Why the US is turning into a subscription-based economy

Tien Tzuo says Wall Street doesn’t get it.
Tien Tzuo says Wall Street doesn’t get it.
Image: Reuters/Stephen Lam
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Rapid changes are taking place in the way people buy things, and companies are reacting accordingly. Increasingly, the US is moving toward a subscription-based economy in which firms will focus less on selling things, and more on gaining recurring customers—a trend seen in companies like Netflix, Zipcar and Spotify. That’s according to Tien Tzuo, an evangelist for the subscription-based economy who built his startup, Zuora, around that philosophy.

Tzuo is CEO of Zuora, a cloud-based billing and finance software company that caters to companies with recurring revenue streams. Tzuo got his training from, the cloud-based customer management software company, as its 11th employee and was with the firm through its IPO in 2004. founder Marc Benioff is an investor in Zuora. The name Zuora, by the way, came out of a bag of Scrabble letters used to spell the founders’ last names. The founders pulled from the bag and fiddled with the letters until settling on a URL they liked. The name seemed exotic, says Tzuo, until Quora, the crowdsourced Q&A site, popped up in 2009.

Tzuo says his theories about the subscription model bear out in services like Iris, the wireless home control and automation system, which will be more important to the growth of home improvement store Lowes than selling power tools. Lowes charges customers a monthly fee for Iris. Overall, a customer who is willing to pay $500 for a one-time purchase isn’t as valuable as someone handing over $100 a month for the next five years for a recurring service, according to Tzuo. And companies will focus on fighting for that regular customer.

“There’s a massive secular shift going on,” Tzuo said. “It’s not about supplying widgets anymore.”

Tzuo argues that Wall Street misunderstands companies like his that are known as SaaS, or Software as a Service. One reason is that it’s not about how much you sold in the last quarter or the last year, but about how much you will grow in the next year or five years. That means valuing a company by the traditional metric of price to earnings ratio (P/E), which takes a company’s current share price divided by its earnings per share, doesn’t apply. Tzuo said it’s about the future, not the past. That’s important as more private companies based on the subscription model look to go public or do debt deals, and Wall Street has to assess them.