[00:00:00] Tien Tzuo: This whole SaaS thing that you and I live in and take for granted, it's gonna evolve and take over the world. It's not software eats the world, right? It's really as a service eats the world. And this whole idea of anything as a service is probably the biggest trend in the next 10, 20 years.

[00:00:23] Dan Saks: That was Tien Tzuo. Tien has been analyzing subscriptions since the dawn of the internet. He's been an expert source for companies creating their own subscription models and also the customers using the products. He is the author of Subscribed: Why The Subscription Model Will Be Your Company's Future and What to Do About It.

[00:00:45] Today Tien is the founder and CEO at Zuora, a company that provides cloud-based software on a subscription basis. It enables any company in any industry to successfully launch, manage, and transform into a subscription business. In today's episode, Tien talks about how his work at Salesforce impacted the work he's doing today with Zuora.

[00:01:07] He shares how important it is to focus on the customer relationship, and he also discusses the evolution of subscription-based services and what the future of SaaS companies look like. This is Daniel Saks, President and Co-Founder of AppDirect, and it's time to decode subscription services and how the subscription model can help your business thrive and strengthen your customer relationships.

[00:01:35] Welcome to Decoding Digital, a podcast for innovators looking to thrive in the digital economy. I'm your host, Daniel Saks, and I'll sit down with other founders, CEOs and changemakers to decode the trends that are transforming the way we work. Let's decode.

[00:01:58] Dan Saks: Welcome to another episode of Decoding Digital. I'm here with my friend, Tien Tzuo from Zuora and really excited to decode the subscription economy Tien. Welcome

[00:02:08] Tien Tzuo: Daniel. Good to see you. Good to see you.

[00:02:11] Dan Saks: Likewise. So we've known each other for over a decade. Yeah, I feel like when I was first introduced to you, you were already a guru in the cloud, all things marketing from being one of the earliest team members of Salesforce and running marketing there.

[00:02:26] And we first met, you know, when you were starting Zuora and you showed me the ropes about, yeah,

[00:02:31] Tien Tzuo: I think it was that coffee shop. It was that coffee shop in San Francisco near Union Square, if I remember right.

[00:02:36] Dan Saks: Exactly. I was so young. I think I was nervous for that meeting because I knew you were such a legend and you kinda made me very calm and confident.

[00:02:44] So I, I appreciate that. So what's interesting is so much has evolved, you know, over last decade plus where cloud has become so much more pervasive. Subscription business models have become so pervasive. But when you founded Zuora, I think a lot of those tenants or even the notion of the subscription economy was very nascent at the time.

[00:03:04] So what I'd love to dig into first is really your background at Salesforce and some of the experiences there. And then I would love to kind of get back to the subscription economy and how it's evolved. And we can talk about your book and talk about all the fun things that we connect on. So with that, maybe if you could give a little bit more background around the early days of Salesforce.

[00:03:25] Tien Tzuo: Yeah. Salesforce was obviously an amazing, fantastic experience. You know, I was one of the folks that first played with the internet. You know, I, I played with Mosaic Communications, the browser when it first came out, you know, I was at Oracle. I installed Oracle's web server, which is a product that coincidentally Benioff actually spearheaded at Oracle.

[00:03:48] In 1994, Marc was probably the only person that knew anything about the internet at Oracle. And now I installed it, built all this stuff where you can have a mosaic browser window into an Oracle database, and it's this feeling this thing is going to change the world. Fast forward in 1999, I find myself on a traditional enterprise software company and saying, this just doesn't make sense, right?

[00:04:08] I really needed to be part of this internet thing. And at the time, all the hot internet companies were things like Webvan. pets.com, eToys. It was all consumer ideas and that wasn't me. Right? And I was looking for some combination of enterprise applications in the internet and there's only a handful of companies back then, I think it was NetSuite and a couple other companies that don't exist.

[00:04:28] But Salesforce, right? Marc's vision of saying, Hey, using enterprise software should be as easy as buying a book on Amazon. And you know, the early days we even modeled our application based on Amazon with tabs, Amazon uses tab metaphor. So there was an aligned vision between, you know, folks like Parker, Dave Molinoff, all of us, you know, Jim Burley, Brian Milham, who's still there, of saying we really want to change the enterprise software industry.

[00:04:55] We wanted to change it in two ways. We wanted to change it with a different delivery model, which we now call cloud - software as a service. But we also wanted to change the fundamental business model.

[00:05:04] We wanted it to be a pay you go model, what we call subscriptions right now. And so in many ways I had a fantastic time at Salesforce. It's got this unique culture. I try to replicate parts of that here, where you really could move around in the company, you can do different projects. So I ran product management.

[00:05:21] You know, Marc taught may be the first Chief Marketing Officer, spearheaded verticals in the enterprise push as a Chief Strategy Officer at the end. But if you bullet all down, it was really about how do you make the subscription model work, right? What does it mean to sell software as a subscription model?

[00:05:38] And a lot of the things that we take for granted the industry is now, whether it's the whole concept of what an SDR does or a customer success does, even terms like ACV and ARR, these were things that we created at Salesforce because there wasn't a language around this. And so that was an amazing experience and this is why, you know, fast from the 2009 right when we started Zuora, you can see, you know, after 10 years of immersing myself in subscription-based business models.

[00:06:05] That's all we knew by then. Right? We really thought that the subscription model was the best model in the world and that all companies really should follow this path.

[00:06:15] Dan Saks: What were the early debates at Salesforce, around the subscription model and pay as go? Was it obvious that it would be a per user model or did you guys test a lot of different types of pricing strategies in the early days?

[00:06:26] Tien Tzuo: Yeah, look, the world was pretty unsophisticated, right? So for us, we just climbed onto the per user model. But for example, You don't know in the start, like are you gonna be a small business play? A big business play. So we really want a collaboration. So we gave five users for $50 a month and after that's $50 a user.

[00:06:45] And I remember we got all sorts of reactions. We got reactions like you know, that's really, really cheap to that's really expensive. That's like highway robbery and so you can see it's new and people just didn't have a sense to look at it. We realized pretty quickly though two things that one, we were just giving away four users free for no reason.

[00:07:03] And so, you know, we needed to change our pricing model and even without that, $50 a month was too low, the business model wasn't gonna click in. The business model would click in more at 65 to 75 bucks. And so we started changing our pricing model and definitely realized, and we were running the whole company off of this Microsoft access based billing system That was built for like small little ISPs, right?

[00:07:23] The world had millions of ISPs at the time, and we couldn't do any of these things. We couldn't make any of these changes. And so we wound up building our own billing system to drive the growth of the company. But that was the extent of the pricing model experimentation at the time.

[00:07:38] But then you go on this journey, right? You go on this journey where it's like, well, we need to do annual contracts, right? Monthly contracts are not good enough, and that was a big debate. Well, should we have a usage based component? We had one company, again, this is early days, a video company. Cause we didn't charge for storage that realized they could just upload these gigantic video files.

[00:07:58] Sounds silly. Now that you know, we got terabytes of storage on our laptops, but back then they would upload all these video files and we said, look, these guys are abusing the system and so we gotta start charging for usage. And so part of the subscription based business model is that debates of pricing never end.

[00:08:16] And there's always more innovation that you can do in pricing. And that's when we realized, look, we have to have an infrastructure that supports any type of pricing and we wound up building our own billing system.

[00:08:27] Dan Saks: And how did you go from building your own billing system at Salesforce to realizing that that could be a company in its own right?

[00:08:31] Tien Tzuo: Well, I gotta tell you, building your own billing system was a terrible experience. And so, you know, you thought you would do it once, and I call it the money pit. That team, you know, the billing team started off with three people. It was probably about 50 when I left and never did what we wanted. In 2006, 2007, our Japan operations were sending out invoices manually.

[00:08:50] One invoice at a time because our billing system couldn't do that. And so, you know, that led to a conversation eventually at one of my lunches with Marc, where I said, look, this billing thing seems like a big complicated area and you know, what would you think if I actually left Salesforce to go do this? And so he gave me his blessing and the rest of history.

[00:09:11] Dan Saks: And what does the Marc blessing mean? Like, did you know from there you were good to start the company and he'd support it or?

[00:09:18] Tien Tzuo: Well, I got this philosophy that relationships are important. You should always leave a company at a point in time. So this was a point in time where there's a bunch of my projects that I was able to transition out.

[00:09:28] We were talking about what to do next year. But you know, I was part of the company growing up and if the conversation said, look, we really need you to do X, Y, Z here, it's too important. I probably would've stayed, you know, folks that, this is my philosophy, they go to their company and say, here's two weeks notice, that's just not the way to do it.

[00:09:44] Right. You're part of the company. You're part of building something. It's like a family. At one point it might be time to move on, but make sure that's a bilateral discussion. It's a collaborative discussion, and that's the way I approached it.

[00:09:58] Dan Saks: Yeah, it makes a lot of sense.

[00:09:59] So what was the founding notion for Zuora and how has it evolved since then?

[00:10:04] Tien Tzuo: Well, we always knew billing was a big problem, and so we were excited about building it. One of the things that we probably didn't realize is the tentacles go deep and the tentacles go wide. And so the next thing you know we're a payments company.

[00:10:18] The next thing you know we're doing AR and collections. The next thing you know, revenue recognition is just as big and just as important of a part as billing. Like you can help companies price and package and grow and be agile with billing, but if you don't solve revenue recognition, they can't do any of those things, especially when you know there's these new rules that cropped up.

[00:10:38] Probably five, six years ago called ASC 606, right? I used to joke about how 606 really should be called ASC 666. Cause it was just a really complicated thing that handcuffed a bunch of businesses. And so our product footprint has grown to be fairly large and I didn't know that we were gonna build a quasi accounting system.

[00:10:57] And we're not an accounting system, but we certainly have a whole bunch of accounting concepts. It'll allow the entire quote-to-cash process to be run as a full sub-ledger. So the product footprint for what we do has been big. But you know, the flip side of it, it's companies really need, and if you have an area where you can put a lot of energy in building a broad product footprint, that oftentimes it becomes your competitive mode, right?

[00:11:19] So you see sort of both sides of the equation.

[00:11:22] Dan Saks: It definitely seems like the subscription economy has evolved dramatically, and then when you put out your book too Subscribe, you had some great case studies kind of speaking to this transition and movement, but one of the things that we've talked about a lot on the podcast this season has been around product led growth and the notion of people playing with utility based models and other type of consumption models.

[00:11:43] How do you see things evolving from that initial kind of flexibility around per user, per month, and then really thinking about a broad quote-to-cash, to today's models where you can have many more layers of complication?

[00:11:55] Tien Tzuo: Well, look, today we powered not just this. The second big thing has changed, and maybe we could talk about that later, is, is we don't just power technology companies.

[00:12:02] The amazing thing this last five years is the physical world is getting into the digital game, right? So today, you know, we power cars, we power washing machines, we power robot vacuums in all sorts of things. And so this thing is pretty big and a lot of these new business models. Per user doesn't make any sense, right?

[00:12:19] It's all about consumption. It's all about usage. Our first customer was actually an API driven company. Core Metrics. They compete with Omniture or competed with Omniture. I think they're part of the IBM portfolio now. They were a hundred percent usage based with rollover concepts, where the pricing model would almost change every single month based on your usage levels in the previous month.

[00:12:39] And so the complexities of usage based models is fairly large and something that we've always embraced. Look, I think people have this mistaken notion that subscriptions means a fixed monthly fee, either a fixed per user, fixed per month, or fixed per module, and nothing can be further from the truth. I think there's always complexities in pricing models.

[00:12:59] There's always multiple things, and so we think of maybe less of the subscription and more of the subscriber, and our view is that the modern business starts with a customer and envisions a customer as a subscriber. Where the old business, the customer exists simply to buy a product. The new business model is, you know, there's a reason.

[00:13:19] It's called Software as a Service. The idea that you have to provide a service to a customer. You exist as a company to service your customers, not your customer exists to buy your products. And this flip is really, really important. And you know, I would not say the software industry operated under this mindset back in the old days of on-premise software.

[00:13:36] The software as a service forces you to, right? Because you need to earn your customer's business every month. You know, month in, month out, year in, year out. You know how important renewals are. You know how important churn is, right? And it really focuses you on the customer.

[00:13:51] And so we think of the subscriber model as a revisioning, an evolution of business models away from product-centric business models to these new business models that are built around customer relationships when you monetize those customer relationships, right? And we think that that's really how modern businesses work.

[00:14:09] And so I’ll share with you a story. I love the story. It's a story of GoPro. We all have GoPros. We all have GoPros. But you know, GoPro's old model was every time they came out with a new one, like HERO4, HERO5, HERO6. The way they sold it is they needed you and I to go to the ski slopes, right? To go scuba diving, to go fishing, whatever it is where we'd want to go buy the latest cameras.

[00:14:33] Well, 2020 hit, and people weren't going outdoors and people weren't buying cameras anymore, but they had this subscription service called Click, and if you read the reviews of Click at the time, they weren't great. But GoPro fans were so in love with GoPro and they just wanted the convenience that they have 30,000 subscribers, something like that, right when the pandemic hit.

[00:14:56] So they said, look, we can't sell you what cameras, why don't we focus on this audience? They grew those subscriber base. Within 10 months, they 10 exits something like 300,000 subscribers. Huge success. And they approved the product. They added things like warranties and so on and so forth. And then they said, you know, today we only let people with a GoPro camera use this app.

[00:15:16] Maybe we should lead with the app. Maybe we should make the app available to our competitor's product. Who's their competitor? Their competitor's a phone, right? Anybody with an iPhone or an Android should use this app? And they're saying, so yeah, but if we do that, why would they buy a GoPro, right? They're like, no, no, no.

[00:15:30] We need a relationship. If we have a relationship with folks, then we can take them on a journey and eventually they're gonna buy more cameras. And so they release their app. Now anybody could use it. And next thing you know, the last earnings call, they announced that they had 2 million, 2 million subscribers to this application.

[00:15:46] 2 million people, they have a direct relationship. So when the next GoPro HERO comes out, they just say, Hey, you know, it could be a popup in the app, it could be an email. Did you know that the new HERO camera's out? Click here and buy one right now. Right? Or if you're gonna write a plan, maybe we'll just go ahead and send it to you.

[00:16:03] And so it's a re-envisioning start with the relationship, build relationships. And again, we take all this for granted with software as a service, but you can see there's so many companies out there and so many ways of thinking that says, look, we're just trying to do a deal, versus we're trying to count how many relationships we have, and then find all sorts of ways to monetize those relationships.

[00:16:23] Dan Saks: Yeah. The focus on relationships and thinking about the customer value is so powerful and important. And as you've seen many technology cycles and you were part of the creator of the subscription economy and cloud economy, how do you see AI and other technologies impacting the future of subscription business models and software in general?

[00:16:45] Tien Tzuo: More and more value is going to be in the services that our physical products are attached to versus the physical product themselves.

[00:16:52] And that's why I'm convinced when I see our manufacturing customers, that every physical product is going to become a service, right? It is gonna be attached to a broader service that's gonna be using AI. And so every invention that we've seen, The last 20 years related to the internet, whether it's mobile phones, right, the iPhone, whether it's big data, whether it's AI, it's all the same trend of pushing everything towards a service.

[00:17:19] And so we partnered with PWC, Deloitte, Accenture. They loved using the XAAS term, really anything as a service. And so this whole SaaS thing that you and I live in and take for granted, it's gonna evolve and take over the world. It's not software eats the world, right? It's really as a service eats the world, and this whole idea of anything as a service is probably the biggest trend in the next 10, 20 years.

[00:17:42] Dan Saks: One of the things I know you see at the forefront is it's hard to make those transformations and oftentimes companies invest a lot and fail or can't get the executive support to do these transformations. What advice would you have for companies that are trying to adopt a subscription model? And are there ways of them getting it right the first time?

[00:18:01] Or does it always have to be an experiment?

[00:18:03] Tien Tzuo: Well, I'll start with a small story. At Salesforce, we were having a major, major issue on adoption. The software was so easy to sell and so easy to buy, and then you had to get these cantankerous salespeople to actually use it. And just to get a sense, when we started, you know, it's not like we all are used to wifi, these MacBook Airs, these super light laptops, right?.

[00:18:26] These guys were carrying around compact bricks. They were going to a hotel, they would plug a phone line, a 56K modem, they unplug it from the hotel phone, plug it into their compact brick, right? Dial up on a 56K modem, and they're saying, you want me to do what in order to like enter my forecast?

[00:18:42] So we were having problems with adoption and try as we could, we could not get our companies to change. And then we realized that what we needed to do is to find the minority of leaders, right? That were able to get these companies to change. And the minority of leaders basically said, you know what? If the data doesn't exist in Salesforce, it doesn't exist.

[00:19:00] You're not gonna get paid on the deal. And we're like, well, we can't go tell our customers that, but our customers can listen to other customers. Right? And you say, wow, if you were able to do that, then I can do that too, right? And so I think people are inspired by other people. Companies are inspired by other companies.

[00:19:17] Ultimately, that's what inspired us to write the book. You know, this book Subscribed. It's turned out to be a best seller around the world. You know, everyone in Japan, as far as I can tell, right in business heads, read the book. But what we try to do is just take a collection of stories and companies really driving that transformation.

[00:19:32] And then just arm any company. And so our work with iRobot came because Colin, the CEO, went to Japan and his Japanese leader gave him the book and said, you gotta read this. And so apparently he read it on the plane right back, went to his team that says, this is what we're trying to do, and we started working with him.

[00:19:50] So the best thing you can do really is to find other customer stories, right? Of companies that have been able to do the transformation and find ways to get those stories out there for the companies that are really hungry for these success stories.

[00:20:02] Dan Saks: I think when we started, you know, it was easy to say like, okay, here's a list of the hundred SaaS companies, and if I fast forward 15 years or whatever it might be, a lot of those companies are massive public companies, but were at their seed or Series A at the time.

[00:20:18] Right now there's just like such a proliferation of startups coming from every angle and every category. It's hard to create mindshare around a product. How do you see standout products evolving today? And how do you feel about the state of the, let's say, startup market in 2023?

[00:20:35] Tien Tzuo: I continue to be bullish.

[00:20:37] I've had a good fortune to really, to meet and get to know and fund some great startups, and it continues to be a great environment, right? You know, the capital markets VC funding, there's gonna be cycles, right? You don't really want the VC valuations to be too frothy. People don't quite understand that.

[00:20:53] You don’t want it to be too low. You want to be even keeled throughout the whole thing. So what they say, Hey look, you know, your successes are always not as great as you think. Your failures are not always great as you think. Right? Some find some way to even those things out. Same thing with valuations. So look, the innovation, I think the model of capital driving innovation is what's really driven the growth, right?

[00:21:18] In many ways in the US economy over the last, you know, few decades and other countries, like the VC market in China really started cropping up, I don’t know, 20 years ago. And it's had a major impact there. I see it happening in Japan right now, right? 10 years ago there were no SaaS companies. If you go to Japan now, it seems like there's a huge crop of, you know, SaaS companies there that continue to crop up.

[00:21:38] I think it's all great. I think it drives innovation and when you hear. The pace of technology change, right? It's AI today. Who knows what it'll be tomorrow. There's just a lot more innovation to be had, and so I'm bullish. I think it's a great time to start something if you're so inclined.

[00:21:54] Dan Saks: And that's great. In terms of the future of Zuora, you spoke a little bit to the evolution of the subscription models and the breadth of your product In terms of quote-to-cash and what's next?

[00:22:02] Tien Tzuo: Well, we have a singular vision, right? We call this vision the world subscribed. We believe that the world that's based on.

[00:22:09] Business models where the link, the vendor and the customer, right, where the vendor is providing a service. Ultimately that business model is better for the customer. Ultimately, that business model is better for the company and ultimately the business model is better for the planet. I really like a lot of the things that I see our customers doing, especially the manufacturing companies in terms of, look, if we're gonna provide as a service, we're gonna make sure our physical products get the most use, right?

[00:22:34] Don't wind up in landfills. Right, because that is the path towards sustainability. And so our mission is really to say, you know, we call this a modern business, right? Is to help every company become a modern business. And it's not something that's done overnight, it's something that takes place over decades, I think, we’re past our one decade mark.

[00:22:56] But there's so much more to do. There's so many more companies to work with. So our focus is really to continue to build more innovations around helping companies build. Relationship with their subscribers and find all sorts of ways to turn customer loyalty into growth and to be the leading evangelist of how to make this whole thing work.

[00:23:14] Dan Saks: Amazing. I want to shift toward Tien the person. I know I've had the pleasure of getting to know you on a personal level, and I'm always inspired by the way you manage your team and the way you're pragmatic about yourself, and you're a very value centered person. But what advice would you have for professionals or entrepreneurs in terms of showing up the best and most authentic way they can at work?

[00:23:33] And so what are some of the tidbits you may wanna share?

[00:23:36] Tien Tzuo: So we've got a side project going right now. I've been working with Richard Hagberg, one of the Preem coaches. Exec coaches in the industry. And what makes Rich different is he's very data centric, right? And he's a statistician. He's got over 40 years of data on leadership compiled, you know, he's got thousands of people in his profile.

[00:23:56] It's interesting, he started working primarily with large companies in the first part of his career, some startups. But in 2009, he flipped exclusively almost to work with startups. And because these database, he's been analyzing this data. It's pretty fascinating and we're starting to see patterns across well, what makes a founder different than a successful big company executive?

[00:24:17] And the short answer to a big, successful executive, big company executive is very balanced. The strong vision, they're stronger relationship. They're strong in execution. Founders are not balanced. Founders are like tilted. They have one dominant thing, which is usually vision, and they're incredibly weak in the other things,.

[00:24:33] And then we find, okay, let's take our data and let's separate our successful founders from unsuccessful founders. And that data's fascinating. And in many ways, a founder is like a ticking time bomb. So as a VC, right, you're a founder, is a ticking time bomb that might explode any time, right?

[00:24:55] And as a founder, you've got a ticking time bomb inside of you where all the things that made you successful and allowed you to raise the money that you raised and convince all these investors to go with you and these early employees to join, they can become the seeds of your own destruction. And so how do you overcome these things?

[00:25:16] How do you develop a sense of self-awareness, right? How do you learn to listen and not override anybody's opinions? How to learn to hold onto your intuition, but not be overconfident in your judgment, right? These are ultimately the things that you gotta learn once your business scales. That if you don't, they tend to become your undoing.

[00:25:38] Everything about your company practically has its roots in who you are. So if there's something wrong in the company, you gotta self-reflect and you gotta ask yourself, how did I contribute to creating that? And once you find that, then you can find your path out.

[00:25:58] Dan Saks: So Tien, this is great. Good catching up as always, but I think it's very insightful for people to see how the SaaS based and subscription models evolved.

[00:26:07] Particularly how a lot of the changes in innovation today can be further propagated by focusing much more on customer relationships and the services that you can provide. So I really enjoyed the conversation. Thank you.

[00:26:19] Tien Tzuo: Absolutely. Thanks for having me on. I really enjoyed it.

[00:26:25] Dan Saks: Thanks for listening to Decoding Digital. Make sure you never miss an episode by subscribing to the show in your favorite podcast player. To learn more, visit decoding digital.com. Until next time.