Here at CloudAve we’ve had a recent theme of guest posts from subscription billing companies (Zuora and Aria). It’s a really interesting area (honestly) and the various vendors all have a slightly different take on it. This time it’s the turn of Gene Hoffman, CEO of Vindicia to give his perspective.
Tien Tzou and Ed Sullivan have come before me here on Cloud Ave and I’m glad to know there are many things upon which we all agree. There is a Services Tsunami passing through Content, Gaming, and Software that will both disintermediate any unnecessary physicality of a product and also disintermediate that product or services prior distribution channels. I co-founded eMusic.com because I knew that music was going to be one of the first products to move to the Content-as-a-Service model. Scaling a service business may be something that only a few technologists have experienced, but I had to learn it while Napster “gave beer away for free and we sold water”. Entrepreneurs and service business owners need to understand the pitfalls and real strengths in the new Software/Gaming/Content-as-a-Service business models.
First, I agree with both Tien and Ed that Service businesses and subscriptions are the wave of the future. I would add to their insightful comments two other major benefits of the business model. First, the perceived average selling price of software, games, and content can be lowered while the average revenue per customer increases. A simple example of this is when our meta-client (we power Intuit’s PaaS offering), Advantage Integrated Solutions, uses the Intuit Partner Platform to offer Smart Routes, a delivery routing optimization tool at $9.95 to $29.95 a month with a free 30 day trial. Software like that used to sell for $5000+. These lower prices expand the addressable market for all sorts of Services. In addition, service models align a company’s interest with their own customers. Active churn becomes real time feedback if the incremental development of a service goes in a direction that customers don’t like.
But this leads me to some important disagreements with Tien and Ed. First, Tien spends a lot of time talking about scaled subscription services that use the power of automatic billing like Netflix, World of Warcraft, Transunion, and the Norton product line, but then he brings forth a carryover of invoicing from the relic software business models. Services that use non-automatic payment lose the power of behavioral economics that comes with automatically billed subscription services. If the average selling price is coming down, and it is, the only way to make up the decrease is to leverage the ability to extend customer lifetimes with retention management. Just generating an invoice that you send to your “subscriber” and hoping he pays you is a recipe for DSO and profitability nightmares. Remember that the new subscription service model potentially means 12 times the billing events and, with an expanded addressable market, hopefully 3 or 4 times more customers or 36 to 48 times more billing events as well as 36 to 48 more times a customer is asked if your service is good enough. Automatic payment works to limit the number of times your customer has to make a buy decision while shrinking DSO to a couple of days.
Ed makes the mistake of advising that service businesses don’t have to rely upon or understand payment methods. When you’re using automatic payment and banking on the profitability of long-term subscriber lifetimes, getting payment exactly right is critical. Monthly services have the surprisingly obvious feature of compounding subscriber wins and losses monthly over multi year customer lives. Call it the power of compound attrition (but hopefully retention!). If your payment processor isn’t getting the maximum number of payments completed, you’re going to be wasting your marketing dollars and cutting directly into your profit. Further, lumping Paypal/Google Checkout/Amazon FPS in with American Express and payment gateways creates a few issues. Gateways are but conduits to the real players in customer acquisition and retention – the payment processor/acquirer, card associations, and issuing banks. For example, American Express may be one of the most important payment methods if you are selling a service into any enterprise – small, medium or large. One client I’ve spoken to who has a large subscription-based advertising sales business that targets small and medium local business had American Express account for 40% of all transactions.
More dangerous is not being aware of the “roach motel” issues of some payment methods. If you’re serious about scaling your service business, you have to own your own customer data. Many SaaS entrepreneurs love the siren song of Amazon FPS/Paypal/Google Checkout because it lets them address a decent population of customers who can pay while side stepping PCI and banking efforts. However, each entrepreneur and business owner needs to think through payment method lock in and who owns their customer data. Hypothetically, if a business starts out on an e-wallet like Google Checkout, ask whether a potential acquirer is going to be concerned about the consequences of needing to move that business to a more scalable and flexible billing platform and payment processor only to find out that will force them to re-enroll all their early adopters since they will not be given “their” customer data back. These payment methods are excellent add-ons to a core card and ACH based subscription infrastructure, but the fact that your customer “checks into these services, never to check out”, creates real business risk.
We are all moving to a world where one fills in the blank – _______ as a Service – with News, Sports, Entertainment, Dating, Gaming, Software, Infrastructure, and even Service. More of us are going to get to try more innovative products delivered as services at lower price points. Those services are going to bring more value to the things we used to think of as products. What is OptionEase but specialized spreadsheet as a service? The Services Tsunami is going to spread far and wide in our economy. We’re moving to a model of selling things directly to individuals. Everyone has heard the terms B2B and B2C. We’re pretty confident that those are as much relics as box software at a retail store. We believe we’re all moving to B2I; selling Business to Individual. Just as consumers brought PCs into the enterprise from home, even large enterprise software is headed to a world where people who run individual workgroups or departments sign up for a free trial with their credit card. Make sure you’re ready to support what the actual subscription service economy requires.