business models

Goodbye, Ownership. Hello, Usership!

Goodbye, Ownership. Hello, Usership!

This story original published in WWD and written by Tien Tzuo, chief executive officer and cofounder of Zuora and the author of “SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future — and What to Do About It.”

The signs are everywhere — ownership is on the outs. From Spotify’s IPO to Amazon Prime hitting a hundred million memberships to Lyft’s new monthly pass, more and more people are opting for fluid services rather than static products. In fact, our physical world seems to be rapidly diminishing all around us. Companies aren’t buying buildings, they’re renting from WeWork or Servorp. Teenagers aren’t saving up to buy cheap cars, they’re catching rides with their phones. Even the malls are disappearing. The world is switching from capex to opex.

Our physical world seems to be rapidly diminishing all around us. Why is this happening now? Many people point to the shifting consumption patterns of Millennials, but at this point, we should probably give the poor Millennials a break. They’ve suffered enough analysis. This is an increasingly cross-generational shift. If you’re not interested in care and upkeep, preferring access to ownership is just basic common sense. The bigger picture here is that the dominant economic model of the last 150 years is coming to a close, and it’s about damn time.

Since the rise of industrial production, we’ve operated under a straightforward asset transfer model. Companies built and sold physical products. The fundamental goal was to create a hit. Once that was achieved, then a company could spread its fixed costs over as many units as possible, so it could compete on the all-powerful margin. At least that’s what I was taught in business school back in the Nineties (it was really bad advice, even back then).

Of course, this entire system was predicated on planned obsolescence. The revenue model depended on us repurchasing products that were specifically engineered to expire after a fixed period of time. Back in the days of Thomas Edison, lightbulb companies actually competed on how many hours their lightbulbs could last (no doubt some MBAs soon corrected them). We were expected to fill up our lives with disposable stuff on a regular basis. Is it any wonder that people are starting to get tired of this approach?

Our new “subscription economy” is far better for everyone for all sorts of reasons. For starters, the explosion of all these digital platforms has enabled consumers and businesses to effortlessly extract the services that sit behind the products we use on a daily basis: music from records, mobility from cars, software from servers. Sweden’s Husqvarna, for example, runs a network of automated storage units that allow people to rent garden tools by the hour. We get to experience the value without bothering with the expense and hassle of maintenance. We get to enjoy the milk without having a cow.

Secondly, in this new model, sustainability and environmental responsibility change from a “nice to have” to an actual economic imperative. In service models, the manufacturer handles the logistics and the equipment (General Electric famously pioneered this concept by offering their jet engines on a “power by the hour” basis). If they don’t make sure that their equipment lasts as long as possible, and that the materials used to build that equipment are recycled or repurposed effectively, they will lose out to their competitors. It’s that simple. When companies become more efficient, the planet benefits.

Third, when companies work smarter at offering the best services possible, all sorts of opportunities open up. There’s more discovery on the consumer side — we get to uncover new music to play, new meals to cook, and new clothes to wear, without throwing more junk into landfills. On the enterprise and manufacturing side, new analytic services are enabling companies to work smarter and “unlock” billions of dollars of unrealized value. The global economy has been desperately searching high and low for growth for years — as it turns out, we’ve been sitting on top of it the entire time! All these remarkable new acronyms we’re hearing about (AI, IoT) are turning into utilities like power or water, that companies can access at the flip of a switch. Services turn economic potential into kinetic commercial activity.

Which leads me to my final point — services bring growth. And not just growth, but sustainable growth. Today’s economy is rife with all sorts of foment and arbitrage. Take a look at taxi medallions, or Gillette stock. Product companies based on discrete, anonymous transactions are particularly susceptible to the whims of the market. Companies that have direct relationships with their customers avoid boom and bust product cycles and greater macroeconomic havoc. A happy subscriber base is the ultimate economic moat.

There will always be conspicuous consumption. Large numbers of people will always try to define themselves by what they own, as opposed to how they act. And how can you blame them? That’s how the old model worked. But a new economic model built around access and services is catching fire across every industry on the planet, because of access, sustainability, discovery and growth. And that’s why this new model is here to stay.

Software Microservices Open Up New Business Models for Companies

Software Microservices Open Up New Business Models for Companies

This interview was first published by Steve Norton in the Wall St. Journal with the title, “Software Microservices Open Up New Business Models for Companies” on June 18th.

Companies are trying to move beyond selling products to creating lasting relationships with customers. Many are seeking new revenue streams by selling software and other products as a service, similar to the model used by Inc.

Automakers such as General Motors, for example, look to interact directly with customers via connected-vehicle systems that help find nearby restaurants or parking lots. Manufacturers are looking beyond selling physical equipment to services that can monitor the health of that equipment in real time. Caterpillar Inc. is nurturing a growing line of subscription data services, analyzing data from sensors connected to their machines to help customers run building projects more profitably.

To take advantage of the subscription model, CIOs must move away from large, centralized systems and embrace a microservices architecture, in which software applications are deployed as a set of independent, reusableservices, said Tien Tzuo, founder and chief executive of Zuora Inc., a decade-old company that provides cloud-based software to help companies manage subscription services. Doing so can allow firms to spin up new applications more quickly, and provide flexibility around where and how they run.

Mr. Tzuo spoke with CIO Journal on Friday about how companies are shifting to subscription-based business models. Edited excerpts follow.

WSJ: What kinds of firms are making the switch to subscription models?

The technology vertical is probably farthest along. Adobe…their shift to subscriptions is giving the whole software sector courage to do the same thing. We see a lot in media. We’re also seeing quite a bit in manufacturing: Caterpillar, Ford, General Motors. These are companies with physical products that they’re realizing are smart products, and they’re finding all these new revenue streams that they now can create and sell and monetize.

What are the biggest hurdles for companies trying to make the shift to subscriptions?

The way you build product is different. Modern companies are iterating based on what customers are doing and making quick decisions. There’s an acceleration, and you need the data, what people are clicking on. What should we be looking at, and how do you personalize down to the individual user?

What CIOs are struggling with is they just spent 20 years standardizing these systems of record, built around an SAP or an Oracle core. Now the business is coming in and saying we need to iterate, we need to be agile and we need to experiment with a bunch of things. The way the IT organization works now … they say, OK, we can put it in our backlog, and in 12 months we can deliver something to you. The business says, I can’t do that. I need something now. There’s an agility there that IT needs to start to support, which means this whole infrastructure that they’ve standardized on is actually holding them back.

How do CIOs begin to facilitate the switch?

A company that’s more of a digital company will do a wholesale replacement of the quote-to-cash process. They’ll rip it out of Oracle and SAP and they’ll put it on a modern stack like us.

A company like Caterpillar or General Motors says we’re still going to sell a lot of cars, but we (also) need a connected-car platform. So they’ll put a subscription management platform on the side of their core business. We’ll still use (the core system) to sell cars or to sell tractors, but let’s put in the digital platform or the subscription platform here.

How does corporate IT architecture begin to shift over the next few years?

You’re starting to hear a lot of people talking about microservices. Silicon Valley companies have always talked about that, but now you’re hearing it in enterprise IT. The general pattern is that the big monolithic system is not going to work. It just won’t scale. So how do you build systems that are independent and have their own data stores and can be hosted anywhere?

We would argue that there should be a three-cloud architecture. We would say the anchor systems are your customer relationship management system, your financials — because at the end of the day you do need financials — and then you have what we call a subscriber management system. In these modern business models, you need a hub that shows your key subscribers and what they purchased. Your interactions with customers now are not some customer buying 50 widgets of something, and if you log in we save your payment information on file. Your customers say this is the subscription I have with you right now. It’s about modifying these plans, which is very different. That system then orchestrates provisioning and fulfillment, it orchestrates the accounting system, it generates all the invoices and payments that are related to all those plan changes.

Having a three-cloud architecture, and then having things bolt around one of these three clouds is a stronger way to go.

How far along would you say customers are in switching to microservices?

It’s very early. This is going to take five to 10 years. They’re probably trying to building new things on microservices, but they still have a lot of legacy stuff.

As subscription happens, how does the role of the CIO change?

The biggest thing is the classic model of IT, saying can you give me all of your requirements and I build something for you over time, just doesn’t work anymore. I don’t know what I want. I don’t know which connected car service will make a lot of money. I don’t know what the right pricing and packaging is that I’m going to hit on. I can’t even tell you all of the things I’m going to launch in the next 12 to 18 months. So when (business units) go to the IT organization and want to support something, they need to be able to do things in chunks and iterate really quickly, and so their systems have to really be able to support that.