation. The idea holds promise. For example, Apple Music offers three plans (see image below) Inherent in this packaging structure are two predictable upgrade paths (Student to Individual, and Individual to Family). Modeling those upgrade paths into individualized estimates of upgrade or downgrade likelihood could prove quite effective at improving LTV accuracy beyond a wholesale average net retention factor. 3. Cost Expectancy The third element of lifetime value is estimating how much it costs you to deliver your product or service. Each of your subscription products has a particular contribution margin associated with it that needs to be estimated. Contribution margin represents the variable costs that go into providing your product and is a measure of the profitability of your subscription products. Some businesses leave out cost expectancy from LTV, but doing so leaves out an important element if you plan to make spending decisions based on LTV.


SUBSCRIBED / FALL 2017

4. Risk Expectancy The final element of LTV is estimating how much risk your future revenue streams face. Risk expectancy is critically important because LTV is an estimate of what will happen in the future. Your estimates of the future can be conservative or aggressive. A common mistake that many make in calculating LTV is that they do not sufficiently account for future risks.

Wall Street, investments are always discounted by higher rates than just the interest rate. The additional percent discount is a risk adjustment commonly called the “spread”. The further out in the future cash is expected from a customer, the more likelt it is that something could go wrong. Additional risk could include changes in economic conditions, competitive landscape, and regulatory changes.

I recommend you strive to underestimate LTV for customers — err toward a conservative LTV. Why? Let’s say you overestimate the average customer LTV at $2000 and it winds up being $1500. Let’s say based on the $2000 number, you decided to spend $1750 to acquire a customer. Your overestimation would have cost you $250 per customer instead of earning you $250. When working with LTV, you always want to estimate for the worst case.

In essence, all reasons that future cash might not be paid by a customer gets rolled into the spread. Spread is roughly the percent change of catastrophic loss per payment period. For those with finance backgrounds, this is the very same concept as corporate bond spreads — high-grade corporate bonds have spreads of 1-5 percent and low-grade corporate bonds (junk status) have spreads between 5-25 percent. Factoring all these risks together, I recommend you use a conservative discount rate.

How should you estimate for the worst case? First, you first want to discount LTV with prevailing interest rates because a dollar in today’s money will be worth less than a dollar in the future. Also, in addition to interest rate discounting, you need to factor in risk discounting. Wall Street investors offer a compelling model to follow when thinking about appropriate levels of risk discounting. On

You may encounter alternate formulas for calculating LTV, but they often lack the cost and/or risk expectancy factor. What makes this formula so powerful is that it includes all four key factors that go into a reliable LTV.

The Best LTV Formula for Subscription Businesses Customer Lifetime Value ($) = Current Recurring Revenue ($) x Gross Profit Margin x Account Retention Rate / (1 + Discount Rate – Net MRR Retention) Imagine you operate a B2C monthly subscription business with the following metrics: • Monthly Recurring Revenue = $9.99 • Gross Profit Margin = 80% • Monthly Customer Account Retention Rate = 75% • Discount Rate = 5% • Net MRR Retention Rate = 85% LTV would be calculated as: Customer Lifetime Value ($) = $9.99 x 0.8 x 0.75 / (1 + 0.05 – 0.85) = $5.99 / 0.2 = $29.97 Over the course of four months (the life expectancy calculated using 1 / Churn Rate or 1/0.25), you can expect $29.97 in profit from the customer.

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SUBSCRIBED / FALL 2017 By David Skok

Strategist, Technologist, and Editor

Even though an entire generation has grown up with the internet at their fingertips, it’s important to remember that digital journalism is still in its infancy. It has only been 26 years since the world’s first website and server went live at CERN on December 20, 1990. For context, the Lumiere brothers presented the first motion picture film in 1895. The 50-second film showing a train steamrolling towards the camera was an engineering marvel, but 26 years later, the world was just entering the Charlie Chaplin era of motion pictures. Sound in cinema would take an additional five years, virtual reality headsets, another 115.

THE SAAS ERA OF DIGITAL JOURNALISM The shift from advertising to subscription models is a revolutionary moment for our craft.

I began thinking about this longer time frame and the evolution of journalism five years ago when I co-wrote an article in Nieman Reports with Harvard Business School Professor, Clayton M. Christensen, and HBS fellow James Allworth, that applied Christensen’s often-cited theory of disruption to the business of traditional journalism. The article, Breaking News, was a look at how traditional journalism had been disrupted by the internet. In this article, I attempt, through my own interpretation of disruption theory, to tackle the question of how digital native journalism, specifically, sites that were born out of the disruption of traditional media, had themselves been disrupted and what could lie ahead for these digital-only publishers. During the first quarter century of the commercial internet, digital journalism has already gone through three eras: the portal years, the search years, and the social years. Each era advanced storytelling and presented new revenue streams, but I would argue that digital journalism is now entering its most exciting period yet. Think of this as the stories as a service era, where journalism will be paid for by readers, for readers. This period, for the first time in modern history, will be characterized by readers building and improving journalism. Organizations that recognize the opportunity of this new period can realize journalistic independence, produce quality reporting, and build reliable revenue streams, preparing them for whatever the next quarter century may hold. Before I walk through each era of digital journalism, I’ll provide a brief explanation of the two most relevant Christensen theories that apply: Disruption Theory and Integration vs. Modularity. Disruption Theory First, a brief primer on Christensen’s Disruption Theory excerpted from our 2012 article: Disruption theory argues that a consistent pattern repeats itself, from industry to industry. New entrants to a field establish a foothold at the low end and move up the value network — eating away at the customer base of incumbents — by using a scalable advantage and, typically, entering the market with a lower-margin profit formula.

David Skok was until recently the Associate Editor and Head of Editorial Strategy at The Toronto Star. Prior to that, he was the Managing Editor and VP of Digital at The Boston Globe. A former Nieman Journalism Fellow at Harvard University, David is a strategist, technologist, journalist, editor, and a leading thinker on digital transformation in media.

It happened with Japanese automakers: They started with cheap subcompacts that were widely considered a joke. Now, they make Lexuses that challenge the best of what Europe can offer. It happened in the steel industry, where minimills began as a cheap, lower-quality alternative to established integrated mills, then moved their way up, pushing aside the industry’s giants. In the media space, newcomers like The Huffington Post and Buzzfeed 39


disrupted traditional publishers by delivering a product that was faster and more personalized than that provided by the bigger, more established news organizations. Traditional news organizations used technology to create sustaining innovations that made their products more efficient to produce and to consume, such as creating digital newsrooms and products for WSJ.com or NYTimes.com. New entrants, however, used technology to create disruptive innovations that built new markets for their products. For example, The Huffington Post built their newsroom for search engine optimization, and later, Buzzfeed did the same to optimize for social media.

The New York Times

Integration vs. Modularity Companies move up the disruption curve in the pursuit of profits. In the early stages of a company’s life cycle, when it’s at the bottom of the disruption curve and just building a new product with new technology, it needs to own its product’s value chain in order for the technology to be good enough for the consumer. For traditional publishers, for example, owning all aspects of the value chain meant controlling the newsgathering, distribution, and selling of their journalism. These integrated value chain companies are not yet vulnerable to disruption.

Modular Value Chain

WSJ. com

Overshot

Good enough

The Huffington Post

Integrated Value Chain

BuzzFeed

Sustaining Innovations / Pace of Technological Progress Disruptive Innovations Performance that customers can utilize or absorb

Time

@dskok 2017

Characteristics of disruptive businesses, at least in their initial stages, can include: lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics. Because these lower tiers of the market offer lower gross margins, they are unattractive to other firms moving upward in the market, creating space at the bottom of the market for new disruptive competitors to emerge. (Excerpted from: http:// www.claytonchristensen.com/key-concepts/)

Sustaining Innovations / Pace of Technological Progress Disruptive Innovations Performance that customers can utilize or absorb

Time

@dskok 2017

At some point, companies exceed what the consumer really needs from that product. When this happens, a company has “overshot” the needs of its consumers. Meanwhile, improved technology means it is more cost effective for a company to outsource portions of its value chain. This modular value chain exposes the company to fragmentation, leaving it vulnerable to disruptive competitors who can pick apart different parts of their business. Each of these cycles of disruption presents perils for some and opportunities for others. When the commercial internet arrived in the form of the World Wide Web, it was perilous for traditional publishers who viewed it only as a sustaining innovation, but an opportunity for those who saw it as a disruptive one. Enter the online portals.

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SUBSCRIBED / FALL 2017

The Portal Era (1990–1997)

The Search Era (1997–2006)

Yahoo Msn CompuServe America Online The Portal Era ( 1990-1997 )

Sustaining Innovations / Pace of Technological Progress Performance that customers can utilize or absorb

Time

@dskok 2017

Yahoo Msn CompuServe America Online

The Huffington Post SFGATE.com philly.com boston.com

The Portal Era ( 1990-1997 )

The Search Era ( 1997-2006 )

The Social Era ( 2006-2015 )

Sustaining Innovations / Pace of Technological Progress Performance that customers can utilize or absorb

Time

@dskok 2017

Disruptive Innovation in digital journalism. The new market entrants of the portal era.

Disruptive innovation in digital journalism. The low-end disruptors of the search era.

The first wave of digital journalism disruptors were the portals. This was a time of integrated value chains, where those owning the bandwidth, software, and the dial-up servers also controlled the digital journalism landscape.

Second, were the search years. This was a time of discovery and modularity with search engines like Google generating referral traffic to a new set of journalism sites that understood how to optimize for search.

These new entrants included MSN, AOL, and CompuServe, whose revenues were tied directly to their display advertising. If you wanted to advertise next to online news, you needed to buy space on a portal. CPMs were high, inventory was low, and digital advertising ruled the day. These digital platforms closely resembled their print counterparts by being end-to-end publishing businesses who gathered, aggregated, published, and distributed their journalism.

These were sustaining innovations in digital journalism, with The Huffington Post being the most celebrated, and they understood how articles answering questions like, “What time is the Super Bowl?” would drive traffic and ad dollars. By this time, traditional publishers had caught on and so there were also an abundance of free legacy and city-branded sites like sfgate.com and Philly.com that also relied on advertising revenue.

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In the early years, CPMs were high and scale was rewarded, but by the end of the era, new advertising technologies like programmatic real-time bidding, put severe downward pressure on the value of CPMs. “Replacing print dollars with digital pennies,” was a common refrain from publishers who recognized that they couldn’t achieve enough scale to replace their traditional revenues through digital advertising alone. This was a time when digital platforms also began to overshoot the needs of their consumers, resulting in the early days of market fragmentation. Think of unpaid writers, articles written for their headline optimization, popup advertising, 75 page photo galleries, article pagination, unmoderated forums and commenting sections, and it’s not hard to see how customers were no longer being served.

The SaaS Era (2015-Present Day) That brings us to the present. After twenty years of modularity and accelerated technological progress, where virtually everyone with a blog has the opportunity to become a digital publisher, digital journalism has overshot the needs of its consumers. These consumers are now living through a surplus of news and information, including fake news, that has eroded trust and credibility. They are on a flight towards quality and community. Digital journalism has been commoditized, creating new market opportunities at the bottom of a new disruption curve that is not yet “good enough.”

The Social Era (2006–2015)

The New York Times SKIFT Financial Times The Information

Yahoo Msn CompuServe America Online

The Huffington Post SFGATE.com philly.com boston.com

BuzzFeed Upworthy Outbrain Taboola

The Portal Era ( 1990-1997 )

The Search Era ( 1997-2006 )

The Social Era ( 2006-2015 )

Sustaining Innovations / Pace of Technological Progress Performance that customers can utilize or absorb

The SaaS Era ( 2015-Present )

Sustaining Innovations / Pace of Technological Progress Performance that customers can utilize or absorb

@dskok 2017

Time

@dskok 2017

Disruptive innovation in digital journalism, the sustaining innovations of the social era. Next, digital journalism entered its third phase: the social era. During this time the market fragmented even further. Thanks to social networks, particularly Facebook, journalism was optimized for viral buzz and “click-bait” entered common parlance. It was best exemplified by the rise of Buzzfeed and Upworthy, but also by low-end sponsored content sites like Taboola and Outbrain, all of whom understood that the best way to generate ad revenue was through custom-sponsored advertising and creative campaigns targeting specific audiences, instead of ad impressions at scale.

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Time

Disruptive innovation in digital journalism. The new market disruptors of the SaaS era. The technological revolution upending digital journalism and creating this disruptive new market includes the emergence of machine learning, predictive analytics and a targeted understanding of user behavior. These data tools have given organizations that own their entire value chain a leg-up over their competitors. Digital journalism has gone from a modular phase of disruption to a new phase of integration that relies on owning the relationship with your reader through data. There is a term for organizations that rely on subscription revenues to build and improve their software: SaaS or Software as a Service. This might be a way to define the phase digital journalism is now entering, one that relies on consumers to build and improve the journalism, called SaaS or Stories as a Service.

Digital journalism had now failed to meet the needs of consumers both in content and in user-experience. At the height of the social era, stories were designed for click-ability and impressions, not readability or loyalty.

I’ve argued before that owning the platforms is less important than owning the story. The same principle applies here: Those who own the relationship between the story and the reader will be at a distinct advantage over those who own the production and platforms of newsgathering and distribution.

As digital journalism moved from one era to the next, each site that was born from a respective era accumulated legacy infrastructure and resourcing in advertising technology and workflows that made it more difficult for those sites to respond to the new upstarts born out of the next phase. MSN was able to move from the portal years to the SEO years but they were not able to effectively shift to the social years. AOL was able to make the shift into the SEO years by purchasing The Huffington Post, but couldn’t quite adapt to the social years.

This journalism era, paid for by readers, for readers, will result in quality journalism, trustworthiness, and the building of new communities. For almost a century, journalism—in all its forms—has been funded by advertisers, and not by consumers. By having readers pay for their own journalism and using the data publishers have to listen to what their readers really want, news organizations can focus on accountability metrics like loyalty, retention, and churn that resemble SaaS instead of a singular focus on CPMs.


SUBSCRIBED / FALL 2017

“Most of the publications seeing success with digital subscriptions rely on quality over quantity journalism.”

Perhaps ironically, this has created an opportunity for traditional publishers to disrupt the earliest digital startups that were born out of the portal and search eras. If print publishers can contain their legacy cost structures and offer a unified editorial vision they could be at a distinct advantage in harnessing their existing subscriber relationships. An organization that has successfully adapted this approach is the Financial Times. Robin Goad, their head of customer analytics outlined last Spring how the FT had built a formula that accurately predicted whether someone would subscribe or cancel their FT.com subscription. It was only possible for the FT to build the “RFV Formula” as it is now known [Recency x Frequency x Volume] because they owned their customer data.

Most of the publications seeing success with digital subscriptions rely on quality over quantity journalism. It is likely not a mass media but a niche media focus. For example, Skift—a travel industry publication, and The Information—a tech industry publication, are sites born out of the SaaS era who are focused on doing a few things really well instead of trying to cover their entire world. Those who will pivot to this new era will have to shed their advertising ambitions that required scale to achieve profitability and instead focus on their subscription ambitions that require focus, engagement and loyalty.

Consumers have always subscribed to ‘content,’ whether it was a newspaper, magazine, or cable television subscription, but increasingly, as Om Malik, founder of technology research and analysis firm Gigaom outlined in his blog post How is The New York Times Really Doing? consumers are willing to pay for digital content. Netflix has 93 million subscribers, Spotify 40 million, Apple Music 20 million, Hulu 12 million, and HBO NOW 2 million.

The Next Era?

This is true for traditional publishers too. For example, The New York Times and The Financial Times are increasingly replacing their digital advertising revenues with digital subscription revenues.

It is an exciting time to be in journalism. Perhaps for the first time ever, it is our readers — not our advertisers — who are determining our fate. The implications of this change trickle down from the boardroom to the newsroom in profoundly positive ways. When you’re assigning stories not for clicks but for loyalty and retention, the journalism and the community will be better for it.

New York Times Media Group Annual Revenue, 2005-2016

It’ll take smarter minds than mine to predict the era that will surface next, but no matter what it is, a recurring consumer revenue stream that forces a strong feedback loop with one’s customers, instead of advertisers, will prepare publications to listen, respond, and adapt, in near real-time to the shifting market.

$3,000

$2,035

$2,077

$2,052

$2,000

$1,917 $1,582

$1,557

$1,555

2009

2010

2011

$1,595

$1,577

$1,589

$1,579

$1,555

2012

2013

2014

2015

2016

$1,000

2005

Advertising Revenue

2006

2007

2008

Circulation Revenue

Other Revenue

Source: Company Filings; Note: Only includes revenue figures from NYT Media Group | OMMALIK @http://om.co

The New York Times now has more revenue from consumers than it does from advertisers. (Courtesy: http://om.co, https://om.co/2017/02/20/ how-is-the-new-york-times-really-doing/)

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PRICING & REVENUE RECOGNITION: TWO SIDES OF A VERY VALUABLE COIN

By Monika Saha, GM of the Finance Product Line at Zuora

SUBSCRIBE

44


SUBSCRIBED / FALL 2017

Determining the right pricing model for a product is never easy. Successful companies are those that think of pricing and packaging in the same way that they think about product development — their pricing is in a constant state of evolution. It’s never 100 percent done. The elements that go into pricing design, the trade-offs you make, and the objectives and outcomes that your pricing and packaging decisions must meet evolve as a company grows. But, one consideration that teams responsible for pricing and packaging often overlook is how their pricing and packaging decisions are interpreted for the purposes of revenue recognition. Look at how pricing and deal structures are interpreted differently under the new ASC 606/ IFRS 15 accounting guidelines going into effect in fiscal 2018. Microsoft, one of the very few companies that was able to adopt the standards early, says the impact on its income statements and balance sheets will be material. Revenues for 2017 and 2016 are expected to increase by around $6B and assets will rise by about $9B, while liabilities will fall by about $6B and $2B, respectively.1 Amazon has pointed out the impact in its July SEC filing stating that it won’t be able to account for revenues the way it usually does. The changes particularly impact “Amazonbranded electronic devices sold through retailers, which will be recognized upon sale to the retailer rather than to end customers, and the unredeemed portion of our gift cards, which we will begin to recognize over the expected customer redemption period, which is substantially within nine months, rather than waiting until gift cards expire or when the likelihood of redemption becomes remote, generally two years from the date of issuance.”2 At the end of 2016, Amazon’s liability for unredeemed gift cards was $2.4B.

1

Amazon says new accounting rule will

change when it recognizes sales of its devices,” MarketWatch, August 15 2017 3

Different Contract Structures Have Different Revenue Impacts There are instances where different contract structures may have different revenue impacts under the old standards vs the new standards. For example, many SaaS companies offer “ramp deals” where the annual fee paid by a customer increases in later years. Under the old guidelines, the revenue you recognized over multiple years of a ramp period might have followed the pattern of your pricing structure, i.e. you recognized lower amounts in the early years, and higher amounts in the later years as the price ramped up. However, under the new guidelines, license fees may need to be spread evenly over the life of a contract, meaning that under certain circumstances, vendors might actually recognize more revenue earlier on. Earlier this year according to a Financial Times3 article, Microsoft had indicated that this will have a material impact on them as sales of Windows 10 licenses, which are currently treated as a rateable license fee spread over a number of years and are all recognized upfront. And, as previously noted, Microsoft has since adopted the new standards and expects an increase in revenues for 2017 and 2016. No doubt some of this increase was a result of how certain contract structures are interpreted under the new guidelines.

“Microsoft Scales Accounting Mountain,”

CFO.com, August 4 2017 2

There is a lesson here for all of us. As companies race to adopt the new accounting standards, this is also a time to take a fresh look at how pricing teams and revenue teams collaborate going forward. To better understand how pricing and revenue are inextricably linked, let’s examine four common pricing concepts and their associated revenue implications: Contract Structures, Sales Price vs SSP, Bundling and Discounting, and Usage Pricing.

“Uber, Amazon and Microsoft brace

for accounting shake-up,” The Financial

Understanding the impact of different contract structures on revenue is key. In order to do this effectively, make sure you are: • Equipped to calculate effective revenue price...at scale • Communicating what critical data you need your sales teams or order management teams to capture • Equipped to automate the process of evaluating how existing open contracts might have different revenue treatments under the new guidance vs the old guidance

Times, July 19 2017

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There’s The Price You Use For Sales, And Then There’s SSP The price at which you sell a product or service to a customer may not always be the same price that is used for revenue recognition. It’s important to understand what impact your pricing/bundling/discounting decisions may have on the calculation of Standalone Selling Price (SSP). In a number of cases, your accounting team will use SSP and not your sales price to calculate the revenue that can be recognized for a particular product or service. Let’s look at an example: In a typical volumebased pricing model, the price to be charged is based on the volume purchased. This type of a pricing model often rewards customers with built-in discounts as they purchase more volume. The more you buy, the cheaper per-unit price you get. So, if a customer purchases between 0-50 software licenses, they might be charged a per-unit price of $120/unit/year. However, if the customer purchases between 51—100 units, they might be charged a per-unit price of $100/unit/ year.

Now, this gets interesting on the revenue recognition side because SSP for this type of a pricing model could be calculated in different ways: • A simple formula (cost plus, percent off list price, etc.) OR • Historical analysis of selling price (often stratified by region, customer type, etc. based on your selling and discount models). And once SSP is determined, some companies might choose to assume the same SSP per unit across all volume bands while some others may choose to assume a tiered SSP for each volume band. It’s clear that determining and applying SSP is not trivial and simply defining a list price for a product or service is only half the battle.

Tracking and understanding how consistent your established list price is compared to your typical sales price can be extremely valuable. And it’s beneficial for pricing teams and revenue teams to jointly evaluate this consistency on a regular basis to drive future pricing decisions. You can make the process easier by automating the following: • Collection, analysis, and application of your historical data to future contracts • Determination of pricing compliance rates and bands • Application of a rules-based formula to calculate SSP for different revenue elements in different scenarios

46


SUBSCRIBED / FALL 2017

Bundling And Discounting Complicate Revenue Recognition

Usage Pricing Models Need To Be Carefully Considered

Say your company prices software at $800 per year and training at $200 per year. If you decide to bundle those two services together and sell the software at a discount for $500 while throwing training in for free, does that mean the training has no value in terms of generating revenue? The new revenue standards require companies to both estimate the SSP of each individual offering and allocate the total transaction price of the contract across each offering based on the relative SSP.

The popularity and market demand for usagebased (or consumption) pricing models is on the rise. Our data shows that at least 40 percent of Zuora customers use some form of usage pricing model. Just as you would never implement usage pricing without considering the metering and rating aspects of billing for that usage, make sure you don’t ignore the revenue recognition implications of your usage pricing models.

Here’s how the above example would play out: • The SSP for the software is $800 while the SSP for training is $200. • When you bundle Software and Training together, 80 percent of the bundle is allocated for software while 20 percent is allocated for training. • Because the customer paid a total of $500 for that contract, the total Transaction Price is $500. • Since the Transaction Price of this particular deal was $500, 80 percent of it ($400) will be allocated to revenue for Software while 20 percent ($100) will be allocated to revenue for Training. There’s plenty of guidance on how to calculate allocations for bundled deals, but imagine implementing such advice for thousands of contracts without an automated solution. This will not only drown your revenue team but will also slow down the pace at which you can roll

Thinking about implementing a new packaging or bundling strategy? Ask yourself: • Do we have the ability to automate the process of systematically separating (or “exploding”) bundles into distinct elements?

When implementing a usage-based pricing model, keep in mind that there may be scenarios where revenue recognition for the usage-based service can only happen when usage occurs. This is often the case when it’s determined that the vendor’s obligation to provide service to a customer is only satisfied as and when the service is consumed. In many instances of usage-based pricing models, the transaction price to be used for revenue recognition isn’t available at the inception of the contract (since you don’t know how much usage the customer will consume yet). So your finance team may need to estimate the variable element of your obligation to the customer, and true-up each period. This is called “Variable Consideration,” and can be a fairly complex exercise, especially when dealing with large volumes of transactions.

Want to implement a usage-based pricing model? Ask yourself: • Can we automate the process of determining the variable consideration at the outset of a contract by utilizing existing data elements and applying them to common scenarios? • Can we automate it for different types of usage-based models (tiered usage, volume usage, etc.)?

• Do we have the ability to automate the process of determining and applying SSP to each element in a bundle? • Do we have the ability to automate the process of allocating the transaction price of a deal across the different elements within a bundle? Without these, your pricing and bundling decisions could end up creating a revenue nightmare for your finance teams.

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FUTURE PLAN

We live in a world where a plethora of new monetization models are now possible. Now more than ever, it is critical for pricing and revenue teams to collaborate closely to connect the dots between the pricing and packaging needs of the business and the resulting impacts on revenue operations and revenue outcomes.

simple suggestions:

Revenue teams should always understand the business motivations behind different pricing or packaging models, and Pricing teams should always understand the revenue implications of their pricing and packaging decisions. Without this close alignment and collaboration, finance teams will find themselves living with the revenue nightmares resulting from creative pricing and packaging choices. Or worse yet, finance teams will begin to push back on certain pricing models because they don’t have the means to automate revenue recognition for these pricing scenarios at scale.

• Ensure that revenue team representatives are involved in deal structuring or consider a materiality threshold to include revenue teams during the deal structuring process to avoid downstream issues.

So, how can the two teams collaborate and contribute towards growth? Consider these

48

Add Order

• Include revenue team representatives on your Pricing Committee. • Establish templates and processes to model deals from sales all the way through revenue.

• ASC 606/IFRS 15 is new to everyone—Use this opportunity to evolve the way your revenue and pricing teams work together. • In the revenue world, it is NOT easier to ask for forgiveness rather than permission. Always strive for a solution that works for both sales/pricing and the company’s revenue recognition policies.


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AT WORK Guiding service technicians through maintenance procedures with a virtual display.

1ST THERMAL

IMAGING

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49


THE 2017 STATE OF THE SAAS-POWERED WORKPLACE REPORT

The workplace will never be the same again. Swiftly and surely, the world is shifting to Softwareas-a-Service (SaaS). It’s becoming the de facto delivery model for core business applications. But how is SaaS transforming the way we work? BetterCloud, the leader in SaaS application management and security, surveyed 1,800+ IT professionals to get a deeper understanding of this new workplace, where SaaS applications serve as the backbone of productivity.

By David Politis, Founder and CEO BetterCloud Excerpts from BetterCloud’s 2017 State of the SaaS-Powered Workplace Report

The data revealed astonishing findings. SaaS is a double-edged sword. And while it brings incredible benefits, it also creates formidable challenges that are taking the roles and responsibilities of IT to new extremes.

Vendors are no longer building on-prem software.

“There hasn’t been an on-premises software company funded since 2007...You have no choice. It’s all going to be Saas. ”—R.“Ray” Wang, principal analyst at Constellation Research TechTarget

Some highlights:

On-opemises HR user risk being left behind, Oracle says CIO

Microsoft-as-a-Service and the Slow Death of On-Premises Software

Adapt Or Die: The Dangers Of Hanging Onto Legacy Technologies

PC Magazine

Forbes

On-premises investments have all but halted. The world’s leading enterprise tech companies — including SAP, IBM, Microsoft, CA Technologies, and others that have dominated for more than a decade — have made drastic changes in their product development, and acquisition strategy. The “cloud” is front and center.

SaaS is now the system of record. Legacy Technology

SaaS Application Employee Customer Identity Finance Internal Communication Email Code

50

SaaS is now a common system of record for many organizations. Today, organizations are trusting SaaS vendors to house mission-critical, irreplaceable data. While some people may have once thought this concept was absolutely absurd, this is no longer the case. These naysayers are now the minority. To beat their competition, many CIOs would argue that SaaS must now serve as the system of record.


SUBSCRIBED / FALL 2017

Companies will be running purely on SaaS soon. 73% of organizatins say nearly all their apps will be SaaS by 2020 100 86% 80

73%

75%

78%

When SaaS entered the fray under the “software on-demand” moniker in 1999, its growth was slow. Within the last few years, we’ve seen SaaS adoption skyrocket. SaaS apps are seen as a future inevitability and have gained overwhelming support from IT professionals, end users, and executives alike. The “all-cloud” conversation has changed tone.

58%

60

51% 43%

38%

40

20

0 ALREADY 80% OR MORE

2017

2018

2020

2019

2021

SaaS adoption continues to rise.

2022

AFTER 2022

It’s now a matter of when, not if.

Percentage of orgs estimating when 80% of their business app will be SaaS

Large companies aren’t as far behind as you might think. 75% of SMBs and 69% of MM/ENTs say the majority of their apps will be SsaS by 2020

100 90% 80

75% 58%

60

40

51% 44%

39%

69%

80%

77%

79%

86%

73%

51%

42%

29%

27% 20

SaaS is legitimized and standard operating procedure at larger orgs. The trend is for new applications to be first adopted by smaller, more agile organizations. Larger enterprises are slower to act, but once they do, they add legitimacy, turning a fringe trend to a mainstream mainstay. In regards to SaaS adoption, that tipping point has occurred.

0 2017

ALREADY 80% OR MORE

2018

2020

2019

2021

2022

AFTER 2022

100 90%

40

80

75%

38% 60

40

20

0

79%

86%

73% 38% of69% companies are 51% running almost entirely on SaaS.

42%

29%

27% 20

44%

80%

58% 51%

39%

77%

0 ALREADY 80%

MORE 2018 ALREADY 80%OR 2017 OR MORE

2019

2020

2021

2022

A new cutting-edge, all-SaaS enterprise has emerged: the SaaS-Powered Workplace.

AFTER 2022

A growing number of organizations are now running just a fraction of their business apps on-prem. These are SaaS-Powered Workplaces. More than 80% of their end user business apps are SaaS. In less than two years, more than half (51%) of our respondents expect to use SaaS apps almost exclusively, all but eliminating their reliance on desktop applications and their onpremises infrastructure.

51


Many in IT are dealing with the consequences of rapid and often out-of-control SaaS adoption.

2001 2002

1998-1999

2004 1990 We’ve come full circle.

2017

2007

2009

2016 2015

2011 2014

1998-1999 NetSuitn and Saleforce are founded 2001 Consultants, not IT lead software implementation ”How to Install ERP Without IT” —TechRepublic 2002 IT regains control “CIOs Take Back Control of Enterprise Projects from Consultants” —CIO 2004 Salesforce IPOs 2007 Shadow IT emerges; NwtSuite IPOs SaaS Apps Being Deployed by Business Units, Not IT”—TechTarget 2009 SaaS creates problems for IT “The Challenges of Maaging SaaS Projects”—CIO

It’s interesting to note that we’ve practically come full circle. In the on-prem world, IT had full control over its environment, deploying and managing 100% of their organization’s technology. However, with the emergence of shadow IT and SaaS apps, IT began losing control. Now, IT is slowly starting to reclaim it.

2014 IT increasingly loses control “Business Users Bypass IT and Go Rogue to the Cloud” —ComputerWorld 2015 IT admits hard truths “CIOs Admit They Are Concerned About SaaS Management —Computer Weekly”

The world of IT is now embarking on a new journey, one where best-of-breed SaaS apps are fueling a sea change in employee work habits and transforming IT operations, budgeting, and ultimately, its purpose. The emergence of the SaaS-Powered Workplace is about empowering IT to run the world’s best workplaces through technology.

2016 IT changes its approach “Parthenon-EY’s research indicated that CIOs are feeling a loss of control, but are beginning to find ways to take that contol back.” —CIOs and Their Shifting Relationship with SaaS 2017 IT starts to control Saa “The CIO must take charge of the organization’s appication por

2011 IT starts losing control “Is SaaS a Treareat to CIO Control?”—Information Age

View the full report at https://www.bettercloud.com/monitor/state-of-the-saas-powered-workplace-report/ 52


SUBSCRIBED / FALL 2017

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THE SECRET BEHIND DOLLAR SHAVE CLUB’S BILLION DOLLAR SUCCESS IN ONE GRAPH By Nikhil Basu Trivedi, Principal at Shasta Ventures

By now you’ve probably heard of Dollar Shave Club. From that video in 2012, to selling razors to millions of customers, to its acquisition by Unilever for $1B last year, Founder/CEO Michael Dubin and the rest of the Dollar Shave Club team has executed incredibly well on many dimensions. They’ve made quality razors and blades much more affordable for consumers. They’ve built a brand that people love, that speaks

54

authentically, and that connects at an emotional level. The team has worked very hard to launch new products, improve margins, spend money effectively on advertising, and more. But there is one key element to the business that has made it so successful: Subscription. Dollar Shave Club built a direct-toconsumer subscription service for razors and other bathroom products. The company was projecting over $200M in revenue last year when


SUBSCRIBED / FALL 2017

Dollar Shave Club Found 2,196,748 transactions for 171,970 customers since 2011-07-29 Website: http://dollarshaveclub.com

Screenshot from Second Measure. This data is not representative of Dollar Shave Club’s true customer retention, for it is based on a population % of U.S. consumers. However, it gives us a sense for what true retention looks like.

it was acquired. And the retention in its subscriber base was the key reason for the company’s ability to make its unit economics work, and why it was such an attractive asset for an acquirer like Unilever.

“What many people may have overlooked about the power of Dollar Shave Club is the power of subscription.”

monthly group of customers, 69 percent come back and transact in the first month after they initially made a purchase.

What many people may have overlooked about the power of Dollar Shave Club is the power of subscription.

You’ll see at the top under “Customer Retention Stats” that for the median and mean monthly cohorts of customers, a significant percentage of customers (over 1/3) remain as subscribers even 24 months out.

Take a look at the customer retention cohort data screenshotted from Second Measure, a service that uses anonymized credit card transaction data to gain visibility on the performance of public and private companies. The percent figures correspond to the percentage of customers that transact in any given month (denoted by the number at the top of the tables). For instance, the top left % number, 69 percent, indicates that in the median

An important aspect of the Dollar Shave Club subscription service is the “Not So Hairy” plan, in which customers can skip a month of receiving blades. You’ll see that month 2 customer retention (73–82 percent) is higher than retention in month 1, meaning that more subscribers transact in their second month than in their first month, a manifestation of a significant portion of members skipping their first month delivery of blades and just receiving them in the second month.

55


Here’s a graph from Second Measure showing Dollar Shave Club’s customer retention by monthly cohort in a 4-year period (a way to visualize the tabular cohort data):

Dollar Shave Club Found 2,196,748 transactions for 171,970 customers since 2011-07-29 Website: http://dollarshaveclub.com

Screenshot from Second Measure. This data is not representative of Dollar Shave Club’s true customer retention, for it is based on a population % of U.S. consumers. However, it gives us a sense for what true retention looks like.

Dollar Shave Club sees 23.40 percent of customers retained in month 48  — that’s almost 1/4 of its subscribers who are still subscribing to the service 4 years later! Note on the graph the upward bumps in retention every other month due to the “Not So Hairy” customers who subscribe to Dollar Shave Club bimonthly instead of every month. Again, this data is from Second Measure, and not from the company, so the absolute numbers should be taken with a grain of salt. Every great subscription business has a retention graph that asymptotes out significantly above zero, the higher the better of course. And the higher the retention, the higher the customer lifetime value, and the higher a business can justify spending to acquire a customer to grow revenue. The company did not just get lucky. The fact that Dollar Shave Club has high long-term retention of its subscription members is not down to luck. People

56

buy razors, need to change the blades frequently, and most people shave on a very regular basis… this is a product category that lends itself perfectly to subscription on a long-term basis. The experience of buying razors in stores can be cumbersome — have you ever had to call a store representative to open up the razor cabinet? Dollar Shave Club made the online experience of subscribing to razors both simple and fun. The company has also paid close attention to why subscribers churn, and has worked hard to address these issues and improve the likelihood that members will continue to subscribe. Above all else, Dollar Shave Club has created an amazing consumer experience, and that has manifested itself in a subscription service that retains its users at high levels.


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57


CLICK By Aarthi Rayapura

The future of retail in the Subscription Economy lies in building long-lasting customer relationships. Whether these start online and extend into a physical store or vice-versa, the key is to offer memorable experiences that keep customers coming back for more. We highlight a few acquisitions that are creating unique “click and mortar” experiences.

AND Unilever and Dollar Shave Club Unilever acquired subscription box company Dollar Shave Club for $1B. You can now buy your shaving supplies at a nearby store or subscribe online and have them delivered to your doorstep!

“Dollar Shave Club is an innovative and disruptive male grooming brand with incredibly deep connections to its diverse and highly engaged consumers. We plan to leverage the global strength of Unilever to support Dollar Shave Club in achieving its full potential in terms of offering and reach.” – Kees Kruythoff, President of Unilever North America

58


MORTAR

SUBSCRIBED / FALL 2017

Walmart and Jet.com Walmart acquired Amazon rival Jet for $3B in cash and $300M of Walmart shares. Low prices and vast inventories online and offline!

“We’re looking for ways to lower prices, broaden our assortment and offer the simplest, easiest shopping experience because that’s what our customers want. We believe the acquisition of Jet accelerates our progress across these priorities.” – Doug McMillon, President and CEO, Wal-Mart Stores, Inc.

59


Nordstrom and Trunk Club Nordstrom acquired Trunk Club, the men’s online personal styling service, for $350M.

“This acquisition is reflective of how we want to move quickly to evolve with customers by finding more ways to deliver a great shopping experience.” – Erik Nordstrom, President of Nordstrom Direct

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SUBSCRIBED / FALL 2017

Amazon and Whole Foods Amazon.com acquired Whole Foods Market for $13.7B, opening up endless possibilities, and perhaps writing the foreword for the next big retail experience.

“This partnership presents an opportunity to maximize value for Whole Foods Market’s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers.” – John Mackey, Whole Foods Market Co-founder and CEO

61


PetSmart and Chewy PetSmart acquired online pet products retailer Chewy and expanded its presence from 1500+ stores on the ground to online e-commerce.

“Chewy’s high-touch customer e-commerce service model and culture centered around a love of pets is the ideal complement to PetSmart’s store footprint and diverse offerings. Together, PetSmart and Chewy will provide the most convenient customer experience to a wider base of pet parents across every channel.” – Michael Massey, President and CEO of PetSmart

62


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SUBSCRIBED / FALL 2017 By Aarthi Rayapura

BRINGG IT ON! Customer-centric logistics for the Amazon era

First, Amazon changed the game with its low prices, vast inventory, and the allure of home deliveries. Then came Amazon Prime with its promise of same-day and two-day deliveries. And now, it’s looking at drones to improve deliveries. Not only has the company upended the retail industry, it has also fundamentally changed customer expectations across the entire shopping experience. To stay competitive, other companies need to offer equal or better customer experiences. This means constant innovation and speedy responses, which in turn require businesses to have agile and efficient systems from start to finish. All these changes have suddenly turned the spotlight on hitherto behind-the-scenes logistics businesses such as Bringg, which believes that “customer-centric logistics systems have become the new strategic imperative for companies facing these new challenges”. Bringg is the leading customercentric logistics solution for enterprises and has some of the world’s leading retail, CPG, food, and 3PL/4PL (Third Party Logistics and Fourth Party Logistics) companies as its customers in more than 50 countries around the world. Founded in 2013, the company has raised nearly $20M from venture capital firms such as Aleph, Pereg Ventures, and Cambridge Capital, as well as corporate investors such as the Coca-Cola Company and Ituran. The company’s platform helps companies gain competitive advantage by matching Amazon’s logistical excellence, in terms of operational efficiency and customer experience, and by streamlining the way they deliver goods and services to create the perfect, frictionless experience from their headquarters to the field and all the way to their customers. The platform has three main elements: Delivery Operations, which helps plan, dispatch, and

analyze every delivery through a customizable dashboard; Driver Applications, for drivers to manage their deliveries, optimize their routes, and communicate with customers; and Customer Experience, which allows anyone to follow their order in real time, bringing full transparency and visibility to the delivery process. Aarthi Rayapura had a few questions for Isaac Buahnik, SVP Operations and Growth at Bringg: The “last mile” has recently gained prominence from investors, businesses, and the media. What do you think caused this sudden spike in interest? Customers’ expectations have changed and there’s been a huge shift towards on-demand services, online shopping, and speedy deliveries. While the ‘last mile’ is receiving a lot of attention lately, the change within the industry has been gradual and it’s still early days for most retailers. In the words of Gartner, customer experience is the new battlefield for competitive differentiation. You are disrupting not just retail but also the logistics industry with your “Uber meets Amazon” kind of service. How did Bringg come about? We’re a logistics company. Retail is a big part of what we do, but our technology is used across all types of on-demand services, delivery companies, restaurants, and 3PLs. Bringg was founded by Raanan Cohen and Lior Sion four years ago. Lior was the former CTO of Gett and they joined forces to bring a new level of real-time visibility, transparency, and operational efficiency to improve the logistic ecosystem — with an innovative customer-centric approach that brings brands, fleets, and customers closer. Bringg helps companies enter the “on-demand” era and essentially compete with Amazon. Can you elaborate on this?

65


“In the words of Gartner, customer experience is the new battlefield for competitive differentiation.” Amazon has changed the playing field and the industry needs to level up. They have truly set a new standard for customer service, speed of delivery, and convenience. In addition, they’ve built an exceptional infrastructure and fulfillment network to make it happen. Amazon accounts for 43 percent of U.S. online retail sales and 62 percent of U.S. households have an Amazon Prime membership. They have successfully created an exceptional infrastructure and retailers must act fast to be able to thrive in an increasingly competitive landscape which is driven not only by cost, but also by convenience, speed, and service. Bringg’s technology is used in over 50 countries by enterprises such as Coca-Cola, Panera Bread, and DHL. We’re helping established brands create and evolve their delivery logistics capabilities and improve their operational efficiency. The end result has an enormous impact not only on speed and visibility, but ultimately on creating superior customer experiences to nurture brand loyalty.

with our customers to improve their supply chain and help them communicate with customers or drivers in the most optimal ways. Is it fair to consider Bringg to be an Amazon competitor as well? After all, you are taking away businesses who might have listed their products on the site (by enabling their own direct-to-consumer efforts)? Bringg is not an Amazon competitor, per se. Our technology equips companies with the necessary tools and platforms to improve their logistics management, fleet management, and customer relationships — so we help them modernize their infrastructure to match the new customer standards created by the likes of Amazon or Uber — where the end customer gets unprecedented service and visibility on the status of

their order, driver, or delivery. How do you see this customercentric era evolving? What’s next for customers and businesses? The customer is king and will always be. At the end of the day, happy customers translate to loyal customers and increased revenues. The biggest change in this “era” is the shift of focus towards service, which will be as important as the product purchased. Research shows that 76 percent of customers view the end delivery experience as the true test of how much a company values them, and with the meteoric increase in online sales over the past decade, companies will focus on improving their brand experiences through every touch point of the supply chain. Brick and mortar retail lets companies control their

How does the data that Bringg collects help businesses improve their customer experience? We have an enormous amount of data which, when aggregated across customers, regions, or industries, help us identify patterns which in return can become either new features or customer feedback. For example, our understanding of accuracy around delivery estimations, delays, or user ratings help us work 66

Isaac Buahnik SVP Operations and Growth at Bringg


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environment and how they’d like to be perceived — it’s their moment to create a unique and memorable experience. Now, there’s a need to build memorable lasting experiences through the way products are delivered.

for them, it’s a positive change. However, it’s a fast and steep learning curve for new team members, and managing their onboarding successfully is as essential as hiring the right person. What are Bringg’s future plans?

Bringg has grown exponentially since its inception. What were some of the challenges you faced — internally and externally? And how did you overcome them? Scaling a company isn’t an easy task, but it’s one of the most exciting and rewarding challenges. The number one priority and focus is to find the right people across all disciplines to join our expanding team. The fact that we’ve tripled the size of our team in the past year doesn’t mean that we’re any less selective and rigorous about ensuring the best people join us. All these changes also have an impact on customers, but since a bigger team translates to more resources

We have teams in New York, Chicago, and Tel Aviv. Given the overwhelming demand for our technology, we’re also scaling our efforts in Europe and LATAM. Besides that, while “last-mile” logistics is at the core of what we do, we’re seeing increasing requests to use our technology for the “first-mile” which is the crucial point in which a retail hands over the goods to a courier company. In addition, over half of the company is R&D, so we’re always creating new product features to expand our platform’s capabilities to help companies and fleets improve and streamline their delivery operations.

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AIR

Connected cars are big business. By 2020, revenue from connected car services is expected to top $152B, according to a recent Business Insider report. But you don’t need to have a self-driving vehicle to be on the cutting edge of the connected car market. Just ask Italy’s Air, an innovative real-time cloud system for car data analysis, which makes any car a connected car with its wide range of services that help protect your vehicle from theft, optimize vehicle usage, manage fuel consumption, and more!

PUTTING CUSTOMERS IN THE DRIVER’S SEAT By Erika Malzberg

Air sits at the intersection between info mobility players, e-payment gateways, car dealers, telemetry and diagnostic providers, and car makers — and is now set to revolutionize the insurance industry by partnering with Axa, a global insurance brand, to offer insurance services. Here we talk with Igor Valandro, CEO of Air, to learn more about their services, acquisition model, growth strategies and what’s next for Air. Igor Valandro, CEO of Air

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“Thanks to our algorithm, we can better understand and satisfy the needs of our customer.” You say your mission is “to connect everyday life in innovative and surprising ways.” What does this mean in practical terms? What kinds of services does your company provide? We offer a new car insurance model that enables drivers to purchase new insurance services using new subscription business models. We offer lower insurance premiums, innovative anti-theft services, and a cutting-edge cloud system that processes in real time all your car information, telemetry, diagnostic data, and instant insurance. Who are your customers ? And how do your services improve their lives? Our innovative and disruptive idea offers a unique service for carmakers, car dealers, fleet managers, insurance companies, and individual customers. Individual customers can easily manage their vehicles through our app to check on trips, car “health” status, and location. Dealers have the opportunity to increase their after-sale margins through predictive maintenance, data monetization, and on-demand services. And, thanks to our system, which helps prevent fraud and enables risk-prevention, insurance companies will build a better targeted customer base. What are you doing that makes you stand out from your competition within the connected car industry? We see ourselves as an ecosystem enabler. We are taking old business models and innovating upon them to disrupt the digital insurance market. Our platform allows automotive and insurance companies to deploy new strategies. We use machine learning and artificial intelligence to automate processes. Thanks to our algorithm, we can better understand and satisfy the needs of our customer. What strategies are you focusing on for growth? International expansion is a real focus. We have a new office in San Francisco, California to manage and expand our business. Furthermore, we are always looking for new services, new integrations that give our customers the possibility of more easily managing their

insurance and services. Also for our partners, we continually implement new features on our system. Can you tell us about the particulars of your acquisition model? We sell services related to insurance policies through car dealers. Then we push our customers to upgrade to our additional services through specific calls to action and with ondemand purchases. This creates a virtuous cycle within the Subscription Economy related to the mobility of the drivers. How do you plan to monetize existing “free” customers? A “free” customer is tempted to buy new upgrade services related to their safety. For example, receiving assistance in case of a crash, or a tow truck when their car is out of order. We want to create loyalty in our customers by constantly providing them with the best and safest solutions, which are always available and easy to manage. Our Customer Care function really takes care of our customers, being available and providing help for any issue, problem, or question they might have. What’s your most popular connected service? Air Basic with protection services: HeartBeat, GeoBeat, and LockBeat. Crashguard, our new innovative assistance service in case of a car crash, is also much appreciated by our customers. What’s next for Air? Our goal is to create an insurance product based on a “pay-how-you-drive” idea. We’re looking to take Air from a telematics service provider to being the first Italian insurer offering this innovative service. Protection on demand. Comfort on demand. Insurance on demand. With Air, you’re ready to roll.

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A NATION SUBSCRIBED 2017 S TAT E O F T H E U K S U B S C R I P T I O N E C O N O MY

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KEY FINDINGS AT A GLANCE

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This report summarises the key findings of a UK-wide study, conducted by YouGov, that quantifies the rising preference of UK consumers to pay a recurring fee for on-going access to services as opposed to buying products outright. The study found an estimated 11% rise in UK subscribers and revealed that new types of businesses from an array of sectors are joining the Subscription Economy. Other findings include:

A Nation of Subscribers

Everything as a Service

Netflix and Bill

Almost nine in ten people across the UK now have at least one subscription service, with broadband and communication services being the most common — an 11% rise on last year.

49% of respondents think there will be more subscriptions available from companies in new product categories.

Almost twice as many 16-24 year olds subscribe to VOD services (47%) instead of TV licenses (25%). VOD is the third most popular service for younger consumers (16-24 year olds) behind mobile network subscriptions and music streaming services.

A Millennial Shift

Mature Consumers Matter

Connected Homes, Connected Lives

Millennials are driving change within the utilities sector. 55% of 16–24 year olds can see themselves subscribing to smart utilities services (smart heating, cooling, and lighting) compared to 18% of 55+ year olds.

Mature consumers, aged 45-54, spend the most on subscriptions. 16-24 year olds spend the least. Of those who have subscriptions, the average monthly cost is £56.

IoT is set to take off in the UK with 3% of the country currently subscribing to connected homes services. Subscriptions to home security services show great potential for future adoptions with almost 17 million people in the UK showing interest.

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THE SUBSCRIPTION ECONOMY IN THE UK HOW POPULAR ARE SUBSCRIPTIONS? As consumer preferences have shifted towards immediate access over ownership, subscriptions have gone mainstream. Adoption of subscription services have increased 11% on last year compared to a population increase of just 0.8%.

90%

Almost Nine in Ten (90%) / 59 million Brits now subscribe to products and services 16-24 year olds can see themselves subscribing to a connected car/selfdriving service in the next five years

Over a quarter think they will be using more services in five years’ time

WHAT ARE WE SUBSCRIBING TO? Subscriptions are moving beyond media. A broad array of industries — from retail to gaming to data storage — are being totally transformed by subscription models in the UK.

VoD Services Amazon Prime Music Media Publications Data Storage Gaming Services Online Retailers

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30% 23% 19% 17% 13% 9% 5%


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FUTURE TRENDS â&#x20AC;&#x201D; WHICH INDUSTRIES WILL SUBSCRIPTIONS DISRUPT NEXT? WHICH MARKET WILL BE DISRUPTED NEXT BY SUBSCRIPTION SERVICES? Subscriptions to home security show greatest potential with almost 17 million people in the UK showing interest. Smart healthcare subscriptions also show a lot of potential among older people.

Connected / Self-Driving Cars

Personal Monitoring / Smart Healthcare Services

Connected City Services

are interested in the potential of subscribing to home security services

are interested in subscribing to connected / self-driving cars

of 16-24 year olds can see themselves subscribing to smart health

are interested in subscribing to connected city services

Including 40% of

Including 40% of 16-24 year olds!

Home Security Services

33%

16-24 year olds!

25%

37%

40%

monitoring service in the future Although 16-24s show a greater interest in all types of subscriptions in the future, those aged 55+ are most likely to see themselves subscribing to personal monitors/ smart healthcare services, meaning there is scope for this among the aging population.

Including 67% of 16-24 year olds!

NEW MARKETS: 5 UNIQUE SERVICES THAT PEOPLE WOULD SUBSCRIBE TO Subscriptions have the potential to transform every industry. Here are some unique services that our respondents expressed interest in.

7%

9%

Hair Cuts

Petrol

8% Restaurants, Concerts & Gigs

7% Toilet Rolls

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HEARD AT SUBSCRIBED 2017 By Erika Malzberg

“Remember when you had to try hard not to miss your favorite TV show and then you forgot to set your DVR? The old world sucked! Thankfully we don’t live in that world anymore. Now we live in a world of freedom! Freedom from products, freedom from obsolescence. We are free from barriers of time and location. Now we can get what we want, when we want it. On a beach, on a plane. Freedom from one size fits all!” — Tien Tzuo, CEO of Zuora

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“For us subscriptions are pretty significant because they keep us honest. We have to earn our customers’ business every year, versus selling a perpetual license the old school way. It also keeps customers tethered to the company on a more regular basis.” — Sunil Potti, Chief Product and Development Officer at Nutanix

“If you’re going to give something away for free, think hard about the value you’re giving to that user and the value you’re getting back — and be very deliberate about that.” — Neal Patel, Head of BD and Sales at Crunchbase

“One of the biggest things we’ve noted in the market: the old way of growing strictly through acquisition is dead.” — Patrick Campbell, CEO & Founder of Price Intelligently


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“Data is becoming more important now. The traditional systems work for workflow perspective, but the part missing from the tech stack is analyzing the data.” — Sunil Madan, Head of Business Ops and IT at Zoom

“Most people think revenue is billing, which is not true.” — Jagan Reddy, SVP, of RevPro at Zuora

“Subscription businesses require a whole new architecture — billing wasn’t the only thing that had to change.” — Tom Krackeler, SVP of Products at Zuora

“To run your subscription business, you need an entirely new set of key metrics that will drive your business: churn rate, lifetime customer value, average revenue per user, and more.” — Matthew Darrow, VP & GM at Zuora

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THE WORLD SUBSCRIBED

By Erika Malzberg

As we well know by now, subscriptions aren’t just for software and media. Today’s subscriptions cut across all businesses, industries, and geographies. And sometimes they venture into some very interesting places… Every issue, we scour the globe to find some of the most unique subscription offerings. This issue we shine the spotlight on… Cheese Posties! It’s a fact: the Brits like their cheese sandwiches. So what better way to satisfy a craving for something cheesy, melty, and delicious than with a subscription to cheese toasties?

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Cheese Posties, a UK-based company, provides “mind-blowing” toasties delivered direct to your desk or doorstep. And these aren’t just a sad slice of cheddar on flavorless white bread. Think savoury combos like brie, bacon bits, and rosemary or sweet offerings like mascarpone, caramel, and apple sauce layered onto artisanal bread. It’s easy: You share your taste preferences and frequency of delivery, they match a unique flavour combo and ship. You assemble the ingredients and toast it in the supplied bag. Et voila...#CHEESEONPOST! www.cheeseposties.com


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European Subscribers? You need Direct Debit Localize the User Experience

Maximize Customer Acquisition

Eliminate Involuntary Churn

Collect payments in 3 currencies via Bacs (UK, £), SEPA (Eurozone, €) and Autogiro (Sweden, SEK).

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Visit us at Subscribed San Francisco gocardless.com/subscribed zuora@gocardless.com

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BUSINESS FREEDOM DELIVERED


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U S D $20.07

Subscribed Magazine, Fall 2017  
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