Zuora: Unconventional Billing for On-Demand Services

Zuora introduced itself to the world this week, and while it is not a typical CRM company, its position should have a big impact on CRM and all other markets that offer on-demand solutions. Founders Tien Tzuo, K.V. Rao and Cheng Zou, formerly of and WebEx, chose the usually sedate billing market because they have a new idea that looks like it has legs.

One of the big disconnects in the on-demand market has been the constraints on product packaging imposed by billing systems. The on-demand model takes a product and renders it as a service, but existing billing systems more or less still bill for the service as if it were a product. Confused? Think of it this way: Conventional software sells product by the seat in a one-time transaction, while on-demand currently sells by the seat each month. For most situations, that works pretty well, but it works largely because it’s the only game in town. What happens, for example, if you negotiate a different seat price? Conventional product-oriented billing systems would have issues with that.

The Utility Model

On-demand computing was once called the “utility model” because it mimics the delivery of water, gas, electricity and other services. In a utility model, there is really only one product to sell, but vendors can package that one product in numerous ways. The packaging and pricing model is driven by what the billing system can support. It’s not a stretch to say that if the billing system can’t adapt to a packaging idea, the idea cannot be implemented.

A utility billing system takes much more into account than simple product information or even the nature of a recurring charge. For example, utilities are always thinking about rates and fee schedules and many times quantities — you get a certain rate for a specific quantity, and often rates become more favorable for customers that buy in higher volumes. There are also special situations, such as nonprofit organizations, which are often billed according to different schedules.

In the product world, multiple rates and quantity discounts are available but not to the same degree as in the service world. Part of the reason is the greater cost associated with making and selling a product. While mass-produced goods can have very low incremental costs, specialized products like software often don’t reach those economies of scale. However, in the on-demand world, the incremental cost of an additional seat sale can be very small, opening up more opportunities for creative pricing and packaging — if the billing system will support them.

Enter Zuora, a company dedicated to providing flexible billing for subscription companies. As an idea, billing for subscription companies may be the fourth wave of Internet commerce. Other models and their paradigms include Amazon for retailing, PayPal for one-time payments processing and Google for advertising. The other models have become very successful and lend support to the idea that many economic entities that were once part of the brick and mortar economy are moving to the virtual world.

A Better Fit

Of course, there are practical limits to how far any of these models will go. As successful as a company like Amazon is, there will always be a need for a hardware store and a cash register, and I have no doubt that the other modes will be similarly limited. However, the really interesting part of the Zuora story for me is that we really don’t know where the upper limit is.

It strikes me that at the heart of this introduction is a core ability for vendors to make their companies easier to do business with. As markets age and multiple vendors become capable of delivering more or less the same product or service, the competition moves from features and functions and toward secondary attributes such as the convenience of the customer-facing business processes. Zuora gives its subscription company customers the ability to better tailor their offerings, and that in itself should be a major differentiator.

Up to this moment, subscription companies have been rather limited by their billing systems, and this introduction could spawn a whole new round of innovation in Software as a Service once companies have the ability to tinker more with their delivery models. Who knows where this will lead.

Denis Pombriant is the managing principal of the Beagle Research Group, a CRM market research firm and consultancy. Pombriant’s research concentrates on evolving product ideas and emerging companies in the sales, marketing and call center disciplines. His research is freely distributed through a blog and Web site. He is working on a book and can be reached at [email protected].

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