The Lateen Sail changed the course of Mediterranean navigation. It was a flexible triangular sail that allowed ships to harness the power of natural resources, specifically headwinds. Previously, fixed square-sailed ships could only sail with the wind; their direction was bound by their design. The Lateen Sail changed all that — it enabled whole new worlds of agility, opportunity and commerce. No longer at the mercy of the prevailing winds, sailors could now shape trading routes from port to port, as well as venture out onto the open ocean in order to explore new territories.

Hearing about the development of the lateen sail on a recent history podcast reminded me of what’s going on in cloud-based subscriptions. This might sound like a stretch, but hear me out! Twenty years ago, the advent of cloud-enabled SaaS services ushered in a whole new age of exploration and innovation. No longer bound by the weight of “fixed sail”on-premise software and in-house servers, businesses were free to explore all sorts of new territories. And of course, the cloud gave us the agility and flexibility to keep moving forward over the past couple of years. Lots of businesses were able to harness the power of headwinds.

And since it’s Earth Day this week, I’m also thinking about digital subscriptions and corporate sustainability. In 2011, only 20% of the S&P 500 published sustainability reports; today almost all of them do. Blackrock, for example, which manages over $8 trillion dollars in assets, has dedicated itself to sustainable investing.

“As more and more investors choose to tilt their investments towards sustainability-focused companies, the tectonic shift we are seeing will accelerate further,” said Larry Fink, the CEO of Blackrock, in a investor letter to CEOs. “And because this will have such a dramatic impact on how capital is allocated, every management team and board will need to consider how this will impact their company’s stock.”

ESG (environmental, social and governance) principles aren’t just important for our investors, of course. They’re also important for our employees, our customers, our kids, our fellow living animals, and ourselves. Clearly, sustainability is not a “nice to have” anymore. It’s a fundamental corporate priority. According to Microsoft, today more than 1,500 companies with a combined revenue of more than $11.4 trillion have published net zero commitments, but we clearly still have a long way to go.

Fortunately, however, you may have a big ESG lever that’s right under your nose: cloud computing. Why? Because more and more of today’s public cloud computing server farms are wind-powered! (Or solar-powered, or hydro-powered, or run on some form of renewable energy). That’s right — just like those lateen sails, cloud computing is actually helping you create more commercial opportunities by harnessing the power of natural resources.

Why is this happening? Well, as I’ve written previously, there’s a very important structural reason for why cloud-based subscription services are inherently efficient and sustainable: because the manufacturers own the assets, not the consumer. Cloud companies are financially incentivized to minimize energy consumption, maximize the recycling of their hardware, and embrace sustainability.

That’s why this isn’t just good PR, but it’s also smart business. It’s why Google has pledged to run all of its data centers on carbon-free electricity by 2030, and Apple is now completely powered by renewable energy. Amazon is promising net-zero emissions by 2040, and Microsoft is actually planning to be carbon negative by 2030, meaning it will remove more carbon dioxide from the air than it produces.

In short, if you’re working with a Big Four cloud provider today, you’re helping to save the planet. But it’s not as simple as just signing up for an account; you don’t get to earn your ESG bona fides that easily.

Given all the options available, what’s the best way for companies to embrace the cloud in an environmentally impactful way? My colleague Jennifer Dransfeldt is a Director of Technology Industry Strategy at Zuora. She’s previously worked at Intel and Ernst & Young, and at Zuora she’s focused on Tech industry trends that are helping drive adoption of subscription and consumption models. Here’s her advice:

If you haven’t already made the shift, by all means do it.

Cloud providers focus on resource utilization and efficiency in a way that on-premise data centers are simply unable to do independently. According to 451 Research, roughly 20% of racked servers are completely unused and abandoned by application administrators! AWS’s infrastructure, for example, is 3.6 times more energy-efficient than the median of U.S. enterprise data centers. Every major cloud provider has made sustainability a core tenet of their forward strategy.

Focus on utilization as a driver of greener supply chains.

Buying what you need, when you need it, doesn’t just make business sense — it also enables circular supply chains. By scaling your compute and IT demands as you need them, you create only the carbon footprint required for an optimal business outcome. There’s no need to build or buy for excess capacity when you run on scalable cloud environments. Additionally, as you are deciding which cloud provider is right for your technical needs, also consider their progress on their net-zero commitments or how they utilize sustainable practices across their offerings.

Take advantage of new carbon footprint data and analytics tools.

You can’t change what you don’t measure. The ability to accurately measure and account for carbon emissions is still relatively nascent, but today almost every major service provider now provides analytics tools to help companies understand how their cloud utilization impacts their carbon footprint. With the help of these tools, you can really start to impact the size of your carbon footprint. As it turns out, doing good for the environment can also materially improve your top-line expenses.

Always be right-sizing.

To put it simply, right-sizing is finding the optimal cloud configuration to maximize your performance at the lowest cost. This isn’t just a question of scaling volume up or down; as AWS notes, right-sizing also entails avoiding instances that are over-provisioned or poorly matched to your workload. Instance types consist of varying combinations of CPU, memory, storage, and networking capacity. There are qualitative as well as quantitative concerns to address. While you don’t need to be monitoring constantly, it’s important to schedule regular right-size check-ins. When utilizing an optimized configuration, you will likely not only save in overall costs, you will also be bringing down your overall carbon footprint.

Sustainability isn’t just about systems — it’s about people and talent as well.

It’s important to align your organization as well as your systems to sustainability. Many of the people you hire to help in your ESG efforts will probably have job titles that didn’t exist five years ago; chief sustainability officers are the new chief transformation officers! While these roles are relatively new, they are often positioned with a direct line to the CEO. In a recent survey of CSOs by Deloitte, it was reported that 32% of CSOs are reporting directly to the CEO, signaling the organization and the market that sustainability is a critical business objective. While everyone has a role to play in lowering your carbon footprint, you may need to look at new kinds of talent.

And finally, remember that if you do this correctly, you’ll find that this is a rare win-win situation. As Jennifer notes, “As you consider your cloud strategy, choosing sustainable options and monitoring and optimizing their configuration not only saves you expense, it also is good for the environment.”

Good luck, and happy sailing!

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Like what you read? You can sign up for the Subscribed Weekly — delivered to your inbox every Saturday — here: http://www.subscribedweekly.com and visit http://www.subscribed.com/, bringing together the brightest minds and renowned experts to keep you informed, educated and inspired about today’s growing #SubscriptionEconomy!

Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.

Last month, on Earth Day, Google pledged to run all of its data centers on carbon-free electricity by 2030. CEO Sundar Pichai said: “Within a decade, we aim for every Google data center, cloud region, and office campus to run on clean electricity every hour of every day.”

Google is in good company when it comes to big tech climate initiatives. Facebook achieved net-zero emissions for operations last year. Apple is now completely powered by renewable energy. Amazon is promising net-zero emissions by 2040. And Microsoft is actually planning to be carbon negative by 2030, meaning it will remove more carbon dioxide from the air than it produces.

While all these companies should be lauded for their sustainability efforts, there’s a very important structural reason for why cloud service companies prioritize efficiency and sustainability: because the manufacturers own the assets, not the consumer. When companies turn from product vendors into service providers, all sorts of innovation starts happening with regards to efficiency and waste.

Data centers, for example, are the Godzillas of electricity consumption. The combined power usage of the Big Five tech companies is roughly the same as New Zealand. Google’s own electricity consumption nearly tripled between 2013 and 2018. Today the IT sector contributes roughly the same amount of greenhouse emissions as the aviation industry (and don’t get me started on Bitcoin mining).

Data center power efficiency is measured through a metric called PUE, which represents the ratio of total energy used divided by energy used specifically for information technology activities. The ideal PUE is 1, where 100% of a data center’s electricity consumption goes toward actual computation as opposed to overhead like transformers and cooling systems.

As you can see below, Google has made significant progress on its PUE ratio since it started handing out public figures in 2008:

Just imagine a scenario where we didn’t have the cloud, and all our current

computing power was spread across hundreds of thousands (or millions) of data centers around the world. What would a global PUE improvement chart look like in that case? Probably up and to the right! Without the centralization of assets, there wouldn’t be enough incentive to drive all this efficiency at scale.

Running a more energy-efficient data center operation is important for fiscal reasons as well. Data centers are expensive to build, and are usually financed through debt and equity. Institutional investors are increasingly prioritizing sustainable funds that meet ESG criteria (environmental, social and governance). Blackrock, which manages over $8 trillion dollars in assets, recently dedicated itself to sustainable investing.

“As more and more investors choose to tilt their investments towards sustainability-focused companies, the tectonic shift we are seeing will accelerate further,” said Larry Fink, the CEO of Blackrock, in a recent investor letter to CEOs. “And because this will have such a dramatic impact on how capital is allocated, every management team and board will need to consider how this will impact their company’s stock.”

Clearly, sustainability initiatives aren’t just about “good corporate citizenship” anymore. These days they are practically mandatory. And that’s a good thing. But guess what? I think it’s safe to say that when Google started concentrating on data center efficiency at the turn of the century, they weren’t thinking about the environment. They were thinking about money.

Again, this is what happens when the manufacturer owns the asset. This phenomenon is nothing new — right now there’s a lightbulb in a fire department in Livermore, California that has been lit since 1901. Why? Because electricity companies used to own the lightbulbs in homes and buildings, not us!

“When products are turned into services, no one has an interest in things with a short life span,” says Ida Auken, a member of the Danish Parliament. “Everything is designed for durability, repairability and recyclability. The materials are flowing more quickly in our economy, and can be transformed to new products pretty easily.”

The same general dynamics behind the shift to the cloud — access over ownership, pay-as-you-go consumption — are happening in every industry. Here’s what the former head of sustainability at IKEA said at a Guardian conference: “If we look on a global basis, in the West we have probably hit peak stuff. We talk about peak oil. I’d say we’ve hit peak red meat, peak sugar, peak stuff … peak home furnishings.”

That’s why IKEA and several other startups are launching new furniture subscription programs. Because when it comes to things like couches, appliances, electronics, and clothing, we are currently living in that non-cloud scenario. We aren’t in a circular economy, where products are designed to be reused and repurposed. We’re still living in the landfill economy.

The good news is that thousands of subscription companies want to change that. A company called Grover lets you subscribe to personal electronics in order to help reduce e-waste. Rent the Runway lets you share and subscribe to clothing in order to minimize clothing waste. Joymode, whose motto is “Do More. Own Less,” offers access to low-utilization items like camping gear and karaoke machines.

Today if a company wants to succeed (and get funding from places like Blackrock), they’re going to need to put their money where their mouth is when it comes to sustainable consumption and responsible repurposing. Peak Stuff (and its partner-in-crime, planned obsolescence!) is coming to an end. That’s why A World Subscribed is a more sustainable world.

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Like what you read? You can sign up for the Subscribed Weekly — delivered to your inbox every Saturday — here: http://www.subscribedweekly.com and visit http://www.subscribed.com/, bringing together the brightest minds and renowned experts to keep you informed, educated and inspired about today’s growing #SubscriptionEconomy!

Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.

Welcome! This week I’m discussing digital transformation and healthcare with Jeroen Tas, the Chief Innovation & Strategy Officer of Philips, a Zuora customer. Most of you are familiar with Philips, the $25 billion Dutch manufacturing conglomerate that makes everything from smart LED bulbs to MRI systems. Jeroen has been with the company for ten years, after impressive tenures at Citibank and Hewlett-Packard. He was kind enough to speak to me from his home in Amsterdam.

Tien: Jeroen, you’ve got a big role as Chief Innovation and Strategy Officer at a legendary $24 billion technology company, where it’s not an exaggeration to say you are shaping the future of healthcare. But first, while we may all be familiar with the brand, can you give us a snapshot of what Philips is working on today?

Jeroen: Sure. Philips was founded 130 years ago on the basic premise that technology could improve people’s lives. We started with lighting, and then we moved on to electronics and healthcare. The company is really about making people’s lives better and healthier. That’s why several years ago we decided to focus our core competency on health.

We basically have four areas we focus on: personal health, connected care, precision diagnosis and image-guided therapy. And all of these areas are getting increasingly tuned to the specific needs of the patients, and are also providing much better guidance for the health professionals.

Tien: When it comes to the healthcare industry, what would you say is the broader problem that Philips is trying to solve?

Jeroen: Well, let me start with a personal story. When my daughter was 12 years old, she was diagnosed with type one diabetes. At that point, everything you do becomes a decision point related to the disease. You become your own care provider. And at that time, it was very difficult because all the different facets of the care system seemed to be operating in a silo. The care was not organized around people, around consumers.

Tien: I’d love to dive into that. We have all this innovation, we have all this expertise. How do we weave it all together and provide an integrated healthcare experience for the customer? Was that the mindset that you brought from your financial services background into the industry?

Jeroen: Sure. My formative years were actually when I ran the tech lab at Citibank in the mid-nineties. Citi was very much an early pioneer in online banking. We realized at the time that it wasn’t about putting branches in the right locations, it was really about understanding consumers and their financial needs.

Tien: I was probably one of your earliest customers. I’ve been with Citibank since 1990. I remember when the first online bill pay product was launched on DOS!

Jeroen: That’s great. The whole idea was to design your services around the needs of the customer. At the time Citibank had already invested heavily in data. So every night they basically would run analytics on 50 million customers and try to identify the propensity for new products, but also the risk of attrition. So it was all about using data to solve customer problems.

Tien: And that was part of your thinking when you moved to Philips ten years ago?

Jeroen: It was definitely part of my thinking when I started looking at our own product propositions and saying, “Of course our MRI needs to be a very high-quality machine with a set of features that are compelling, but it’s really about the value. And how do we help our customers actually accrue the value of that machine?” It’s not like a car you drive off the lot and then the value drops 20% and you start depreciating the asset. So it’s a completely different mindset.

Tien: You organize your value proposition around the customer — in the case of an MRI machine, that customer is a hospital administrator.

Jeroen: That’s right. We have another product that’s a smart toothbrush. We have an AI agent on the toothbrush that helps you guide your brushing. So the whole idea is that the device becomes smarter and smarter; it knows about you, and it gives you relevant information. Now, how do you deliver that information? It can be through a smart mirror. It can be through an app. It can also be shared directly with your dentist. But the customer outcome is the same — a healthy set of teeth.

Tien: All companies call themselves customer-focused, but in my experience, a lot of them are still just trying to sell as much inventory as quickly as possible. What advice would you have for an executive that’s trying to lead their company down this kind of journey?

Jeroen: First, create a compelling story about how you can dramatically improve outcomes and value. And then you work your way backwards from that. If you share it’s much easier to get access, as opposed to saying, “I need to own it, I need to maintain it. I need to support it. And I need to put up the capital to get it.” Moving to a true services approach to a business can really expand access, scale and outcomes at a much lower cost.

I’ve asked our R&D leaders that when they create something new, they should always articulate it in terms of customer value. And we’ve created a very simple framework for that. The first rule is that it has to improve health outcomes. It has to create a better experience for the consumer measurably. So it has to be more seamless, more tuned, et cetera. It has to be more efficient and you have to prove that it definitely creates more predictable, better outcomes for that patient. And then once it’s in the field, then we need to continue to improve it.

Tien: That’s great. Start with the customer, focus on value, and find ways to unlock your assets and your innovation. Because at its core, the subscription model is about shared values and better outcomes. And you just showed us that when you get this right, the entire business wins. Finally, what is Philips thinking in terms of how to democratize access to healthcare?

Jeroen: We want to provide better access to good healthcare for two and a half billion people by 2030, but 400 million of those are people who don’t have access to care right now. So that’s forcing us to think into extremely low-access ways of providing care, which of course means digital.

I met with the CEO of Dana-Farber, one of the best cancer centers in the US, and she told me that despite their reputation, their patient base is still largely in New England. And she said, “Well, I have some of the best oncologists in the world. What if we can codify our cancer care pathways and provide clinical services to any hospital in the world?” So we started thinking about the concept of having digital access to their expertise, their knowledge, their pathways, and their protocols. So that any hospital can provide basically world-class cancer care.

The other way to provide access to care, of course, is to get it on your phone. To talk to an AI that helps and guides you, and when necessary connects you with a care provider. So these are the kind of models that we believe will dramatically create broader access to quality care.

Tien: I for one, am really glad that you switched from financial services to healthcare and the impact that you’re having with Philips! Thanks for sharing your journey to usership, Jeroen.

Jeroen: Thanks Tien!

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Like what you read? You can sign up for the Subscribed Weekly — delivered to your inbox every Saturday — here: http://www.subscribedweekly.com and visit http://www.subscribed.com/, bringing together the brightest minds and renowned experts to keep you informed, educated and inspired about today’s growing #SubscriptionEconomy!

Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.

A couple of weeks ago I talked about product offerings with Zuora’s Amy Konary, and our research data on this topic is clear: revenues of higher-growth companies are typically concentrated in a more highly curated set of products. Less is more.

And now I have an excellent example of smart product editing from GitLab, a hugely popular developer platform that is growing like crazy. GitLab is a fascinating company — they were 100% remote well before the pandemic, and they have an interesting philosophy where everything they do they make public for all to see, even as they prepare to go public.

Last month, GitLab dropped its bronze and starter plans in favor of a three-tier subscription model for its SaaS and self-managed offerings: Free, Premium and Ultimate. (The old plan was free/core, Bronze/Starter, Silver/Premium and Gold/Ultimate.)

This was clearly not an easy decision to make. You don’t just casually push pricing changes on your customers. A lot can go wrong. Netflix famously blew it back in 2011, and Adobe went through all kinds of hell when they shifted to subscriptions.

So what prompted the move? Well, here I’d like to paraphrase my colleague Madhavan Ramanujam of Simon Kucher & Partners: If you have more than 70 percent of your subscribers in your basic package, then you may have a perfectly respectable entry-level service that will ultimately kill you.

Since GitLab got rid of a starter tier, I suspected that’s what was going on. So I reached out, and they were kind enough to get back to me. As Xiaohe Li, Principal Pricing Manager at GitLab, told me, “The Starter/Bronze tier was originally designed for a single team and did not have enterprise readiness features or support. However, we had some larger customers on the tier who weren’t seeing the value that they really needed. One of our more sophisticated customers told me directly that everyone should get on Premium at minimum.”

The result was a customer/product mismatch that was actually costing GitLab money. As founder and CEO Sid Sijbrandij explained to TechCrunch:

“The Bronze tier, we were selling at a loss. We were just losing money every time we sold it — just on hosting and support. To be a sustainable business, this was a move we had to make. It’s a big transition for our customers but we want to make sure we’re a sustainable company and we can keep investing.”

It was a smart move. Sure, the bronze plan only cost subscribers $4 a month, but that’s exactly the point: if you want to run a successful subscription business, you should be putting real resources and investments into all of your offerings, not just some of them. As the old saying goes, feed it or kill it.

As GitLab further explains on their blog:

“The Bronze/Starter tier does not meet the hurdle rate that GitLab expects from a tier and is limiting us from investing to improve GitLab for all customers. Ending availability of the Bronze/Starter tier will help us accelerate development on customers’ priority needs such as improving usability, availability, performance, and delivering enterprise-grade security and compliance.”

What’s a hurdle rate? The bare minimum rate of return on a project or investment required by a manager or investor. GitLab simply decided that the money it was losing on its bronze tier could be better applied to improving its overall product. It’s an important lesson for all of us.

But that’s not all GitLab gave us a master class on how to make a pricing change the right way. Here are four key lessons that I took away:

Don’t just drop the ax. Make a transition offer.

Not only can GitLab customers on the bronze plan choose to remain on the same tier until the end of their subscription period, but they can also renew at the current price for one additional year or upgrade to Premium at a significant discount. That means some current bronze customers won’t see any pricing changes for almost two years. That strikes me as a very generous offer.

Don’t push upsells. Highlight value across all your plans.

GitLab did something quite surprising in their pricing announcement: they encouraged current bronze users to investigate their free plan! As they note on their blog, “The Free tier of GitLab includes 89% of the features in Bronze/Starter, making it a great option to get started with DevOps. Last year alone, GitLab added over 450 new features to the Free Tier, and we never move open-source features to paid tiers.”

Why is GitLab happy to invest in its free program, but not its bronze plan? Probably because the free plan is robust enough that it does an excellent job of converting paid customers. The bronze plan just got stuck in the middle in terms of costs versus benefits.

Listen to your customers. Invite feedback.

As they explain in this video, before the launch Sid and Xiaohe solicited lots of feedback (on a confidential basis) from customers and internal team members alike. They also made sure to align on principles first. As Xiaohe explains, “We understood that some customers would not be ready to upgrade immediately. So before we decided on the transition plan, we aligned on a central transition principle: Make sure to offer a customer-friendly pricing policy that ensures a smooth transition experience for customers. As you can find in our handbook, collaboration is a key pricing philosophy that we follow.”

On launch day, GitLab invited its customers to offer feedback in a special section of their community forum. Unsurprisingly, some people weren’t very happy about the change. That’s perfectly okay — they were encouraged to share their thoughts, and the company respectfully replied when they thought they had relevant responses to offer.

Make sure you move towards pricing simplicity, not away from it.

GitLab’s new pricing page is simple, intuitive, and does an excellent job of communicating value:

Always remember: less is more.

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Like what you read? You can sign up for the Subscribed Weekly — delivered to your inbox every Saturday — here: http://www.subscribedweekly.com and visit http://www.subscribed.com/, bringing together the brightest minds and renowned experts to keep you informed, educated and inspired about today’s growing #SubscriptionEconomy!

Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.

The pandemic has acted as a dramatic accelerant for the Subscription Economy in terms of agility, flexibility, and autonomy. It has been the ultimate forcing function for digital transformation.

Here in the US, roughly 40% of the workforce are currently sitting through Zoom meetings in their sweatpants. That percentage will drop by the end of the year, but the data is clear: when the dust settles on the pandemic, there will be roughly twice the amount of remote workers as before.

And many of those remote workers have already left town. About twenty million people have moved, or are planning to soon. Lots of them are leaving big cities for cheaper and larger spaces, while younger workers are happy to replace them (at discounted rents!).

So what’s the common denominator across this new “post place” world in terms of work, leisure, housing, dining, health care, travel, and all the rest of it? I think it boils down to one word: Usership. A new consumer sentiment that values people over things, experiences over products, and access over ownership.

What does a typical day in the life of a newly relocated remote worker in 2021 look like? After staying in an Airbnb for a few weeks, maybe they’ve landed a rental through Zillow or Trulia. Maybe it came furnished, or maybe they’re subscribing to furniture through Feather or CORT (that’s right — you can subscribe to dining room tables now).

In terms of transportation, maybe they graduated from ride-sharing apps to a lease from Fair or a subscription from Volvo. After binging on takeout for the first month, maybe they’ve settled into a steady meal kit service like Thistle or Freshly. Their entire employment infrastructure probably consists of a work-provided laptop, pre-equipped with a suite of productivity apps like Box and Asana.

I could go on: streaming services, dating apps, clothing services, telehealth plans, fitness routines, personal finance dashboards, online counseling. Today all those things live in your pocket. You can hop on a plane and take your life with you — all you need is a few changes of clothes, a laptop, and a cell phone.

We still have to tackle the hard stuff on our own: taking care of friends and family, finding fulfilling means of work, looking out for our community, staying healthy and happy. But the Subscription Economy has evaporated an amazing amount of logistics and friction from our lives.

All this has dramatic implications for modern businesses. According to our own End of Ownership survey, nearly two-thirds of consumers feel more connected to companies with whom they have a direct subscription experience versus companies whose products they can simply purchase as a one-off.

So what are some key takeaways for entrepreneurs in this new “post-place” era?

First, set yourself up for subscription success by mastering five key components: a compellingly priced offer, a frictionless subscriber experience, a business model optimized for recurring revenue and profitability, an efficient order-to-cash process, and a scalable technology architecture. (I’ll be writing more about these skill sets in future newsletters!)

Second, if you’re running a business that depends on foot traffic and physical locations — stores, restaurants, gyms, etc — you need “flip the script” and make your online presence your first point of contact. The pandemic has been a massive forcing function for online primacy, and that consumer imperative won’t go away anytime soon.

Third, and perhaps most importantly, start paying attention to consumption, as opposed to unit sales. Miles driven, not cars sold. Hours played, not games shipped. Features used, not applications downloaded.

That’s where the real value lies. That’s where the usership lives.

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Like what you read? You can sign up for the Subscribed Weekly — delivered to your inbox every Saturday — here: http://www.subscribedweekly.com and visit http://www.subscribed.com/, bringing together the brightest minds and renowned experts to keep you informed, educated and inspired about today’s growing #SubscriptionEconomy!

Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.

Want to triple your sales efficiency? Think about trimming your product catalog. That’s according to the new benchmark study from the Subscribed Institute and McKinsey & Company (you can download the full report here). This week I’m talking to Amy Konary, VP of the Subscribed Strategy Group, about these surprising key results.

Amy, as VP of our Subscribed Strategy Group, you advise some of the biggest companies in the world on how to improve their subscription models. You’ve seen all sorts of successes and pitfalls. When it comes to B2B companies, or businesses that sell to other businesses, you’ve told me that one of the biggest mistakes you see is when they neglect to consistently “rationalize their product catalog.” Now for a reader who might not be swimming in subscription models all day long, what does that process entail?

It means thinking very carefully about how you present your service to the market. Successful B2B subscription companies are constantly optimizing their product catalog: removing redundant products, assessing bundling choices, figuring out which add-ons to remove or replace. And it’s not something that should happen just once in a while — it’s a constant, iterative process.

For a company that is shifting from a traditional asset sales model to a subscription service, this process is particularly tricky. Why? Because large product-based businesses have very complex SKU structures that tend to explode when they try to launch subscriptions.

And what is a SKU, exactly? Again, asking for a friend.

A SKU number, or stock keeping unit, is a code assigned to a piece of inventory, which allows a company to track the manufacture, storage, and sale of that particular asset. They’re generally associated with retailers and manufacturers, but they can be used by any company that wants to monitor a specific product or service.

Picture a lawnmower sitting in a Home Depot Aisle. When a customer buys that lawnmower, its SKU number (in conjunction with Home Depot’s ERP system) allows the company to account for the sale, as well as track its in-house supply and potentially trigger a new order from the manufacturer. Have you ever seen a bar code sticker on a box or a product? Well, then you’ve seen a SKU.

And how do SKUs work in a subscription model?

The short answer is not very well! Let’s say that Home Depot wants to get into the lawnmower subscription business. Or maybe for a fixed monthly fee, they will offer you access to a whole range of lawn equipment that you wouldn’t otherwise purchase.

Now Home Depot isn’t selling lawnmowers, they’re selling access to a lawnmowing service (probably involving connected devices attached to a cloud-based service) over a fixed period of time: 6 months, one year, two years. Maybe they also want to roll out different bronze/silver/gold tiers, a suspend and resume option, or a usage-based element which could trigger an upgrade or downgrade.

But remember, Home Depot is sitting on all this expensive SKU-based ERP software. In order to manage this new offering, every possible iteration of this service now requires its own SKU!

So a six-month bronze plan with an option to upgrade would have a different SKU number than say a 2-year gold plan with, say, a fixed number of times you can use the lawnmower per month.

Exactly. So you can see what this does to your product catalog. Things become complicated very quickly. But the problems go from bad to worse when that catalog is reflected in a confused customer offering and an inefficient quoting process. Onboarding takes way too long — it might take pages and pages to find the right plan, both for a rep or a customer. User experience suffers. It’s basically just much harder to sell. You can easily lose out to a faster competitor.

So all these hidden back-office mechanics like SKU numbers can have a real impact on real live customer experience.

Definitely. If the service is overly complex, then it reduces your trust in the service, right? You start asking yourself: What’s buried in the fine print? What exactly am I buying anyway? It can also create scenarios where customers are quoted two different prices by two different sales reps, depending on which SKUs are combined to create the service quote, which also reduces trust.

This is why you should never try to configure an ERP system to run a subscription service. I believe I’ve mentioned this before.

You have indeed, Tien. Successful subscription businesses are customer-focused, as opposed to product-focused. They offer clearly tailored offerings supported by systems that automate and support the inherent dynamism of subscription models. And if this sounds like common sense advice, well, for the first time ever, it’s actually been quantified.

Great. Let’s get into this new study you just finished with McKinsey! What did you find out?

So the Subscribed Institute worked with McKinsey & Company to analyze three years of performance data from nearly 500 companies and compared indicators such as revenue growth, expansion, and net retention against 30 metrics corresponding to design choices in the quote-to-cash process.

And the results are clear — revenues of higher-growth companies are typically concentrated in a more highly curated set of products:

So for a given amount of revenue, high growth companies actually sell fewer products than lower growth companies. High growth companies need an average of only 1.1 products for every $20 million dollars of Annual Recurring Revenue, while low growth companies need an average of 3.4.

They’re selling less to sell more.

They’ve done a better job of optimizing and editing their product catalog. And in an industry where most B2B subscription services sell less than half of their existing catalog during any given year, higher growth companies sell a significantly larger percentage of the catalog: 40% compared to 30%. There are several other key takeaways in the report, which you can get here.

Thanks, Amy!

Anytime, Tien.

Selling Less to Sell More: A Conversation with Zuora’s Amy Konary was originally published in The Shadow on Medium, where people are continuing the conversation by highlighting and responding to this story.

This is the same publication, I might add, that wrote an article called “Netflix Shares Could Dive to $45” in 2016. “Investors continue to overlook increasing cash burn and relatively modest income,” warned Barron’s. The stock is now trading at around $563.

Lots of people felt the same way back then. Do some googling and you’ll find plenty of articles with headlines like: “It’s Official: Netflix, Inc. (NFLX) Stock’s Run is OVER,” (Investor Place, 2016). Here’s another quote from Movie City News: “Netflix will be purchased by 2020… because the content issues will overwhelm their business, not too much unlike the way Netflix overwhelmed Blockbuster and the remaining mom & pop DVD/video stores.”

The bear argument against Netflix has always been that it will never be able to repay the huge amount of debt it has accrued ($16 billion at last count) to finance all those thousands of hours of content.

For example, here’s what Comcast CEO Brian Roberts told the Wall Street Journal when House of Cards came out: “Unless Hastings has figured out a way to lay off some of the [House of Cards] costs with a partner, or work some kind of production magic, this thing is going to cost Netflix a pile of money.” LOL.

That argument has now been settled. Not only does Netflix now have a significant competitive moat with attendant pricing leverage (get ready for your monthly rate to go up this year), but it’s also planning on an initial $500 million debt payment, as well as stock buybacks.

Of course, this will come as no surprise to Subscribed readers. As I noted in the book, borrowing heavily to invest in new content was simply Netflix using its recurring revenue as a competitive weapon. Unlike traditional movie production shops, Netflix starts every year with known, predictable revenue. It just made sense to use leverage, similar to a mortgage on a house, to invest in attracting new subscribers, especially if it also extended the lifetime value of their existing subscribers. That’s the beauty of a smartly run subscription model.

So now that Netflix has proven the naysayers wrong, is it all over? Has the streaming race been won? I don’t think so, not by a long shot. To paraphrase a line from The Social Network, “Two hundred million is a pretty good number. Do you know what’s an even better number? Two billion.”

According to a recent study from Juniper Research, there will be two billion active subscriptions to on-demand video services in 2025, which represents an increase of about 65% from the current total. Could Netflix capture at least half of that number, and become the world’s first billion subscriber company? It’s quite possible.

Let’s look at another juggernaut: Amazon Prime. Today, over half of all American households are Amazon Prime subscribers, so a 50% market penetration is certainly possible. Amazon Prime, however, is limited to the U.S. It’s hard for Amazon to replicate its logistics elsewhere, which is why other e-commerce vendors, such as Taobao and Flipkart, tend to dominate outside of the U.S. But Netflix doesn’t have that problem. In fact, most of its subscribers are already overseas (74 million American subscribers to 130 million abroad).

And this doesn’t have to be a winner take all situation. While lots of people have been trained to go to Amazon for all their e-commerce needs, the same dynamic doesn’t apply to streaming. Most people have multiple video and music streaming services. Netflix just has to be one of the services they pick.

Finally, as the success of Disney+ has recently shown, content is king. The idea that one company will eventually own all that content remains highly unlikely. Streaming video is a vast industry that will never be truly monopolized. Over the next decade, I predict that we’re going to see new streaming channels dedicated to sports, news, gaming, live events, business, you name it.

The market might wind up looking like the old Hollywood studio system, where the major streaming services act like the big studios, and the niche services act like the smaller indies. And as gaming technology and virtual reality increasingly seep into the rest of media, they will start creating entirely new subscriber experiences.

These days there’s a lot of doom and gloom about content saturation and “streaming fatigue.” Don’t believe a word of it. If anything, a more realistic subscriber number for this market is probably closer to global cell phone penetration. Streaming video is just getting started.

Two billion, here we come.

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Like what you read? You can sign up for the Subscribed Weekly — delivered to your inbox every Saturday — here: http://www.subscribedweekly.com and visit http://www.subscribed.com/, bringing together the brightest minds and renowned experts to keep you informed, educated and inspired about today’s growing #SubscriptionEconomy!

Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.

Here’s how it worked: If you had a web site, you submitted it to Yahoo, and if someone there thought it was worth including, they categorized it accordingly. The company hired librarians and book store employees to do this job. It was hailed as the most significant effort at organizing knowledge since Carolus Linnaeus invented the modern system of taxonomy.

Then, of course, came Google. Google didn’t use people, it used math — or rather, it used math to formalize the collective intelligence of people. You typed in a subject, and its PageRank algorithm recommended a web site to you based on the number and quality of links to that web site. It was a brilliant algorithm.

Google eventually left Yahoo in the dust. It grew enormously popular because it was simple and it worked. There was no public outcry about Google’s algorithm. No one accused it of making the world a worse place. There was no documentary decrying its evils, a “Social Dilemma” for its time.

But then things took a turn for the worse. Social networks exploded in popularity, which was fine enough, but their algorithms had a very different goal: engagement. Suddenly the algorithmic priorities shifted away from authority and validation, towards hype and virality.

Now, that was fine when people used Facebook to connect with old high school friends, or used Twitter to post about what they had for lunch. But it became extremely problematic when these platforms transformed into the primary source of news and information for millions of people.

Which brings us to the grim situation we find ourselves in today. In a recent Wall Street Journal article titled “Social Media Algorithms Rule the World. Good Luck Trying to Stop Them,” Joanna Stern writes that:

“People are shown things that appeal most to them, they click, they read, they watch, they fall into rabbit holes that reinforce their thoughts and ideas…They end up in their own personalized version of reality.”

So what can we do about this? I have a few ideas.

First, insert authority back into the algorithms. Stern suggests one option is that “the platforms get serious about deprioritizing the outrage, anger and conspiracy, and prioritizing the trustworthy, thoughtful and reputable — even if they know it means less engagement.”

Your feed can’t just be simply what your network is sharing. Amassing a large following doesn’t make you by default an expert on anything. In the early days of Google, people were constantly trying to game the system by purchasing dozens of links to their websites; the algorithm eventually figured it out.

Second, create more accountability. If the social media companies are indeed becoming a main source of “what’s going on in the world,” there needs to be consequences for spreading false information. We’re finally starting to see some of this happen now, but there needs to be way more investment in content moderation.

Third, fix the business model. Google works because its business model demands that user searches return relevant information. Again, this gives them an incentive to fight against people trying to game the system.

The social media companies have no similar incentive. If anything, they make more money when people game the system by driving more engagement. That’s the problem with a business model that runs slot machine psychology and variable rewards.

Social media will never be free of tribalism and anxiety. But getting rid of a business model that actually depends on tribalism and anxiety seems like a really good place to start.

Prioritize authority. Create more accountability. Fix the business model. Then maybe social networks can go back to doing what they do best: connecting people.

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Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.

And that’s good news. We need more players in the EV market. While Tesla dominates it today, there is clearly plenty of room for more competition and innovation (Elon Musk said so himself!). The market research firm IDTechEx estimates that EVs will constitute 20 percent of the worldwide market by 2030, and up to 80 percent by 2040. At some point, EVs will constitute the entire automotive market — it’s just a question of when, not if.

Like most people, I’m very excited about our EV future. We have the opportunity to reinvent transportation, as well as make material progress on climate change. But if the auto industry just exchanges their combustion engines for electrical ones, and operates on a business as usual basis, they’ll be missing out on some huge opportunities.

Here are some other ideas that could make the EV market truly transformational:

Reinvent the dealership experience.

Wouldn’t it be great if your car dealership acted more like an Apple Store, and less like a flea market, where you haggle and haggle, and it always feels like a win/lose dynamic? I think there are some lessons to be learned here from smart omnichannel vendors like Patagonia and Warby Parker. Appealing showrooms and engaged customer reps are still incredibly important, but the transactional elements need to be shifted online. Buying or leasing a new car should be as frictionless as possible.

Most customers are 70% through their buying cycle by the time they’ve arrived at a dealership, anyway. As GM’s Chief Electric Vehicle Officer Travis Hester noted in the presentation, today we’re looking for a seamless buying experience across mobile, web, and dealership sales. We’re also looking for complete pricing transparency from the manufacturers, as well as validation from third-party pricing comparison services. New EVs are a great opportunity to transform the dealership experience.

Recognize that drivers are looking for access, not ownership.

Exciting new technology is advancing so fast — who wants to be stuck with a dated vehicle? That’s why over a quarter of new vehicle sales are on lease, and the global vehicle subscription market is expected to surpass $80 billion by the end of the decade.

It makes sense. When it comes to automobiles, consumers are demanding all the payment optionality and flexibility they get from their other mobile devices. And they don’t want the hassles of maintenance. I might need something simple and light for my daily commute, but a two week-road trip might call for something a little more fun and exciting. Give me the option to mix and match.

Invest in the system, not just the car.

If EVs are going to achieve Mary Barra’s ultimate goal of the “three zeros,” they are going to require a fundamentally new system of driving. A new network. And that will entail thinking about things like sustainability and infrastructure. And we can’t afford that system to be balkanized and proprietary. New infrastructure is going to be immediately necessary for charging, but it’ll become even more important for autonomous driving (Beijing even has a new highway just for self-driving cars).

For example, the end of ownership means that OEMs will increasingly become custodians of their own physical products. They’ll act more like fleet managers. And that’s fine, because EVs depreciate considerably slower than their gas-powered counterparts, and since they’re connected to the Internet, manufacturers can see in real-time how their cars are doing. Vehicles will get more usage, consumers will get more options, manufacturers will get smarter, maintenance will become automated, and planned obsolescence will become a thing of the past.

When it comes to digital services, think beyond the car.

As GM’s new customer service platform Ultifi platform makes clear, connected EVs are the ultimate mobile devices. They are going to become completely customizable, with a whole range of different apps, services and features. I will be able to build my suite of EV services the same way I build my cell phone home screen. I will have the option to add or subtract premium content and features after I drive my new EV off the lot.

But a driver’s digital experience doesn’t stop as soon as she gets out of the car. In fact, that’s just the start. We’re going to need digital services that can meet our extended needs. McKinsey says that “driven by shared mobility, connectivity services, and feature upgrades, new business models could expand automotive revenue pools by about 30 percent, adding up to $1.5 trillion.” That’s an extraordinary figure. I think it points to a future in which we will purchase automobiles largely on the basis of what digital services they provide, and how well they synchronize with the rest of our digital lives.

Re-orient the auto industry towards the experience, not just the vehicle.

As more consumers (especially younger ones) choose to subscribe to connected vehicles as opposed to buying static ones, manufacturers stand to benefit enormously. In a traditional model, the product is done when it’s shipped, and then it’s up to the field — dealerships, garages, customer support — to make that product work.

That’s not how the best companies work today. Backed by rich customer data, auto manufacturers can now bring together all the component parts of the company — engineering, finance, support, customer success, management — and focus on creating measurable value for their drivers.

At the end of the day, today’s businesses live or fall behind by the value they deliver to their customers. This is a chance for the auto industry to rethink how they deliver their vehicles. As services. As networks. As experiences.

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Like what you read? You can sign up for the Subscribed Weekly — delivered to your inbox every Saturday — here: http://www.subscribedweekly.com and visit http://www.subscribed.com/, bringing together the brightest minds and renowned experts to keep you informed, educated and inspired about today’s growing #SubscriptionEconomy!

Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.

General Motors’ Vision of EVs was originally published in The Startup on Medium, where people are continuing the conversation by highlighting and responding to this story.

These days it feels like cash is disappearing by the minute. Just look at fintech giants like Ant, which started as an e-commerce escrow service and now handles over $16 trillion dollars in payments for over a billion users. Rural market purchases in China don’t involve yuan anymore, they’re done with cell phones and QR codes.

Last year, over two-thirds of the world’s 37 billion mobile money transactions happened in Sub-Saharan Africa. In Sweden, where less than ten percent of all payments are made in cash, the government is considering moving completely to a digital currency. Indeed, according to a recent study approximately 70% of central banks around the world are considering issuing their own digital currency.

The idea of a cashless future isn’t new (researchers have been discussing the concept of the “checkless society” since the mid-20th Century), but the COVID crisis has dramatically accelerated the shift towards online payments. The digital economy probably moved forward six years in the last six months.

All this has me thinking. Transactions are never going to go away. Money will always have to move from one place to another. But what happens to payments in the Subscription Economy? I’ve heard arguments on both sides: in a world of subscriptions, payments don’t matter anymore; and when you run a subscription business model, payments are a bigger challenge than ever.

On one side, you could argue that payments don’t really matter anymore because of the intrinsic nature of subscription businesses: they run on relationships, not anonymous transactions. If a client misses a regularly scheduled payment it’s not a big deal, they can always make it up later. In a sense, we can go back to the days when we knew the people we bought from. Remember when people bought stuff from the general store on credit?

If this sounds far-fetched, just look at how subscription companies reacted to the COVID crisis last year. Many of them (including Zuora) gave their struggling customers a break, because they knew they were good for it. Companies helped each other out with deferred payments, usage credits, strategy sessions, you name it. That’s the beauty of subscriptions; they’re about fostering long-term relationships based on mutual trust.

But on the other side, payments are now more important than ever for one simple reason: complexity. Growing enterprise companies with a diverse array of services can see their change orders and transactions balloon exponentially. And for consumer companies, credit cards generally expire after three years, which means if you’re going to have a fixed percentage of declines, or involuntary churn. According to Visa and Mastercard, an average of 15% of recurring credit card payments are declined every month.

Let’s say you’re a highly successful subscription business that starts the year doing $100 million in monthly recurring revenue, with all your subscribers paying you the same amount every month. At that 15% churn rate, your business is down to $44.5 million by June and $25 million by December. Those are serious numbers. After all, it’s not like your clients can just pull out another card while they’re standing at the checkout counter!

All this means that automating your collections process is incredibly important. You need to invest in order to tame complexity. We’ve found that most of our clients use between two and four payment processors depending on the country they’re operating in. These include solutions like GoCardless, Stripe, Alipay, and Paypal as well as bank transfer systems like SEPA and ACH.

So which side is ultimately going to win out? Who knows? Ideally, it’ll be a combination of both: trusted partnerships on one side, and smart collections on the other.

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Like what you read? You can sign up for the Subscribed Weekly — delivered to your inbox every Saturday — here: http://www.subscribedweekly.com and visit http://www.subscribed.com/, bringing together the brightest minds and renowned experts to keep you informed, educated and inspired about today’s growing #SubscriptionEconomy!

Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.