By Tomasz Tunguz from Redpoint Ventures for his blog
Over the weekend, I read Tien Tzuo’s book, Subscribed. Tien is the founder and CEO of Zuora, and former CSO/CMO at Salesforce, where he started in 1999. He has been working in SaaS for nearly 20 years. He’s a thought leader in the world of subscriptions, and I learned a tremendous amount from his book.
There were three key themes that resonated with me. First, the shift to a subscription business model reinforces customer centricity. Second, pricing is one of the most powerful growth levers subscription companies have. Third, balancing customer mix across three-tier plans is critical to long-term success, and there is a right way to think about it.
In the book, Tien talks about Fender, the guitar company. Though tens of thousands of people have salivated over Fender’s guitars – notably Wayne Campbell and his love affair with the Stratocaster – 90% of people who pick up a guitar churn. They stop playing because it’s too hard to achieve small wins. Fender wrote a mobile application to help aspiring guitarists learn how to play music within minutes. This reduced churn by 10 percentage points, doubling the size of the market. The mobile application requires subscription, introducing a new revenue model for the business. Fender redefined the notion of a sale and customer success.
Pricing is one of the most powerful growth levers you have as a subscription company. It seems like complex topic, and one I have written quite a bit about. Tien shares a simplifying viewpoint. There are only two kinds of subscription pricing: consumption and capability. Consumption pricing means charging by the seat, the API call or the CPU cycle. Capability pricing means charging by new features and functionality. Subscription companies should choose one or the other.
Many startups adopt the bronze, silver, and gold plan strategy. Tien has worked with Madhavan from Simon-Kucher, who wrote an excellent book on pricing called Monetizing Innovation. According to Madhavan, if 70% of your customers are in the entry-level tier, your business will not survive. The demarcation between pricing buckets is not successful. The bronze tier offers too much value. The goal is to achieve 70% of customers in silver and gold tier.
We’ve been fortunate enough to partner with Tien in his journey at Zuora. Every time I see him, I learned something new, and his book was no different. It’s full of insights about how to build subscription companies from someone who has operated in the space for more than 20 years. And a leader who has facilitated the transformation of hundreds of businesses into subscription companies.