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Subscription billing service Zuora announced a $50 million funding round today. That’s just the latest confirmation that online subscription services are thriving.
Zuora cofounder and CEO Tien Tzuo told me recently that he believes all companies will have subscription-based business models, no matter what sector they’re in. And I’m inclined to agree.
We’ve come a long way in the last year. During the application process for our first class at SparkLabs (a startup accelerator in Korea), one company that applied was Memebox – a subscription commerce company selling beauty products.
Memebox bootstrapped its first year and was well on its way to hitting more than $1 million in revenues. So we thought it was worth a look, but we cautioned Memebox that we were wary of subscription ecommerce companies since they seemed to be on the downward trend. Dino Ha, Memebox’s CEO, replied, “If you want us to change our business model, we will – just let us know.”
Dino and his team’s run-through-brick-walls attitude but flexible approach sold us, so we accepted them into our first class, and they in turn taught us how to be flexible in our thinking. Memebox continued on its tear: By the end of this year (its second year of operations) the company looks to triple its revenues while maintaining a churn rate of less than 2% across their various subscription services.
Editor’s note: Cloud subscription services like Zuora and Memebox are examples of how the cloud is shaking up old business models. Our upcoming CloudBeat conference, Sept. 9-10 in San Francisco, will be tackling revolutionary cases of enterprise cloud usage, including how businesses are adopting new cloud apps. Register today!
The last figure reminded me about the importance of a buyer – in the retail industry sense of a merchandise purchaser, not the “individual end-customer” meaning – in any commerce operation, regardless of whether it’s a brick-and-mortar store or an e-commerce one, especially in verticals more dependent on having a prime selection of goods and products. That ability to offer a selection that appeals to shoppers and turns them from one-time buyers to loyal customers is an intangible quality that is difficult to measure – and Memebox taught me that they simply kick ass at curating beauty products for their customers.
This realization led us to accept two more subscription plays into our second class this past May: HeyBread, a fresh bread delivery play in Korea, and Petsbe, a premium service for pet dogs and cats.
More importantly, it made me take a step back and take a look at how the subscription market has grown, from telcos and cable companies to Salesforce.com and Netflix to Zipcar and Dropbox and even Adobe’s gigantic move towards becoming solely subscription-based.
I recently spoke to two movers and shakers in the sector – the CEOs of Zuora and of Citrus Lane – and here’s what they had to say about subscription ecommerce economy and business model.
Mauria Finley, cofounder and CEO of Citrus Lane, a service that provide monthly care packages for parents of young children, mentioned that they expanded their offerings in response to requests from their customers. They started out just focused on the baby months, but parents kept saying they didn’t want their kids to age out of the service or that they wanted it for their older kids too – a great sign that something was working – so Citrus Lane now offers subscriptions for children from newborns to age five.
Speaking more generally about what makes subscription ecommerce companies work – or not – Finley said, “I believe that the companies that will survive and thrive in the subscription space will be those that focus on a vertical where they can deeply understand and serve their customers, allowing them to build a trusted brand. And to successfully scale a subscription ecommerce business and build that trusted brand, a company must be good at the ‘art’ of merchandising and community engagement, as well as the ‘math’ of ecommerce.”
A week later, I spoke with Zuora’s Tzuo. Zuora is a SaaS-based solution that helps companies manage the entire customer subscription lifecycle across commerce, billing, and finance processes. When asked what made him decide to leave Salesforce.com to start his own company, he talked about how different the underlying structures are for a subscription-based business model versus the old product business model.
“For 30 years, companies have run on ERP systems, and ERP systems are great when you’re shipping widgets,” said Tzuo. “But they are not good for the subscription-based business model. The telecom industry is just an example of a recurring-base business model. They don’t use ERP systems, they use billing systems, which are these operational support systems.”
He explained that at Salesforce, they had to build a whole bunch of such systems – such as a billing system around Zipcar, which built its own homegrown system. Netflix also had its own homegrown system.
In 2007, Tzuo and his cofounders had an epiphany: On the one hand Salesforce was just a SaaS company, focused on the SaaS industry. But by that time, Salesforce wasn’t the only SaaS company anymore – everybody was or was becoming a SaaS company. That meant that the problems Salesforce was experiencing were likely also being felt at other SaaS companies.
“We realized not only that, but also that all businesses were going to have to be more customer-focused,” said Tzuo. “They would have to build customer relationships, have to focus on customer loyalty, and would have to take the lead and say, ‘I need a subscription-based business model to hang onto my customers, because if I’m just thinking about selling as a product, someone will come along and steal my customers.’”
What Zuora wants is to be the company that powers the infrastructure for these businesses, that makes them successful.
“If you look at two big giants of the enterprise software industry, it’s SAP and Oracle. But their products are great for the old world,” said Tzuo. “We want to create for the new world. Business models are changing – they are really, really different from what they used to be. And SAP and Oracle really don’t support these new business models. So it gives us a chance to create a new company that can be meaningful one day. Meaningful now, but we want to continue to grow and hopefully build a multibillion dollar establishment,” he concluded, looking focused.
Learning about Citrus Lane’s continued success and Zuora’s growth matched my experiences with SparkLabs’ accelerator companies and confirmed for me that the subscription economy will continue to spread and grow across industries.
But specifically for ecommerce providers, success will be more dependent on the merchandising quality, customer service, and overall value a user receives versus traditional retail stores. The confines of a physical box that a user receives regularly decreases the emphasis on price and outside factors, such as celebrity endorsements, and instead, it really focuses on the quality or uniqueness of a product. Target or Walmart subscription services will not work even if Lady Gaga and Madonna both provide their major blessings. But Nordstrom or Neiman Marcus boxes will probably work, especially since they have unparalleled customer service.
The dilemma for investors like me is that the success of these services depends on the same factors as for traditional retailers – the intangible, immeasurable factor of having talented buyers that provider customers will this perception of excellent product selection and obtained value from such services, and unusually good customer service. Dedication to customer service is easier to spot in a startup looking for funding, but it may be harder to see up front whether they will have that buying and curation talent – that may be where investors need to take a deeper look, or where time will really tell.
Bernard Moon is co-founder of SparkLabs, a startup accelerator in Korea. He is based in Palo Alto, CA.