Subscribed Magazine, Spring 2017 by Jayne Gonzalez

Spring 2017

Why is PTC's Stock Up 85 Percent? Caterpillar & the Age of Smart Iron Deloitte's 2017 Digital Democracy Survey How Politico, Motor Trend & The Young Turks Make Subscriptions Work Tesla Who? Why the Big Three Will Win the Connected Car Race

Legacy Tech Prison? Hybrid Cloud Economics 101 from HPE

THIS IS THE 21ST CENTURY. WEâ&#x20AC;&#x2122;RE ALL IN THE RELATIONSHIP BUSINESS.

C O N T E N T S

Why Is PTC's Stock Up 85 Percent This Year?

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Deloitte’s 2017 Digital Democracy Survey

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7 Ways to Wrap Your Business Model Around Your Customer

O F

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Caterpillar and the Age of Smart Iron

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Tesla Who? Why The Big Three Will Win the Connected Car Race

Building a Truly Global Subscription Business

Subscriptions Go Luxury

T A B L E

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9 14

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52 54 58

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Hybrid Economics 101: Calculating Total Cost of Ownership How to Get 500,000 Businesses Using Your Product While Burning Almost Nothing

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SaaS Growth Strategies Infographic

"Can I Give You More?" How Politico, Motor Trend, and the Young Turks Make Subscriptions Work

Gerber Technology: Where IoT and Apparel Manufacturing Meet

Interview with Sean Kelly, CEO of SnackNation

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Subscriptions Are for the Dogs (and Cats, and Birds, and…)

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The 10 Things I'd Tell My Younger CEO Self to Do Better Next Time

Net Retention: How Has the Game Changed?

10 Rules for Customer Segmentation: How to Market to Customers of All Sizes

Jason Lemkin Founder of SaaStr

Judy Loehr Venture Partner at Cloud Apps Capital Partners

Kevin Westcott Vice Chairman and U.S. Media and Entertainment leader at Deloitte

Lalit Singh COO and VP, Cloud Business Unit at Hewlett Packard Enterprise

T E A M T H E

Eric S. Yuan Founder and CEO of Zoom Video Communications

M E E T

F E A T U R E D

Amy Konary Program Vice President at IDC

Executive Editor Gabe Weisert Managing Editor Aarthi Rayapura Sr. Staff Writer Erika Malzberg Art Director & Designer Shaun Middlebusher Brand Lead Lauren Glish Copy Editor Emily Aradi

Published by Zuora, Inc. 3050 S Delaware St #301, San Mateo, CA 94403 (800) 425-1281 editorial@zuora.com

Want to subscribe? Send an email to editorial@zuora.com

Sean Kelly Co-founder and CEO of SnackNation

Tien Tzuo Co-founder and CEO of Zuora

Printed on 100% recycled paper

Editor's Letter

Welcome to the Spring 2017 issue of Subscribed, the first and only business periodical dedicated to the Subscription Economy. We’re covering a broad array of stories around the profound, systemic shift that’s currently underway from products to services, assets to outcomes, legacy constraints to commercial freedom.

In this issue we’re focusing on digital transformation in the enterprise — specifically from old systems of record to new platforms of engagement and insight. As Box CEO Aaron Levie noted in our last issue, the management and assets that led to success in the industrial era are holding incumbents back today, in some cases fatally. The software industry is no exception. While Adobe’s dramatic transition to a subscription model inspired dozens of headlines, PTC is shaping up to be the next poster child for major enterprises moving to cloud-based, recurring revenue models. In this issue Zuora CEO Tien Tzuo explores some of the key strategic moves behind this remarkable success story — PTC has seen their stock rise 85 percent year-over-year, adding almost $2.5 billion in shareholder value in the process.

Gabe Weisert Executive Editor Prior to Zuora, Gabe worked in senior editorial roles at Forbes and Yahoo! Inc.

That being said, big companies can’t just hop on the cloud with a credit card and an AWS account. They have all manner of systems to support, and product lines to protect. Hewlett Packard Enterprise certainly understands this, and we’re fortunate to present some insights from their COO of Cloud Business, Lalit Singh, on calculating the total cost of ownership on transitions from on-premise to public or hybrid solutions. No vertical is safe from digital disruption, including the construction industry. Caterpillar is justly proud of its institutional legacy as a great American tractor company. Today, however, it’s just as excited about its new “Smart Iron” digital platform. Caterpillar is transforming its space with smart machines, analytics, and drones in its transition from an equipment retailer to a solutions partner. There is much more inside, including new research on net retention from Zuora, customer segmentation insights from Box, hyper-growth strategies from Zoom, the latest digital consumer trends from Deloitte, and IoT innovation from Gerber. As always, our print issues are inspired and guided by the amazing speakers at Zuora’s Subscribed event series. From this month's event in San Francisco to New York, Paris, and London in September, we hope you can join us in person to experience the world's only conference dedicated to the Subscription Economy. We hope you find some sharp insights here, and stories that will hopefully provoke creative entrepreneurial thought. Also be sure to visit our online academy for prescriptive, role-based advice. Let’s move forward. Best, Gabe Weisert Executive Editor gabe.weisert@zuora.com

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from the catalog

In a variation on the theme “everything old is new again,” we take a peek into “the catalog” to find old world products subscriptionized for the digital age, in the ongoing shift towards services over products.

by Erika Malzberg

COFFEE

coffeebean.com

philzcoffee.com

coffeefool.com peets.com bluebottlecoffee.com

SUNGL ASSES

shadesclub.com

shadesmonthly.com

shizzades.com

TOYS

play.mattel.com

toyboxmonthly.com

pley.com

hoppibox.com

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S A V E

T H E

D A T E

SYDNEY

MELBOURNE

NEW YORK

AUGUST 22ND

AUGUST 24TH

SEPTEMBER 14TH

PARIS

LONDON

SEPTEMBER 26TH

SEPTEMBER 28TH

visit ZUORA.COM/EVENTS

Why Is PTC's Stock Up 85 Percent This Year? by Tien Tzuo

PTC (Parametric Technology Corporation) is one of the fifty biggest software companies in the world. Their customers design aircraft, plan buildings, make sneakers, build tools, pioneer new medical diagnostic technology, and much more.

Since then, SaaS has rapidly become the preferred model for distributing and consuming software. Who wants to deal with the headaches of buying the hardware, installing the software, backing it up, dealing with upgrades, and getting calls in the middle of the night when it breaks?

PTC’s earnings have dipped lately. In the second quarter of 2015, PTC recorded $303M in revenue. A little over a year later, that number dropped to $288M. In the same period, earnings swung from $17.4M profit to a loss of $28.5M.

That’s why Gartner predicts that by 2020, more than 80 percent of software providers will have shifted to subscription-based business models. These days it’s all about outcomes, not assets.

But today their stock is up 85 percent year-over-year, to around $50, from a low of $27 last March. They’ve added almost $2.5B in shareholder value in less than 12 months.

But shifting to subscriptions can seem hard, particularly for large traditional software companies like SAP and Oracle. There are so many questions: If I take revenue over time versus up front, doesn’t that hurt my bottom line? Won’t subscriptions lower my margins? How do I get my sales team to sell this stuff? As a result, they find themselves desperately trying to protect an outdated business model.

What's going on here? To answer that question, first let’s take a step back. The last 18 years has seen a huge change in the $400B software industry. It all started in 1999, when Salesforce. com was founded. As the eleventh hire at Salesforce, I was lucky to be able to help build not just a new kind of CRM, but a whole new approach to enterprise applications that were delivered directly over the Internet, and as easy to use as buying a book on Amazon.

That’s what makes PTC such an interesting case. They’re in the midst of a near-flawless transition to SaaS. Let’s deconstruct their recent financial performance to see what we can learn. Just a few years ago, PTC was chugging along, like the rest of the traditional software sector, at low single-digit

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Tien Tzuo, Co-founder and CEO of Zuora. Prior to Zuora he served as Chief Strategy Officer and Marketing Officer of Salesforce.com.

growth. PTC had to begin every financial year at zero — revenue had to be clawed together one deal at a time, only to vanish again in twelve months. As a result, many wondered if PTC was simply a mature company that should be passing its maintenance revenue to investors in the form of dividends — PTC’s valuation multiples were stuck in the 1x-3x price/sales range.

revenue growing at a sustainable 10+ percent growth rate, a 85 percent steady state subscription mix resulting in 95 percent of their software revenue being recurring, nonGAAP operating margins in the low 30s, and free cash flow of $525M.

At the same time, PTC found through its own survey analysis that more than 90 percent of its customers shared a desire for subscription-based pricing. They liked paying for only what they used. They preferred Opex spending to Capex spending — less bureaucracy. And they didn’t want to deal with maintenance.

That kind of successful transformation brings to mind Adobe. In April of 2012, Adobe moved Creative Suite from expensive DVDs to monthly subscriptions, causing its net income to plummet by almost 35 percent the following year. Yet by April 2016, Adobe’s stock price had nearly tripled from its value four years earlier.

Those findings weren’t surprising — SaaS had begun to explode into every category. But here’s where it gets interesting. Not only did PTC announce a broad, systemic shift from perpetual licenses to cloud-based subscriptions, they also confidently predicted that this shift would rekindle growth, expand margins, and maximize long-term shareholder value. They wound up going three for three.

Adobe is clearly an inspiration, but today PTC says that they want to be the next “poster child for subscriptions.” And much like Adobe, PTC took a temporary hit to their top line in their transition. After all, they’re spreading revenue over time, not collecting all at once. PTC calls this initial period, which I mentioned at the top of the article as the “subscription trough.”

In October 2015, at the start of the journey, PTC told investors and analysts that in five years (FY2021) it was aiming for $1.6B in revenue, 10 percent revenue growth, an operating margin in the low thirties and 70 percent of bookings coming from subscriptions.

But PTC is clearly rocketing out of the other side of the trough, the same way Adobe did. They’ve reached an inflection point. PTC’s subscription ACV (Annual Contract Value) guidance at the beginning of Fiscal 2016 was $43M. They delivered $114M, almost three times that original target.

That resulted in a nice little pop for them — PTC went from $32 per share at the end of September 2015 to about $37 per share at the beginning of November, or 15 percent increase in its valuation.

Wow!

Let’s take a look at this remarkable shift through three lenses: growth, operating margins, and multiples.

GROWTH

But just one year later, the news was significantly better. When PTC gave an update on its transition, it moved its FY21 targets up by a full year. It also raised its target for pure subscription bookings from 70 percent to 85 percent. This was on the heels of FY16 earnings results that consistently demonstrated the transition was tracking ahead of PTC’s initial plan. Let me just compare those two analyst calls again: In 2015, PTC predicted $1.6B in revenue with 10 percent sustainable growth in Fiscal 21, a steady-state subscription mix of 70 percent, non-GAAP operating margins in the low 30s (from the mid-20s), and $450M of free cash flow. In 2016, they revised those estimates to $1.8B in Fiscal 21

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PTC is anticipating a lot of growth. It expects its subscription revenue to grow a significant 50 percent compounded annual growth (CAGR) through FY21. Before PTC had meaningful subscription revenue (greater than five percent), its CAGR from FY09 to FY14 was 8 percent, with individual fiscal year growth rates ranging from 3-16 percent. Not bad, not great — note that it only hit a double digit growth rate in one year, FY11. By FY15, PTC had roughly 20 percent of their bookings coming from subscriptions, and they took a look at their books, liked what they saw, and predicted by leaning into subscriptions they could sustainably achieve double-digit growth. So far they’ve consistently seen an acceleration in their growth due to this shift.

Let’s take a look:

OPERATING MARGINS By definition, there are two ways to expand your operating margins: make more money or lower your expenses. PTC keeps a sharp eye on its expenses. Today it has roughly the same operating expenses, in the mid single digits, as it had before it transitioned to recurring revenue. But here’s the thing — its operating margins are expected to leap from mid 20s to the low 30s, an almost fifty percent increase. And not only are PTC’s margins much higher, they are vastly more predictable, which creates a virtuous cycle of effective expense management and increased operational efficiency. Recurring revenue isn’t just about growth — it’s about predictable growth. Let’s take a look at those margins:

You can see the “subscription trough” at around the 11 percent subscription revenue mix, before the overall revenue starts rising dramatically. The net down here is that subscriptions can move large enterprises from singledigit annual growth rates to sustained double digit growth rates.

Gartner predicts that by 2020, more than 80 percent of software providers will have shifted to subscription-based business models.

The lesson? Subscriptions can create natural margin expansion well beyond what would be possible with a perpetual business model.

VALUATION In terms of valuation, one dollar of subscription revenue is fundamentally worth more than a perpetual license dollar. Think about it — would you rather agree to earn a dollar

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Increase conversion rates and customer life time value with the Zuora subscription platform powered by global payments from Worldpay

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this year, or a dollar every year for the next five, six, seven years? PTC’s products are incredibly sticky — their average customer life is well over ten years. But subscriptions themselves are sticky (and stable) by definition. In difficult economic conditions, perpetual license sales decline and hurt overall company growth, while a subscription model requires customers keep paying to access the service and thus shields businesses from macroeconomic volatility. That helps explain why PTC is enjoying such a great valuation today. I want to call out two key points from a recent HBR study on on-premise to SaaS initiatives. 1. You don’t have to go all in, all at once. The study found that investors increase their valuations of the software vendor’s stock by an average of 2.2 percent if the vendor makes clear in its announcement that the SaaS offering is provided in parallel to a perpetual licensing model. 2. You don’t have to do it all yourself. Announcements that implied the SaaS offering would be built in cooperation with cloud infrastructure and platform providers increased company valuations by an average of 2.9 percent. Take a look at the contrast in the table below, which shows how PTC’s EV/NTM sales multiple has expanded over time

as it moved through the transition: The takeaway? If stock prices are defined by projected future earnings and the risk associated with achieving those earnings, recurring subscription revenue makes a company's financials substantially more predictable. We’ve found similarly impressive growth numbers in Zuora’s Subscription Economy Index, which is based on anonymized, aggregated system-generated data of over 350 recurring revenue-based companies that have been on our platform for at least two years. Subscription-based companies are growing nine times faster than S&P sales over the past five years, and four times faster than U.S. retail sales. So what’s the main lesson here? The story of PTC is a lesson of disrupt or be disrupted. Customers are changing. They don’t want up-front purchases anymore. They want smart, ongoing services that upgrade and adapt according to their needs. And this isn’t just a software story — it’s happening in transportation, retail, media, and manufacturing. It’s happening everywhere. PTC saw the shift towards subscriptions coming, and reacted with a smart, emphatic transformation. Their management team knew full well that the subscription model creates deferred revenue, so quarterly GAAP metrics can take a short-term hit. While this dynamic has caught other teams flat-footed, PTC embraced it and kept the public investment community informed every step of the way. As a result, PTC is driving growth, showing substantial margin improvements, and discovering whole new territories of shareholder value.

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Deloitteâ&#x20AC;&#x2122;s 2017 Digital Democracy Survey by Aarthi Rayapura

Kevin Westcott, Vice Chairman and U.S. Media and Entertainment leader at Deloitte

Every year, Deloitte releases their Digital Democracy Survey, a multi-generational view of consumer trends in technology, media, and telecom. The 11th edition focuses on five generations, providing insight into how consumers ages 14 and above are interacting with media, products and services, mobile technologies, the internet, attitudes and behaviors toward advertising and social networks, and what their preferences might be in the future. Some of the key findings from the 2017 survey include:

binge watch, and demand more media. As the growing forces of social media and over-the-top services continue to accelerate, particularly among millennials and Generation Z, it’s clear that the consumer rules. The shift to streaming, mobile, on-demand services, and personalization are significant opportunities in 2017. And brands can bring new value, services, and incredibly entertaining content to empowered consumers across all age groups in a manner that can be monetized.

•

Where are millennials finding and viewing video content? And what are the implications for OTT video companies?

•

Seventy-four percent of consumers subscribe to PayTV and 49 percent of consumers subscribe to paid streaming video services. Almost half (49 percent) of U.S. consumers and nearly 60 percent of Gen Z, millennials, and Gen X subscribe to at least one paid streaming video service. Seventy-four percent of consumers across U.S. households still subscribe to pay TV such as cable or satellite, but 66 percent of subscribers say they keep their pay TV because it is bundled with their internet. Nearly three quarters (73 percent) of U.S. consumers (up 3 percent from 2015) and nearly 90 percent of millennials and Gen Z have binge watched video content; almost 40 percent of millennial and Gen Z binge watchers do so weekly. Millennial and Gen Z binge watchers report watching an average of six episodes, or five hours of content, in a single sitting. The device of choice for key demographics remains split; Gen Z and millennials spend about half their time watching television shows and movies on devices other than a TV. Additionally, Gen X favors the TV by over 60 percent and baby boomers watch over 80 percent of programming on the TV. With 84 percent of U.S. consumers on social networks, social continues to gain traction well beyond socializing; 32 percent of millennials use social media as their primary news source and over 70 percent have used social media to resolve customer service issues in the last year. Mobile advertising is the big opportunity in 2017; 70 percent of consumers say the mobile ads they receive are currently irrelevant; 45 percent of millennials are using ad blocking software.

We spoke to Kevin Westcott, Vice Chairman and U.S. Media and Entertainment leader at Deloitte on the survey and OTT video business strategies: What are the key takeaways from this year’s survey? In a nutshell, American consumers continue to stream,

Twenty five years ago, technology was introduced to the household primarily by middle-aged men with a little bit of disposable income. What we now see is that the middle-aged men no longer have influence over the technology decisions in the household. It's being driven by their children or their young children, young adults. We’ve also seen that every single trend that starts typically with teenagers and 19 to 24-year-olds grows upward. Media consumption over the last few years, where over-the-top may have been introduced early by the millennials, is now being used by the Gen Xers and the baby boomers. The number of services subscribed to the household is larger in the younger generation, but growing in the older generations. We found that Gen Z and millennials spend about half their time watching television shows and movies on devices other than a TV. Millennials actually stream more than they watch live TV. They also are avid binge watchers of content (nearly 90% of millennials and Gen Z) and have changed the way that content is consumed. They're spending a significant amount of time watching content on streaming services, and that's where they're getting all their content and information. Given that there's almost no advertising on streaming services and nearly half of them use ad-blocking software anyway, how do you reach these consumers? How do you introduce them to products, services or new shows? That's really the challenge. In our survey, Gen Z and millennials indicated that social networks are more effective than TV commercials for learning about new shows. What are some of the things that companies should be thinking about in terms of acquisition and retention? Customer acquisition is extremely expensive in our business, so it's really about how we use data. What I ask people is, "Tell me, what is your business problem?" If it’s churn, let's SUBSCRIBED

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figure out how we predict churn. If it's customer acquisition, let's figure out how we lower the cost of acquisition. If it's increasing revenue per customer, let's figure out what is it about that customer that I can learn through different channels thatâ&#x20AC;&#x2122;ll help me sell them something additional. That's what you should focus on when you think of your customer base. You can identify someone who may churn six months before they churn. It's a lot easier to try to retain that customer than to try to attract a new customer. How do you identify the potential to churn? Is it through their use of subscription? Is it through some activity on social? Are they moving? What else can I identify that gives me a trigger to do something to give them the next best offer to retain them? We hear some talk about down selling. While it sounds negative, if I can take someone who's currently spending $79 a month and retain them at $59 a month, that's a lot better customer than losing that customer altogether.

How do you nurture a customer? What's the data you should be concerned with? Usage data is very critical. If I think about full subscription services, where there aren't transactions happening except for the monthly ones, I would actually look at the actual usage. But in general, gather all the data you possibly can to get a comprehensive view of your subscribers. For example, I can gather third-party information about my sports subscribers and understand what else they're interested in. I might find out that this sports subscriber, a mom or a dad, a dad who might be a sports fanatic, they also have two young children. Maybe I can target them with children's content. That's where getting to and understanding the customer is actually critical because every one of our customers is not single dimensional. They may be sports fans on weekends, but we don't know what they're doing during the week. We don't know what their family situation is unless we have all the data we can get about this and learn how to target them.

Nearly half of Millennials use ad-blocking software x

45%

85%

of Millennials use ad-blocking software to improve the speed and performance of their online experience

40%

Streaming video subscription services by US household

of Millennials use ad-blocking software on their smartphones

Sources fors treaming video content

49%

35%

Paid video streaming subscription

43% 31% 40%

25% Other

2012

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2014

2016

Free video streaming services

Whatâ&#x20AC;&#x2122;s your advice on monetization strategies for companies about to launch an OTT video service?

Tell us a little about your new Marketmix for Media solution with Zuora and Adobe.

You've got to give something away for free and allow people to try the product. We've seen people who go up with 100 percent paywalls, and that's very difficult. You might have been able to start that way maybe 6-7 years ago, but I think that you do have to give something away for free to get customers hooked these days. There's too much content available through too many channels. If you make someone go through an authentication and registration right up front, you're turning away customers.

We came up with Marketmix for Media with Zuora and Adobe because we found our clients struggling with different aspects of OTT â&#x20AC;&#x201D; evolution, multiple platforms, go to market, etc. We thought it would be good to bring together world-class technologies and show what a comprehensive solution can look like. The solution is up and running, and can be demoed. It looks at all the challenges of audience engagement, monetization, relationship management, and analytics. We put all of them together in a single solution just to show what can be done.

Consumers across US households who subscribe to pay TV

Two-thirds keep their pay TV subscriptio because it is bundled with their internet subscription

74%

69%

59% 2013

2014

71% 66%

2015

ING EAM STR

PAY

2016

Growth of paid streaming video subscriptions 2009

49%

2016

Millennials value streaming video services more than pay TV

60%

10%

Total US Consumers

Sixty percent of 14-50 year olds subscribe to at least one paid streaming video service

Image credits: Digital Democracy Survey, Eleventh Edition, Deloitte. SUBSCRIBED

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Caterpillar and the

Caterpillar has been in the business of building tractors, engines, and

Age of Smart Iron

other machinery for over ninety years. But as Caterpillar CEO Jim Umpleby notes, today priorities are shifting towards “what goes around the iron,” or the technology and services that wrap around Caterpillar’s core offerings to drive greater productivity for customers. Welcome to the Age of Smart Iron.

Instead of gas and diesel, Smart Iron is powered by digital solutions. Caterpillar is transforming the construction industry with smart machines, analytics, drones — anything and everything that will help their customers be successful.

by Erika Malzberg

The core of Caterpillar’s digital solution is Cat® Connect Technologies and Services which helps customers monitor, manage, and enhance job sites in four key areas: Equipment Management, Cat Safety, Cat Sustainability, and Productivity. Cat® Connect connects customers not just to Cat equipment, but to other equipment across their fleet. As Greg Folley, VP, Industry Solutions, Components & Distribution for Caterpillar notes, “The individual product is not going to be nearly as important as the management of the entire fleet through effective connectivity and being able to manage that effectively and well.” Caterpillar knows that providing equipment isn’t enough. As John Carpenter, Construction Digital & Technology Manager, Construction Industries for Caterpillar noted, “What customers want is a little bit more visibility to their own business.”

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Towards this end, Cat® Connect is continuing to innovate on ways to connect all of their customers’ assets, including their people, materials, tools, and equipment. As they expand their menu, everything ties back into a common ecosystem that provides a comprehensive solution for customers on a work site.

While Cat® Connect is connecting

Today Caterpillar is cooperating with work site managers on solving for specific outcomes, rather

than

simply

manag-

ing equipment. The question has changed from “How many trucks do you need?” to “How much dirt do you need moved?” But Smart Iron extends even beyond the boundaries of a physical job site. So Caterpillar is now tackling the challenge of getting involved in customers’ businesses even before there is a site. They’re

GE Predix: Creating an Industrial IoT Ecosystem

asking

big

questions

around how they can analyze data from one project to another and even help customers win more business.

Innovate or die. If we do not change with the world — and ahead of the pace of the world — we are very much at risk.

customers not just to Cat equipment, but to other equipment across their fleet, some companies are taking it a step further: creating comprehensive industrial IoT service ecosystems. GE Predix is a great example of a company at the center of the industrial automation evolution, providing a platform for expanding industrial automation to the cloud. While GE builds systems to control industrial equipment, Predix is building an ecosystem of applications with shared data that work together to improve performance and increase efficiency. To put it in layman’s terms, it’s like crowdsourcing for industrial transformation with Predix serving as

The history of Caterpillar is all

the infrastructure for gathering, storing,

about doing: creating, building, problem solving, inno-

mining, and transmitting information

vating, testing, servicing, and improving. And, as Um-

from a host of systems, in order to

pleby says, Caterpillar is always “going to continue to provide world-class iron, all the time, constant innovation.” But in 2017, iron — even world-class iron — just isn’t

uncover and deliver actionable insights. Because Predix as a platform is easily extendable, there’s no limit to the

enough. "Old paradigms can kill you. Innovate or die.

industrial applications that it will be

If we do not change with the world — and ahead of

able to support. And as new services

the pace of the world — we are very much at risk,” says

are added to its portfolio, it will only

Folley.

become more powerful as a tool for greater industrial efficiency, increased

So, goodbye product-based economy. Welcome to the

safety, improved environmental impact,

Age of Smart Iron.

and surging financial returns.

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Building a Global SaaS Business by Judy Loehr, Venture Partner at Cloud Apps Capital Partners

Businesses all over the world are now

here are a few best practices to keep

Large global markets are motivating

online, mobilized, and using cloud

in mind as you prepare to dominate

for your team and investors.

business applications. And new cloud

your global market.

Understanding your global market

business application companies are built on modern cloud platforms that

PL AN GLOBAL FROM DAY

product, business, and investment

can scale to users all over the world.

ONE.

appropriately. At Cloud Apps Capital,

Today the market for cloud business

business markets and invest in early-

So you’re instantly global ready, right? Not quite.

we understand the nuances of global

applications is global, which means

stage cloud business application

In order to serve customers all over

your total addressable market (TAM)

companies that have a path to

the world and become a global market

is global too. Your business model

becoming the global leader in a large

leader, you need to plan and design

should incorporate the different price

market.

your business for the global market,

points and customer acquisition

from day one. This is equally true for

models in different geographies.

established SaaS companies launching

Thinking about your global market

new products as it is for new cloud

isn’t optional; your competitors will

In terms of product design, it’s

business application startups

pursue the global market opportunity

always easier to plan and build your

designing their first product.

and if your product or business model

cloud business application for global

LOCALIZE YOUR PRODUCT.

doesn’t support global customers, it’s

customers from the beginning, rather

From your business plan through

unlikely you’ll be the future market

than retrofitting your code later. This

product design, pricing, go-to-market,

leader.

means making sure your product

and operationalizing your business,

opportunity will help you plan your

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supports time zones, currencies,

date and number formats, and languages

toolbox. A one-size-fits-all pricing and

Just as you have to localize your product,

holistically. Even if you’re not ready to

packaging strategy rarely works all over

packaging, and pricing, it’s also important

support users in other languages, it’s a

the world. Price too high, and you are too

to localize your business operations. There

small upfront cost to externalize your labels

expensive for some markets. Offer the exact

are 196 countries in the world, most with

and text strings at the beginning of building

same product for a lower price in a different

their own currencies, languages, and

your product, versus a very high cost to

country, and you’ll be inviting prospects to

business conventions. Take taxes as an

retrofit this into your product later.

twist themselves into payment-headache

example — in the E.U. taxes are included

knots to get the lower-priced version.

in the price you list and charge your

As one of the original product managers

When thinking of your global go-to-market

customers, while in the U.S., taxes are

at Salesforce.com, I learned this lesson

strategy, consider the ability of businesses

added on top of the price. Other global

the hard way. We already supported users

within a certain country or region to pay,

differences include invoice sequencing,

in eleven languages, and it really wowed

and the core functionality they realistically

currency rounding, and the range of ways

prospects to see the entire app change

need to get started and be successful with

customers expect to be able to pay you.

seamlessly from English to Japanese with

your product.

If you can’t manage global invoicing and

one click. But in early 2004 when Marc

payments, you’re literally turning away

Benioff wanted to allow a big customer

Some emerging markets are just starting to

to change the name of our standard tabs

embrace cloud business applications and

customers.

(accounts, contacts, leads, etc.) to any term

their use cases may start off as less complex

It’s on you to make sure your business can

they wanted, this seemingly simple feature

than what is expected from customers that

monetize your product and get paid by

spiraled into a localization monster because

have been using SaaS applications for a

users all over the world. This is hard, but

we had to support this new capability

long time.

necessary if you want to serve the global market.

across every language. For example, let’s take Brazil. To go to Allowing customers to rename standard

market effectively in Brazil, you could

COMMIT TO BUILDING YOUR

tabs became a huge project that touched

create a Brazil-specific edition that provides

every user-facing page of the application.

an edition of your product in Portuguese,

GLOBAL STRATEGY.

In order to retrofit customized and localized

accessibly priced in Reals, and that includes

Succeeding in the global market ultimately

terminology into our product, we had

the core functionality that businesses will

comes down to planning ahead and

to externalize all labels and text out of

need to get started using your product

building the product capabilities, systems,

the page, add a “Translation Workbench”

successfully. The combination of being

and processes that allow you to serve and

feature, and rewrite every line of copy on

available only in Portuguese, coupled with

monetize customers all over the world.

our screens into a structure that could be

payments in Reals, means companies in

You also need the support of partners —

accurately translated across every language.

other countries wouldn’t be able to use

including venture investors that understand

this lower-priced edition. As your Brazilian

the global business software markets and

The moral of this story: Your code base

customers expand their usage they can

cloud business models, and who can help

will only keep growing, so even if you’re an

upgrade to higher editions when they are

you plan and build the right foundation for

established SaaS product, if you want to

ready to collaborate with users in other

long-term global market leadership.

serve global customers, it’s best to tackle

countries and languages. This approach

today what will just be more expensive to

allows you to serve most SMB businesses

tackle tomorrow.

and enterprise teams in Brazil with a pricepossible edition tailored specifically for

LOCALIZE YOUR PRICING AND

them — while protecting your price points

PACKAGING.

in other countries.

Pricing and packaging flexibility is the key

LOCALIZE YOUR BUSINESS

to success in international markets and

OPERATIONS.

Cloud Apps Capital Partners leads Classic Series A financings in early-stage cloud business application companies. Our team has more direct industry, operational, and investing experience building global cloud business application companies than any other earlystage venture capital firm.

a powerful tool in your global strategy

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Subscriptions Go Luxury by Erika Malzberg

The latest subscription trend? Subscriptions that are impeccably curated and highly cultivated for the most lavish of experiences. Whether youâ&#x20AC;&#x2122;re traveling in ultimate style or indulging in the highest quality products and services, high-end subscriptions reign. Here are just a few first-class subscription experiences for those who prefer the finer things in life:

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www.surfair.com

Forget about long security lines, bad airplane food, and cramped middle seats. With Surf Air, you can travel quickly, simply, and comfortably. Originally an all-you-can-fly membership program only available in California, Surf Air recently expanded their service internationally. This means that you can get unlimited flights, for one monthly fee, to anywhere Surf Air flies. A comfortable private lounge, concierge service, and an effortless flying experience makes Surf Air a smart luxury for frequent fliers.

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www.elevenjames.com

If you’re into extraordinary timepieces and like to try new things, it might be “time” to become an Eleven James member. With plans ranging from $149 to $999 per month, you simply pick your favorite watch from your selected collection, enjoy it for a few months, and then exchange it for your next favorite. Collections include watches from Rolex, Patek Philippe, Hublot, and other designers from the “very top of the horological pyramid.”

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www.fender.com

Since 1946, Fender's iconic Stratocasters, Telecasters, and Precision & Jazz bass guitars have transformed nearly every music genre. In Spring 2017, Fender is preparing for more transformation with a subscriptionbased guitar learning system. With 500 hours of educational content, Fender is officially taking its brand into the digital learning space â&#x20AC;&#x201D; great news for every would-be Jimi Hendrix or Stevie Ray Vaughan whoâ&#x20AC;&#x2122;s got the equipment but needs to build their chops.

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www.bagborroworsteal.com

With a subscription to Bag Borrow or Steal, you can borrow, collect, and share luxury â&#x20AC;&#x201D; in the form of designer handbags. From Louis Vuitton to Chanel, Gucci, and Tory Burch, your luxury accessory is available to be leased in onemonth periods. If you want to show it off for longer, your rental will automatically be renewed. And they even have a Buy option if you simply must make a rental your very own.

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www.inspirato.com

From Rio to Venice, Provence to Shanghai, you can vacation like never before with Inspirato, the premier luxury destination club. Inspirato offers access to a curated collection of 900+ luxury vacation options in 175+ locations. Membership helps remove the stress of vacation planning, and gives you access to personalized dream vacations so you can experience and enjoy all the world has to offer.

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| SPRING 2017

www.renttherunway.com

By giving people access to remarkable luxury fashion, Rent the Runway is changing the meaning of ownership â&#x20AC;&#x201D; and revolutionizing retail. With thousands of styles and more than 300 coveted designers, Rent the Runway provides access to runway looks, wedding styles, work wear, exclusive designs, and more. Subscribe to Unlimited to get any three items on rotation for just $139 per month. An unlimited wardrobe of designer wear and no dry cleaning â&#x20AC;&#x201D; what more could a fashionista want?

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www.opulentjewelers.com/opulent-box

If you have a discerning taste for luxury jewelry and wonâ&#x20AC;&#x2122;t blink at investing a minimum of $100,000 a year to drape yourself in gems, The Opulent Box is for you. The worldâ&#x20AC;&#x2122;s first true luxury jewelry subscription box, The Opulent Box offers bling from the finest brands like Cartier, Chopard, and Chanel. Each box of jaw-dropping trinkets also comes with appraisals, certificates of authenticity, and extra little goodies to sweeten the deal.

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Hybrid Economics 101: Calculating Total Cost of Ownership

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by Lalit Singh, COO and VP, Cloud Business Unit at Hewlett Packard Enterprise

* This article is adapted from a 10-part blog series which can be found by searching for “Lalit Singh” at https://community.hpe.com *

At HPE, we are regularly asked by our existing

to contain and reduce costs. Hence, there is

cloud customers, and by customers just starting

a built-in bias to select the cloud option that

out on their cloud journey, about how we can

appears to have the lowest cost. But for most

help them understand the true costs of the

businesses, things are usually not quite that

various cloud options available to them.

simple and other factors need to be considered in addition to monetary value. In the end,

In order to decide whether to host an

costs need to be weighed alongside other

application on a public, private, or managed

decision criteria in selecting the appropriate

cloud (or some combination of the three),

cloud option—or more likely, a combination of

customers need to consider a number of factors

options.

— of which quantifiable monetary cost is only one. In some cases, this may be an overriding

In the cloud, the price landscape is fraught

factor, but in others it may be a secondary or

with additional complications. Public cloud

even a tertiary factor. Every enterprise will have

service providers are able to change prices

their unique mix of IT resources specific to their

with limited advanced notice. Different public

business requirements.

cloud providers do not always quote prices in comparable units. Even virtual machine (VM)

Security, compliance, cost, performance, speed,

sizes often vary from provider to provider, and

and other factors will need to be weighed when

may come with different amounts of ancillary

making an application deployment decision.

resources, such as disk storage, or different

When cost becomes a key consideration in

transaction costs associated with moving data.

deciding whether to use public, private, or managed cloud, the methodologies used to

When cost is an important decision criteria, a

calculate and compare costs need to be both

surprising statistic from 451 Research’s Voice of

consistent and sufficiently robust to capture all

the Enterprise found 33 percent of IT end-users

of the costs that go into creating Total Cost of

were not confident that their cloud costs were

Ownership (TCO).

under control, or even properly understood. The study further found that 25 percent of these IT

In most organizations, there is constant pressure

end-users were not doing any cost evaluation whatsoever.

Thirty three percent of IT end-users are not confident that their cloud costs are under control, or even properly understood. SUBSCRIBED

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Allow me to say a cautionary word or two about what

Whichever combination of cloud delivery options you

I call “contingent costs.” For the purposes of this

select, you are certainly going to try and design them

discussion, contingent costs are defined as costs:

so that issues don’t ever arise. However, it may turn

• •

that are not expected to be incurred, and

out that different cloud options still present differing

for which there is no reliable way to predict

levels of risk.

either the likelihood of incurring the cost or the monetary amount of the cost if it is incurred.

For example, even if an application that uses a public cloud service is designed to address data sovereignty

Since these costs are inherently non-quantifiable

concerns, the fact that the underlying infrastructure

with any precision, there is no way to work them into

is being managed by someone outside your business,

any rigorous TCO model. In fact, most or all of the

and therefore not under your direct control, may raise

contingent costs that I have in mind are ones that

concerns. As an alternative, you may want to consider

you will never want to incur, but still need to consider

a private cloud solution where you have full control

when evaluating TCO for different cloud options.

over the location of the underlying infrastructure. For many applications, these considerations will not

The main potential source of contingent costs that I

come into play or the costs will be small, even if they

have in mind could arise if an application or service is

are incurred. In these cases, a pure TCO approach

subject to strict regulatory or other legal constraints —

that looks at readily quantifiable costs should be all

and those constraints are somehow violated.

that is needed. However, in cases where the costs can be high, you may want to opt for a solution that

For example, many countries have “data sovereignty”

minimizes risk, even if it seems to be more costly than

laws that prohibit the physical movement of certain

other options.

broad classes of data to servers or datacenters outside of the country’s borders. Another example is the

When looking at TCO between traditional IT and

HIPAA requirement in the USA for protecting all data

private clouds to public cloud alternatives, it’s hard to

relating to patient medical records. There are many

get an “apples-to-apples” comparison. The difficulty

other examples, and the list is more likely to grow

is further compounded if an IT department doesn’t

than to shrink.

possess the economic skillset required to assess all the variables for a proper TCO analysis.

A business providing cloud applications or services that runs afoul of these constraints could face a

The TCO might be known across a set of servers,

number of potentially very costly consequences.

switches and storage for a specific set of dedicated

These include fines and business sanctions such as

applications, but the actual cost per application is very

the suspension of the ability to offer the application or

hard to compute in order to compare costs with cloud

service, costs of remediation including the liability of

alternatives.

fixing the problem, law suits, damage to the company reputation, and general management distraction,

Public cloud pricing and costs can be calculated on a

which takes focus away from running the core

price per Virtual Machine (VM)/hour, but those prices

business.

also change regularly as public cloud vendors are in constant competition with each other. With managed

Needless to say, these costs could be significant even

cloud, the price is calculated per VM/hour on a price

to the point of dwarfing basic operations costs.

per contract. For private cloud, there are many cost factors to consider.

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The table below highlights the large number of cost variables that have to be considered for a proper TCO analysis:

HARDWARE

SOFTWARE

DATA CENTER

PERSONNEL

BUSINESS CONTINUIT Y

Servers

Virtualization

Facilities

Salaries

SLAs

Storage

Storage management

Space

Benefits

Disaster recovery

Network

Security

Power

Fully loaded cost

Redundancy

Maintenance & warranty

Firewall

Cooling and HVAC

Turnover

Audits

contracts

Maintenance

Bandwidth

Recruiting costs

Compliance

Over/under capacity

Management software

Installation

Non-IT personnel

Industry-specific regulatory

Lifecycle management

Upgrade costs

Space management

Training

concerns

Up-front spend

License management

Contract management

IT Maturity

Procurement costs

Backup costs

Procurement costs

VM/Admin

Disposal costs

Procurement costs

Automation

Technology lock-in

Legal costs

Utilization Availability Type of workload

Understanding the full value of each potential cloud

When looking for the validation of a plan or insight to

option allows the right business decision to be made.

inform decision makers, a quick approach based on

The goal should be to optimize and control costs

a set of assumptions and accompanying margin of

while simultaneously giving end-users access to the

error can offer a decent estimate of cost. A quick TCO

resources they need to develop and grow their part

might help form early opinions and validate general

of the business. If costs are allowed to spiral out of

assumptions. This may be just enough information for

control, it’s difficult for an enterprise to compete

the enterprise to make the right choice.

effectively. Other decision criteria beyond cost can sometimes When comparing options, there are basically two

play a role in making a choice between public

general methods for getting TCO for private cloud

cloud and private cloud. In a recent paper from 451

services, a quick approach and an in-depth approach.

Research (https://www.hpe.com/us/en/solutions/ cloud.html), they present a simple approach

A QUICK APPROACH

companies can use to derive their own comparison.

A quick approach provides a “good enough” cost comparison when: resources and time are limited;

We look at two core metrics to evaluate cost of

management requires a quick current-state

a private cloud: system utilization and manpower

comparative estimate; or some cost insight is needed

efficiency. Then we apply a cloud price index to those

as part of other decision elements and a quick

variables. System utilization looks at the percentage

calculation of TCO is required.

of use that the assets are actually getting work done. Manpower efficiency looks at how many virtual machines an administrator can handle.

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AN IN-DEPTH APPROACH An in-depth approach provides a deeper level analysis, which is needed at times to help organizations ultimately set a larger strategy and make more detailed workload placement decisions. An in-depth approach is best used when: additional workload specific insight is required; variables such as risk, security, compliance, performance, and staffing need to be factored into the cost analysis; or a large transformation, large investment, or a need to redesign an application deployment strategy arises. A complete view of the individual cost elements, unique to the needs of each enterprise, is required to achieve a sound economic decision. Factors such as high performance computing needs, regulatory compliance, security, unique workload placement requirements, or just overall investment levels may be the initial triggers of an in-depth analysis. Developing this level of cost detail requires the enterprise to take the time and resources required to understand, which of the elements in the table matter most based on their unique situation, and develop the detailed comparative costs of those elements. Whether using a quick approach or in-depth approach, creating a cost comparison in order to compare private cloud with public cloud options is extremely important. Understanding the different costing approaches, how to use them, and when to use them will help put the business on track to make the right decision for a given scenario. Please visit the HPE Community Blog (https://community. hpe.com/) for the rest of Lalit Singhâ&#x20AC;&#x2122;s posts blog in this series, including finding the metrics that matter, how to derive a quick cost comparison, and the hows and whys of in-depth cost analysis.

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A complete view of the individual cost elements, unique to the needs of each enterprise, is required to achieve a sound economic decision.

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How to Get 500,000 Businesses Using Your Product While Burning Almost Nothing

by Eric S. Yuan, Founder & CEO of Zoom Video Communications

When Zoom was founded six years ago, video conferencing was a crowded market. But none of the existing solutions were making customers happy. We saw the opportunity to make a much better solution â&#x20AC;&#x201D; and the customers quickly followed. Here are six lessons we learned along the road to getting Zoom into the hands of 500,000 businesses and millions of users.

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#1 - SEEK INVESTORS WHO WILL INVEST IN

Freemium is a huge driver for us as well. In a crowded

YOU

market, you need to give customers the opportunity to test our your product. Our freemium product essentially

Even if you’re fortunate enough to have access to

functions like our Pro paid product, but with a time limit

investors, finding the right investor isn’t easy. Our goal

on group calls (it’s unlimited for 1-1 calls). Research has

was to find an investor who wanted to invest in our

shown that the most effective meeting is 45 minutes, so

team, not in the business. A business can go up and

we cut off our freemium calls at 40 minutes.

down, like a marriage. So you need to find an investor who wants to be married to you. Finding the right

I firmly believe in testing everything. We conserve cash

investor is a process. You need to test investors to find

by refusing to fund anything until it’s proven that it

the best one to support your business.

works.

#2 - DON’T WAIT UNTIL YOU NEED MONEY TO RAISE MONEY It’s one of those sad truisms that if you don’t need the money, you’re more likely to get it. So even when we had money in the bank, we still raised. The goal isn’t to just have the money sit in your bank account, but to ensure that you have the necessary funds to capitalize on opportunities when they arise. At Zoom, we’re serious about spending our money

We conserve cash by refusing to fund anything until it’s proven that it works.

smartly. We made it a goal to be both fast growing and cash-flow positive, so we raised and spent smartly to achieve that goal.

#3 - SPEND MORE, BURN LESS

#4 - DON’T GROW TOO FAST I like to make this analogy: If I drive 80mph from San Jose to San Francisco, I’ll get there faster...but the risk

Our first deal that really gave us huge confidence was

is much higher. Likewise, at Zoom, we’re focusing on

Stanford Continuing Studies. At that time, we had no

sustainable growth, not growth at any cost.

sales and marketing, just engineers — and they sold the solution.

We don’t want to grow too fast. We’re less focused on valuation and more focused on making our existing

But even with that jolt of confidence, getting to that first

customers happy. We don’t aggressively pursue new

million is difficult because nobody knows you and you

customers. Instead, we prioritize features that existing

likely don’t have a solid sales and marketing function.

customers want over what new prospects might want.

In the beginning, our marketing strategy was just word-

Existing customers are our top priority. Our Net

of-mouth based on customer success, which didn’t

Promotor Score (NPS), measuring customer satisfaction,

require additional spend. A lot of our lead gen came

is between 67-69, dozens of points ahead of our

from organic leads from existing happy customers.

competitors. We’ve focused on NPS since day one.

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of accomplishment. The process is more important

I hate the idea of hiring people who are overqualified.

than the outcome, and every day is as important as those few days when you celebrate your successes. If you don’t build a company around delivering happiness to your employees, it’s like torture to be at work every day. I truly want employees who will be able to look back on their work with sweet shared memories of our time at Zoom. TO 500,000 BUSINESSES AND BEYOND...

#5 - HIRE PEOPLE WITH POTENTIAL FOR GROWTH

overqualified. If you hire individuals with potential for growth, they’re loyal to your company, will adapt to your company, and are more humble, rather than resting on what they accomplished in the past. I was told at one point to hire a VP of Sales who had worked for another company in that role, and I said “No.” For every single position, from management down, I hire for potential. I think this strategy is serving us well — not only did we reach a billion-dollar valuation in six years, but our original management team has remained. Nobody has left.

#6 - CULTURE IS THE #1 PRIORIT Y Before I even started a company, I always thought about what kind of company I wanted to build, and what kind of company I wanted to work for. We’re all working hard at Zoom. When you work so hard on something for so many years, you want to be able to look back at all your work and feel a sense

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when I encounter a problem, or worry that our customers aren’t happy, or our employees aren’t

I hate the idea of hiring people who are

Building Zoom has been difficult. I have my days

| SPRING 2017

happy. There are mornings when I wake up and think everything is wrong. And about once a year, I worry that we’re not going to make it! But then I remind myself that if we can deliver the first million customers, we can deliver the second and the third. In the end, it all comes down to our customers. We’re committed to customer happiness — and that commitment will continue to serve us. Please check us out and sign up for a free Zoom account at https://zoom.us.

Net Retention by Chris Bruner, Director, Product Management at Zuora

How does a company like New Relic post 70 plus percent revenue growth year-over-year? How has Veeva transformed the conversation about vertical SaaS, continuing to grow at 50 percent, even with a highly targeted set of industry-specific customers? Behind these and numerous other top line success stories is a compelling narrative. Long before their IPO,

WHY IS NET RETENTION SO POWERFUL?

many of the most successful subscription companies became very good at retaining and growing their

Net retention is powerful because it makes a non-linear

customer relationships over time. Veeva and New Relic

contribution to growth. It’s either a dividend or a tax that

are particularly strong in this respect, but data suggests

you pay on every group of customers that you acquire,

that their excellence may be part of a larger trend.

and the more customers you acquire over time, the more this adds up.

We looked at data from 17 public companies to identify what we can learn about retention from today’s leading

Let’s use an example to bring this to life. While it’s not

subscription companies. The results validate the

hard to imagine how revenue growth could be linked to

importance of success in this domain:

retention, the strength of the relationship over the longterm is striking.

•

Median net retention stands at 100 percent, meaning that the median company gains at least as

Imagine a company that adds $1,000 of new monthly

much recurring revenue as it loses from each cohort

recurring revenue through new customer acquisition.

of customers over time.

Now, imagine two different versions of that company: A

The top half of companies in net retention grow at

and B.

nearly twice the rate of companies in the bottom

•

half, suggesting that net retention is one of the key

Company B is better at growing customer relationships

ways in which hyper-growth companies become

over time. For Company B, upsells and revenue

hyper-growth companies.

expansion with existing customers slightly outpace lost

Companies are positioned to invest more in sales

revenue from churn and downsells, giving them a net

and marketing for each dollar of new business

dollar retention of 101 percent month over month. On

that they acquire, and appear to take advantage of

the other hand, Company A is slightly worse at customer

this in practice, something which may give them a

relationships than Company B, and has a net dollar

powerful competitive edge.

retention of 99 percent month over month.

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At first, the revenue performance of the two companies is similar, but, over the course of five years, their fates diverge dramatically. After that much time, Company B has almost twice the revenue of Company A and a dramatically different growth trajectory. Their success with existing customers has a compounding effect over time.

by public companies to report

That, plus or minus one percent

retention.

difference in monthly retention, translates to plus or minus about 12.5 percent in annual retention! Differences in net retention performance can be at least that dramatic in the wild. For instance, while some companies report net dollar retention numbers that are less than 100 percent, Veeva reported “Annual Subscription Revenue Retention Rate” was 138 percent in their annual report for 2015. New Relic reported quarterly “dollar based expansion rates” that reached above 130 percent over their most recent year.

The top 25 percent of companies in net retention grow at twice the rate of companies in the bottom 25 percent.

HOW DO COMPANIES MEASURE NET RETENTION?

Five9, which makes call center software, uses an invoicing-based measure. To arrive at an “Annual Dollar Based Retention Rate,” they divide their current monthly invoicing by their invoicing from the same group of clients from a year prior, then they calculate a 12 month average. Or: 12 month average of (Recurring Invoicing in current month) / (Recurring Invoicing from same month one year ago) Hubspot, which makes demand generation software, uses MRR. They divide the aggregate

contractual monthly recurring revenue of their customer base at the end of each month by the

Before we dive in and explore more of the data, it’s

aggregate CMRR of the same group of customers

important to spend some time talking about what this

at the beginning of that month, and then arrive at a

measure really means. Because this is a non-GAAP

twelve month weighted average. Or:

metric, there are a number of methodologies used

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(12 month weighted average of (CMRR at end of

recurring revenue) or MRR (monthly recurring revenue)

month) / (CMRR at beginning of month))^12

as the base metric. You would measure ARR net retention using the formula below.

Marketo, which similarly makes marketing automation engagement software, looks at aggregate GAAP

Net ARR retention = ARR t = n + 1 / ARR t = n

revenue. They compare the aggregate monthly subscription revenue of their customer base in the last

Since these point-in-time metrics reflect changes

month of the prior year fiscal quarter, to the aggregate

to subscriptions immediately, they provide a better

monthly subscription revenue generated from the

leading indicator of net retention. If a customer

same group in the last month of the current quarter.

churns near the end of a period, the entire impact is

Then they calculate a weighted average “Subscription

reflected in the impact on ARR, while the impact on

Dollar Retention Rate” of the four fiscal quarters within

GAAP revenue for that period is prorated and therefore

the year. Or:

significantly smaller. The full impact on GAAP revenue would not appear until the following period.

4 quarter weighted average of (GAAP subscription revenue from last month of quarter) / (GAAP

That said, regardless of how a company calculates net

subscription revenue from last month of same quarter

retention, what is crucial is the underlying performance

one year ago)

itself. Below we mine some of the publicly available data in order to explore how widely performance

In spite of differences in the underlying metric and

ranges and how important retention is.

approach to crafting this ratio, they have a lot in

WHAT CAN WE LEARN FROM COMPANIES

common.

•

Look at a group of customers that were present at t = n and understand how much recurring revenue

•

BEFORE US?

you were receiving from them

Net retention is not a GAAP metric and does not have

Look at the same group of customers at t = n+1

a standard definition. Nonetheless, as a testament to

and determine how much the recurring revenue

the growing attention to this performance measure,

from that group of customers has increased or

dozens of public companies now report retention

decreased

figures in their public filings. We spent some time studying this data recently and think there are several

Doing this on a dollar-basis with upsells included is

important trends worth noting.

particularly powerful. This takes into account both your effectiveness in reducing churn and your effectiveness

The standard for public companies is high. Among the

in growing your customer relationships over time. As

public company reports that we studied, the mean

a result, it translates directly into the expected lifetime

is over 100 percent revenue retention. Some leading

value of each new customer you acquire.

companies report revenue retention numbers over 150 percent for certain periods. This suggests that

For example, in the simplified lifetime value model

customer delight and focus on relationship growth is

below, GC is yearly gross contribution, d is the discount

the new normal.

rate, and r is the yearly net dollar retention. Lifetime Value = GC * (r / (1 + d - r)) At Zuora, we prefer methods involving ARR (annual

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Companies with greater net retention grow faster.

When we compare overall sales efficiency with

Companies with below average retention rates grew

net retention, companies with high net retention

at an average of 36 percent year-over-year while

generally look similar to, if not more efficient

companies with above average rates grew at an

than, their peers. This makes sense at some level.

average of 59 percent year-over-year.

Expanding relationships with existing customers typically requires less sales and marketing investment than acquiring new customers. Great examples of this are available in Pacific Crestâ&#x20AC;&#x2122;s annual survey of SaaS metrics.

On the other hand, when we look at the amount of sales and marketing spend relative to the amount of new business, the numbers tell a different story. High net retention companies may be able to justify a greater upfront investment in new customer acquisition. Because of their strong customer relationships, these high net retention companies not only win in the long-term but also take advantage of their position to win the acquisition battle upfront. Finally, companies with high net retention may wield this as a competitive weapon. One important decision that companies face is how much to invest in sales and marketing expense. Net retention plays an important role there. Because companies with higher net retention have higher customer lifetime value, they might be able to justify a greater investment in upfront customer acquisition. To see how this plays out in practice, weâ&#x20AC;&#x2122;ll look at two additional metrics:i) how much overall additional revenue a company gets for $1 in sales and marketing spend (overall sales efficiency); and ii)

These are only a few of the interesting relationships

how much revenue from new customers a company

that you can find and we encourage further

gets for $1 in sales and marketing spend (new

exploration.

business sales efficiency).

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WHAT STEPS CAN YOU

questions we encourage them

them more or less likely

TAKE NOW?

to ask.

to churn or grow? What segments can you identify

We expect that businessâ&#x20AC;&#x2122; net

Understanding outcomes

retention performance will

and drivers: What is my net

only continue to become

retention? Whatâ&#x20AC;&#x2122;s driving

Triggering the right action: As

more crucial over time.

it to be high or low? To

you identify new customers in

Companies that excel in this

what extent is it controlled

segments (e.g., renewals at-

arena are likely to grow faster

by churn, expansion, or

risk), how do you take action

and be able to justify greater

contraction in recurring

as an organization? How do

investment in growth than

revenue?

you conduct experiments

across your subscriber base?

to test different intervention

those that do not. Gaining a single view of each

strategies? And how do you

The good news is that there

of your subscribers: What do

learn from those experiments

have never been more

you know about the identity

in a systematic way?

resources and knowledge

of each of your subscribers?

available for companies

What are all of the moments

Needless to say, there is a lot

interested in doubling down

your subscribers experience in

more to discuss.

on customer relationships.

their interaction with you?

If you would like a starting point for this journey, here

Linking outcomes with

are some of the key areas that

subscriber behaviors: How

we encourage our customers

do the identity of your

to focus on and important

subscribers and the moments that they experience make

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Rules for Customer Segmentation How to Market to Customers of All Sizes by Lauren Vaccarello, VP of Marketing at Box

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Lauren Vaccarello, VP of Marketing for Box, has what

target for the year and then break it down. How much

seems to be an enviable position: marketing a product

do you want to come out from SMB, midmarket, and

that anyone and everyone can use. Unfortunately, what

how much should come out of enterprise and from your

at first glance seems as easy as shooting fish in a barrel

target accounts? Then look at your data. Don't look at

is actually more complex. Here, Lauren outlines the

blended averages; look at your sales cycle and pipeline

10 rules for successfully marketing to businesses of all

coverage. Then you can assign — and agree upon —

sizes...without coming across like a beige couch!

targets across sales, marketing, partners, channels, and alliances.

Box, a cloud content management company, is a marketer’s dream: everyone can use our product — from

3. ASSIGN SEGMENT LEADS IN MARKETING

small startups to Fortune 500, across all industries and within every department.

One of the first things you should do is make it someone’s job to ensure that a given segment is

This “marketing dream,” however, turns out to be

successful. Someone in your marketing team should

problematic. When everyone and anyone can use your

be assigned to commercial (SMB), and another to

product, your messaging and go-to-market strategy

field (enterprise). This doesn’t mean that this person is

can often be the communications equivalent of a

individually solely responsible for owning all the tactics,

beige couch: it’s boring and it won’t stand out in the

but they do have to own the strategy. Taking this simple

marketplace.

step greatly increases your chances of success.

Fortunately, there are ways to solve for this by anchoring

4. BUILD SEGMENT SPECIFIC MESSAGING

on customer segmentation and following these 10 rules:

1. ALIGN WITH YOUR SALES ORGANIZATION.

You can't use the same content and messaging per segment. If you do, you’ll end up with a generic message in the market and you will miss.

If we’re being honest here, we’d have to admit that, at most companies, sales and marketing don’t regularly get

Instead, sit down across small business and enterprise

together. But if you want to market to businesses of all

and think about who your ideal customer is. This

sizes, you need to be in lockstep with sales. What are the

should not be done by a bunch of marketers in a room.

goals of your sales organization across commercial and

To identify ideal customers, do your research: talk to

enterprise? Are you going after net new or upsell? What

actual customers, engage with your customer success

are the most important geos?

organization, look at the data.

Both sales and marketing need to know what the targets

When you’re building your strategy, you’re looking

are and set goals together as a unit.

for customer proof points. At Box, we did a massive customer survey and held user groups, asking why folks

2. SET TARGETS BY SEGMENT

chose Box...and why they didn’t. We looked across our business segments to understand buying triggers and

Your ARR pipeline isn’t just the responsibility of sales —

what problems we solve.

it’s all go-to-market. So you need to look at your ARR

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5. TECHNOLOGY AUTOMATION AND

doesn't leave, and bake that into the trial experience.

PROGRAMMATIC MARKETING IS KEY FOR

Your trial should walk through actions that indicate

SMB

product stickiness. Include in app messaging and

It’s really hard to have high-touch interactions with

and behaviorally triggered emails.

tutorials to onboard and A/B test onboarding emails

huge markets, so building out your automation is key for small business.

7. NURTURE LEADS THROUGH THE FUNNEL

You need to build out your tech stack with the

Lead nurturing goes beyond just email marketing. You

best tools. Here are some tools that Box currently

need to think programmatically about onboarding.

particularly likes:

• • • •

Demandbase for reverse IP lookup

If you really want to speed up time to close, you need

Radius for data accurancy

to use technology to tie together all of your data

Radius or 6Sense for predictive analytics

(e.g., what emails prospects are interacting with, what

Marketo Sales Insights to let sales know who's

content they’re using on your website, etc.).

interested

• • • • •

Optimizely for experimentation and

And make sure that as you’re onboarding and

personalization

nurturing, you keep your sales organization

Conductor for SEO

looped in. All marketing touchpoints interact with

Intercom for app messaging

sales touchpoints so you need to look holistically at

Engagio to build scale with messaging

the full funnel to understand the end-user perception.

Conversica for artificial intelligence for lead

8. HIGH TOUCH AND HIGHLY TARGETED

management

6. GREAT TRIAL EXPERIENCE

ACCOUNT-BASED EVERY THING FOR UP MARKET

A great trial experience is vital. You’ll need to depend

When you target Fortune 500 and other high-potential

on your product organization to build this out, but

revenue customers, your tactics are going to be

here are keys to a great trial experience:

different and need to be more account-based.

Prepopulate some data. Don't welcome visitors with a

At Box, we really believe in this account-based-

blank slate. Identify the attributes of a customer who

everything approach, and are about a year into

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targeting enterprise with this approach. We worked

Bucket your website visitors into three categories:

closely with our data scientists to understand the

• • •

highest addressable market and what accounts to go after. Then we coordinated with sales to get their

Customers Prospects - small business Prospects - enterprise

input on this list. By focusing on the data scientist/ sales combined target list, we got an incremental

If you can identify 15 percent of the people coming

uptick on our win rate.

to your website, those are the ones with dedicated IP addresses, thus larger companies. You can

With alignment between sales and data, we can pull in

then tailor your messaging upmarket accordingly.

intense signals and predictive analytics to identify the

Unknown visitors without dedicated IP addresses are

most active accounts and make sure that we’re going

smaller companies. So for your prospect version of

after them right now.

your website, serve these visitors up small business messaging.

There are account-based marketing plays across the board from net new leads to customers. With net

10. THE ROLE OF MARKETING DOESN'T END

new, marketing’s job is to provide as much air cover

AT PURCHASE

as possible with tactics such as digital targeting, field marketing, and even direct mail. When you have low

Marketing should play a role in driving net retention.

penetration into an account, identify your users and

This is a joint responsibility across sales, customer

shoot for full penetration. With larger accounts, we’ve

success, marketing, and product.

found that “hand-to-hand combat” activities are our most profitable.

9. DEALING WITH THE OVERL AP

Onboarding and product engagement are crucial. The first 30 days are the most important for a customer and the health of that customer relationship. Identify high engagement and stickiness attributes and focus

News flash: everyone uses the internet. Small

your content and messaging accordingly.

businesses aren't the only ones clicking on ads. So when building out your digital marketing, what

Think about the ongoing role of marketing. How do

happens when you focus on just the low end of the

you create a month one and year one engagement

market?

plan? Getting people in the door is great, but how can you follow through and do your part to ensure happy

This is when web personalization comes in handy.

customers?

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10 Essential SaaS Growth Strategies For SaaS businesses, growth is the number one indicator of success. According to a recent McKinsey study “Grow Fast or Die Slow,” if a software company grows less than 20% annually, there is a 92% chance that they will fail. So, how can SaaS companies grow – and grow fast? By pursuing these 10 key growth strategies:

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Learn more about the SaaS growth imperative and see how your growth metrics measure up at zuora.com/ saasgrowth

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Ways to Wrap Your Business Model Around Your Customer by Amy Konary, Program Vice President at IDC

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The era of digital transformation has given rise to a number

aren't seeing value. Providers of digital products and services

of established businesses and start-ups that combine

should remove any friction that can make it challenging for

digital technologies with unconventional business models

customers to understand:

to disrupt competitors and even entire industries. The convergence of cloud, mobile, social, cognitive, big data/

•

What they need

•

How to get it

•

How to start using it in a productive way

analytics, and IoT is providing a platform for a variety of important transformations, including a shift from traditional product-centric to customer-value-centric business models. Many organizations are structured around business models that assume that all the value is generated through a product

Whatever your pricing and packing model, it should be

transaction. This results in a customer environment that may

transparent and easy to understand. This means putting

be product rich, but experience poor. In a digital economy,

things together for customers in a logical way so that they

value is generated through the cultivation of successful

can see what they need today and throughout their journey.

client relationships. Here are seven steps that organizations can take to better position themselves to build successful

Once the prospect becomes a customer, self-service tools,

customer relationships through the delivery of digital

community resources, and processes that support your goal

products and services.

of helping customers see value quickly and cost-effectively become critical success enablers.

1. GIVE YOUR CUSTOMER A SINGLE DIGITAL IDENTIT Y

3. ALIGN YOUR PRICING AND PACKAGING WITH CUSTOMER EXPERIENCE

Your customer record should provide a centralized digital representation of each customer. Most customers, especially

Aligning your pricing and packaging strategy with customer

larger ones, will engage with you in multiple ways, but

experience starts with a shift to subscription-based financial

you need to view their journey holistically. Customers see

structures to support a relationship that changes over time.

themselves as a single entity, and they don't want to receive

With a subscription foundation in place, you can start to

eight invoices, for example, or find that accessing customer

look at the different measurements used to calculate value.

support or determining the best way to buy new services

Companies often begin with an access-based measurement,

requires an archeological dig.

where customers have the ability to change the amount and type of access over time. The next step is to develop a model

Mitigating customer data sprawl typically requires a series

that reflects product or service consumption. To do this, the

of process and technology changes in order to aggregate

organization must:

information going forward. Organizations must also address existing systems of customer numbering and identification,

•

transactions, reports, or scans?)

as well as work to line up renewals to enable co-termination.

2. MAKE IT EASY FOR CUSTOMERS TO START SEEING VALUE, QUICKLY If your customers aren't using your product or service, they

Determine what consumption means (i.e. is it

•

Implement systems that track consumption

•

Implement systems that report on, bill for, and recognize revenue on consumption

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A further step is to consider outcome-based pricing models.

financials, and customer sales and support. A cloud

To do so, the organization must define a successful customer

architecture that underlies connected devices, as well as

outcome in clear-cut terms and have a way to accurately

analytics to help curate valuable data to support decision

measure it.

making and create market opportunities, are also essential.

Even if you do not price based on consumption or outcomes,

Systems must also support multiple payment gateways,

you should define and track customer usage and success

including credit/debit cards and region-specific payment

and then report this to your customers. This helps you

methods. They should allow custom policies, such as the

understand which customers are seeing the most value, as

cadence at which the organization chooses to automatically

well as those that are likely to churn.

retry payment failures.

4. DON'T STRAY TOO FAR INTO SCIENCE

A dashboard view is required across all key business metrics,

FICTION

including bookings, billings, recognized revenue, revenue

Because we can track and measure so many different types

include customer usage data to help manage the customer

of customer interactions, there is sometimes the temptation

lifecycle and predict when a customer is ready to move

to price and package it all. It's one thing to track and report

to the next stage. Usage reporting should be presented to

on these elements, it's another to consider whether they

customers to demonstrate value and keep them engaged.

backlog, and deferred revenue. The dashboard should also

make good business model sense. To wrap your business model around your customers, you should settle on a pricing

The company's entire portfolio of offerings should be

and packaging model that will be familiar to your customers

integrated from a policy and systems perspective, making it

and that reflects the way that they want to buy.

possible for customers to transition back and forth, as well as mix and match offerings with a unified experience.

There are several examples in industries such as software where organizations have tried to align price and value with

6. BAL ANCE FLEXIBILIT Y WITH SIMPLICIT Y

metrics that were unfamiliar, intractable, or unmanageable from a customer perspective. These approaches created

Business models for digital products and services are

FUD for customers and gave competitors an opportunity to

becoming more flexible, resulting in additional options

take market share. While you may want to price differently

for customers and the ability to better align value with

than your competitors, you should also consider customer

experience. However, it is likely that complexity will result.

needs for predictability, simplicity, and ways to buy that align

Over the years, the simplicity/flexibility pendulum swings

with how they budget.

back and forth and initiatives to simplify are often followed by efforts to offer more flexibility. To successfully tackle the

5. SUPPORT YOUR BUSINESS MODEL WITH MODERN SYSTEMS

model should wrap around your customer, as well. "Front office" experiences will be determined by your back-office capabilities. Companies that build subscription businesses on a backbone designed to support one-time orders and purchases will run into scalability and agility issues that impact customer experience.

successful execution, including billing systems, revenue

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removing some of the complexity associated with business model transition and/or flexibility. Process and cultural change will also be required. For example, consider how to make the customer experience across different models as uniform as possible by unifying sales, support, and financial objectives. If your organization has a top down culture that views each approach as meeting a specific customer need, it will be easier for the organization to design a holistic

A number of key technologies are essential enablers to entitlement

the kinds of systems technologies discussed in the previous section. However, technology will only be successful in

The operational systems that support your business

management,

simplicity/flexibility conundrum, your organization will need

management,

| SPRING 2017

telephony,

experience rather than betting one model against another.

7. STRUCTURE A FINANCIALLY HEALTHY BUSINESS While it is important to provide products and services that delight customers, organizations should not lose sight of the need for an underlying financial model that enables the organization to provide products and services to customers in an economically sustainable way. Organizations that are focused on products and up-front sales measure success based on units sold, billed, and revenue generated. However, organizations that wrap their business models around customers measure success based on recurring revenue, retention, churn, and customer lifetime value.

Companies that build subscription businesses on a backbone designed to support onetime orders and purchases will run into scalability and agility issues that impact customer experience.

In the early stages of digital business model maturity, companies are focused on signing up new subscribers. However, it is dangerous to focus on doing so at the expense of efforts to create satisfied, longterm customers. It also takes discipline to keep the wrong customers out while bringing the right customers in. For companies with hybrid business models (i.e., subscription and one-time fees or professional services), subscription may initially represent a minority portion of total revenue. However, it is important to implement processes and systems that will provide agility and scale in the future. Business model success requires a new way of looking at customers. The ability to analyze the depths of a customer record and effectively manage the customer lifecycle is a critical capability. To achieve financial success, automation must underpin your customer lifecycle strategy. It won't be financially feasible to handhold every customer throughout their journey, so your systems and processes should support a strategy where you know which customers to reach out to, when, why, how, and to what end. It has been said that the first step in reinventing your business model is not to think about business models at all. Instead, companies should think about the opportunity to satisfy a real customer that needs a job done. The secret to wrapping your business model around your customers isn't at all about pricing, packages, or profits. It's about real customers, with real problems that you can help solve.

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Tesla Who?

Why The Big Three Will Win the Connected Car Race by Tien Tzuo, Co-founder and CEO of Zuora

Let me clear

—

be think

Tesla is an amazing company. The William Gibson line “the future is already here, it’s just not very evenly distributed” Te s l a

applies perfectly to that company. Tesla drivers wake up

m a d e

to find that their cars have improved suspensions, new top

recently

speeds, autonomous driving, the list goes on. They have a

when its market cap of $52B

generational cool factor that the Big Three is missing right

headlines

nosed past Ford’s $45B and GM’s $49B.

now.

Overall U.S. auto sales are down after last year’s highs, and the Big Three have been turning in lackluster numbers

But they are catching up in a hurry, and not just on style points

lately. Meanwhile, Elon Musk’s company is on track to sell

— Detroit is taking the coming step change in transportation

a hundred thousand cars this year, after delivering almost

business models very seriously. As Ford noted in an investor

80,000 last year.

presentation a few weeks ago, they are quite happy to take a short-term revenue hit in exchange for long-term recurring

So is Tesla poised to dominate Detroit’s Big Three in the next

revenue gains by heavily investing in technology and services.

great race for the connected car? I seriously doubt it.

Here is why I think the Big Three are well positioned to take advantage of the next wave of automotive technology:

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We’re not talking about an app that two engineers can put together over a weekend, or even a new gadget that can be compiled and sourced directly from the Shenzhen First,

supply chain ecosystem. Unlike the standard PC industry

the

process of creating cheap, easily clonable products from

distribution. Though they

low-quality part suppliers (while outsourcing your core

need to adapt to the times, the vast

competency overseas in the process!), producing a car that

they

have

dealer networks these companies operate are

is safe, and at scale, is hard.

commanding assets. Sixteen and a half thousand dealerships in the U.S. employ over a million people. Pretty soon

Third, their financial resources are huge. Since GM and

prospective buyers will be able to “build” their car online

Chrysler emerged from bankruptcy, the Big Three have

the same way they compile a phone or a PC, sign up for a

invested more than $30B in new jobs and facilities. The

monthly subscription plan depending upon which services

American automobile industry spends $18B a year on

they want, then head down to the nearest lot to pick up

research and development, focusing on fuel efficient,

their car. Does subscribing for a car sound far-fetched? Well

electric, and autonomous vehicles. The Big Three have a

it’s already happening — subscriptions for Hyundai’s new

combined market cap of $116B and cash and equivalents

Ioniq EV start at $275 a month, and that includes everything:

of $83B (just for reference, total VC funding last year was

vehicle, fuel, maintenance, titles, and fees.

around $69B). Tesla is currently sitting on just over $3B in cash.

Second, they have the manufacturing scale and expertise. The Big Three will continue to reinforce their decades of

Finally, they have the consumer brand relationships.

industrial manufacturing and design expertise with cool new

Remember when everyone was ready to declare the death

features that happily surprise their drivers on a consistent

of the newspaper industry five years ago? Well, newspapers

basis:

state-of-the-art

have made a big comeback in recent months, thanks in no

infotainment systems, predictive safety technology. And the

small part to reader loyalty that has taken decades to build

scale of their operations is impossible to duplicate — over

and is very difficult to copy. It can be easily lost, but brand

17M cars were sold in the U.S. last year, of which Tesla sold

affinity matters today, now more than ever.

360

degree

video

recording,

76,000. Tesla will continue to amaze and innovate. But Detroit has As several large Silicon Valley firms have recently learned

the institutional structure to start competing on technology,

from painful experience, making a car is incredibly difficult.

design, and (perhaps more importantly) price very soon.

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SPRING 2017

“Can I Give You More?”

How Politico, Motor Trend, and The Young Turks Make Subscriptions Work

by The Enthusiast Network This article originally appeared in Digiday.

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Publishers aren’t making enough money on ads alone. So

utor” access, featured on that page with a headshot and

far this year, Medium announced that it will get rid of its

blurb, and granted access to a special community Slack

native ad sales team to focus on subscribers. Meanwhile,

channel, where they can discuss industry challenges. That’s

the New York Times in its 2020 report calls itself “a sub-

no small perk, considering The Information’s “contributors”

scription-first business,” saying it stays away from “trying

include Snapchat Founder Evan Spiegel and Quora CEO

to maximize clicks and sell low-margin advertising against

Dustin D’Angelo.

them.”

BOLSTER INTELLIGENCE With programmatic vendors and inventory challenging

Perhaps the most established subscription practice, gating

direct-to-publisher dollars as well as advertiser metrics that

a selection of premium content behind a paywall, is the

demand publishers write stories that scale — aka clickbait

favored tack of Politico and Business Insider.

and sensational content — in order to make ends meet, publishers are recognizing the power of consumer-funded

Politico launched policy-focused Politico Pro in the U.S.

models. For those still building that paywall, here are some

in 2011, when it found its morning tip sheets to be wildly

subscription models to look to for inspiration.

popular. It followed with a European launch in September 2015. “People were clamoring for even more policy stories,

GRANT UNIQUE ACCESS

so it seemed there was really a need in the market,” said

The Young Turks (TYT) knew it was leaving money on the

Dari Gessner, executive director at Politico Pro.

table the day one of its readers offered to take staffers on a white water rafting trip. The man, a doctor, felt like a lone

Rather than sell to individuals, Politico Pro’s team sells

Democrat in California’s deeply Republican Central Valley.

journalistic content and access to live Politico events

The left-leaning video publisher became a lifeline. Soon

around 16 major policy areas to companies and organiza-

after, a subscription service was born.

tions. Lower-cost packages, which start at “a few thousand euros” in the EU, are shared among five or so employees,

“We came up with a tiered structure because some of

while top-tier memberships that serve 100 plus readers

our members asked, ‘Hey, can I give you guys more?’"

go for “the low six-figures,” Gessner said. To successfully

said Steve Oh, Chief Business Officer. “Our answer was,

sell throughout all of Europe, Politico Pro’s dedicated sales

‘Of course.’” By creating a membership community, TYT

team collectively speaks close to 10 different languages.

allows its top-paying subscribers entry into the inner-circle, a special perk that sets it aside from media outlets with a

Business Insider has leaned on a combination of sales to

one-way broadcast mentality.

large organizations and individuals to grow its subscriptions business, which launched in 2013 and offers research

Members of The Young Turks’ “chairman” circle – which

reports in six verticals for $2,495 a year. When it comes

costs a cool $1,000 a month — get a monthly, one-on-one

to BI Intelligence’s price point, Andrew Sollinger, EVP of

call with its founder, Cenk Uygur, to pitch improvements

Subscriptions said, “We’ve found there’s relatively inelastic

and ideas. Subscribers to the less costly “executive produc-

demand for high-quality content.”

er” level get a quarterly call with staff, while other levels offer benefits like discounts, t-shirts, and full access to

The new focus on enterprise sales has worked. BI’s sub-

content.

scriber business has “more than doubled in the past year,” Sollinger said. BI’s revenue is up 70 percent over last year,

The Information, a technology industry trade with an elite

and the BI Intelligence team has grown to 40 members. He

audience, takes a similar community building tack. Sub-

credits an investment in marketing tactics like lead genera-

scribers who pay $399 each month are conferred “contrib-

tion campaigns, conversion series, and SEO.

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| SPRING 2017

STOKE FANS’ FIRE Publishers with passionate, niche audiences can build

So in 2016 Motor Trend strategically reorganized its content

community around them, as The Enthusiast Network has

both in front of and behind a paywall, giving subscribers a

for Motor Trend On Demand. CMO Jonathan Anastas de-

30-day sneak peak at video that would later air on YouTube,

scribed the service’s audience as “a passionate crowd who

as well as other platforms such as Netflix and Amazon

will disproportionately spend around their passions.” That

Prime Video. It also began offering exclusive shows, live

crowd then attracts big brands like Dodge, who can con-

racing, and other motor sports content not available to

nect with them through Motor Trend’s content by sponsor-

non-paying viewers, using PR and paid and earned social

ing events, running ads, and integrating into shows.

along with digital, TV, and print ads to promote the service. The gambit worked.

Motor Trend already had a successful revenue model in its YouTube channel. It was one of YouTube’s charter content

Enough Motor Trend YouTube subscribers were the kind of

creators way back in 2012. Building an audience over four

people who would “prioritize buying a carburetor, a set of

plus years put them in an enviable place, with more than 4

wheels, or an exhaust system over their rent,” Anastas de-

million subscribers, well over a billion views and, accord-

scribed. This made $4.99 a month to watch exclusive con-

ing to Tubular Labs, the number one car, truck, and racing

tent about their favorite hobby an easy sell. The subscriber

video platform in the U.S.

audience is also of value for partners like Dodge, which have the ability to integrate into editorial video and feature

According to Anastas, the internal elevator pitch for a

prominently in this otherwise ad-free environment.

subscription model was simple: “What if we can get just

In turn, the paid subscription model allows Motor Trend to

10 percent of four million subscribers…to become paid

be “hyper focused on getting the consumer exactly what

subscribers to Motor Trend On Demand? That’s a real busi-

they want.”

ness.”

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| SPRING 2017

WORLD-CLASS PAYMENT PROCESSING SOLUTIONS Chase offers what your subscription service needs: •

A global payment acceptance platform that enables you to sell in more than 120 currencies and settle in 13 currencies

•

Platform also certifies to SEPA (Single Euro Payments Area) for cross border payment transactions

•

Level 3 purchasing card with data capture capability that may qualify your business for lower interchange rates and enables your customers to receive detailed summaries of goods bought

TO LEARN MORE ABOUT MERCHANT SERVICES WITH CHASE OR TO SIGN UP, CALL 1-800-667-1201.

Gerber Technology and IoT

The Future of Apparel Manufacturing is in the Cloud by Erika Malzberg

What do the pants you’re wearing, the

fashion and apparel, transportation,

Their state-of-the-art machines al-

couch you’re sitting on, and the foot-

furniture, packaging, aerospace, and

ready power a huge percentage of the

balls on the field in the NFL all have in

textile industries across 130 countries.

apparel manufacturing industry. But

common?

today Gerber Technology is moving When the GERBERcutter® System 70

beyond the product, into services

There’s a good chance that they were

was first introduced in 1967, it played

with intelligent solutions that pair the

all manufactured on cutting-edge

a huge role in bringing automation

creative process with sharp, efficient

industrial equipment produced by

technology to the apparel and allied

product cycles. At the same time,

Gerber Technology, the 50-year-old

industries. Fifty years later, Gerber

they’re moving beyond ownership and

manufacturing company that serves

Technology is again transforming

perpetual licenses into subscriptions

more than 78,000 customers in the

industries.

to make their products and services more widely available.

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| SPRING 2017

In short, they’re inserting IoT into the

ogy, noted, "Cloud-based technology

And these are just the latest compo-

manufacturing process and embrac-

is one of the most important trends

nents of the suite to be offered as a

ing the Subscription Economy.

in the industry. We believe offer-

subscription this year.

ing YuniquePLM In The Cloud at an Their Product Lifecycle Management

affordable monthly rate will remove

Making their products and services

solution, YuniquePLM®, was devel-

competitive barriers between large

available through subscriptions is a

oped to enable organizations to con-

and small companies and empower

way for Gerber Technology to extend

nect creative teams with their supply

our community of users to achieve

their reach to a broader, more nimble

chain to get the right products to

optimum results.”

audience. This benefits their bottom

market, on time, and at the right cost.

line, for sure, but it also benefits the

YuniquePLM gets Gerber Technology

Because YuniquePLM In The Cloud

closer to their customers so they can

offers a flexible and scalable product

now have access to Gerber Technolo-

help them to more effectively manage

lifecycle management software, with-

gy’s products and services.

and connect the supply chain, from

out the costly IT infrastructure, it is a

product development and production

platform that businesses of all sizes

And, by extension, it benefits all of

to retail and the end customer.

can use – from independent design-

us end consumers. Because, though

ers to Fortune 500 companies.

we may not understand the complex

YuniquePLM started as a tradition-

innovators and small businesses who

workings of Gerber Technology’s spe-

al on-premise offering, but Ger-

Designers, brands and manufactur-

cific hardware and software, we do

ber Technology soon realized that

ers collaborate effectively through

care deeply about the wonders they

offering a cloud-based subscription

YuniquePLM. They can also use

produce: the materials that clothe,

version would be more accessible

Gerber’s expansive computer-aided

support, decorate, protect, transport,

to a wider range of customers, so

design software suite AccuMark® to

power, cover, and delight us all.

they made the decision to move their

execute a multitude of time-saving

technology to the cloud and sell their

tasks, such as:

new capabilities as a monthly service.

•

Making garment patterns and grading them into various sizes

Offering their software as a service

•

Translating orders for thousands

(SaaS) enables them to reach both

of garments, consisting of multi-

established brands as well as tens

ple sizes and colors, into efficient

of thousands of small to medium

cut plans

businesses that can’t afford to pay for

•

Creating files that drive Gerber

big hardware and upfront, perpetual

spreaders and cutters to cut

licenses.

anything from a single custom printed dress to 10,000 jeans at

As Mike Elia, CEO of Gerber Technol-

one time

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“We’re continually adding value...” -Sean Kelly, CEO and Co-founder of SnackNation

by Aarthi Rayapura

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If your office is well-stocked with snack options such as

that no other model can — a true set and forget solution.

protein bars, dried fruit, granola and other healthy food, you should probably thank SnackNation for it. Since 2014,

Tell us a little about your customers. Are they predomi-

the California-based company has been offering business-

nantly millennial-driven startups in big cities?

es easy access to healthier foods. Clients include leading brands such as Microsoft, Uber, Marriott, Travelocity, NFL

Yes, two thirds of our members are affluent or “upscale

Networks and others whose employees benefit from the

millennials,” a term coined by Nielsen to describe millen-

company’s nutritious, whole ingredients and taste-tested

nial-aged professionals. This is one of the reasons brands

snack boxes. And last year, SnackNation launched a home

are so eager to partner with us — access to this coveted

delivery service — healthy snacks delivered right to your

market where they spend the majority of their time, at the

doorstep.

workplace.

Aarthi Rayapura had a few questions for Sean Kelly, CEO

That being said, you’d probably be surprised at how diverse

and Co-founder of SnackNation.

our member base is. We serve everyone from Fortune 500 companies, to more traditional corporate customers like

You were running a successful healthy snack vending

accounting firms, law firms, and financial institutions, to ad-

machine company H.U.M.A.N...what inspired you to start

vertising and marketing agencies, to local governments and

Snack Nation?

school districts. One of the coolest things about our business is that we get to learn about and serve some of the

Our experience with H.U.M.A.N. Healthy Vending definite-

most talented and creative people in nearly every industry.

ly provided inspiration. It’s actually a separate company but it helped us learn a lot about what resonates with the

What about the home subscription service, who’s your

health-conscious consumer. One thing we saw early on

target customer for it?

was that healthy vending machines and micro-markets were perfect for places like gyms, hospitals, and large cor-

One target customer is certainly families with young

porate clients, but not always the right solution for small to

children who want to provide snacks that they know their

mid-sized businesses. We developed SnackNation specifi-

kids will love, but who don’t want to give them products

cally for this underserved market.

with too much sugar, or those that contain GMOs or other harmful additives.

The rapid growth and enthusiasm we saw for the product made it pretty obvious that we were onto something with

Another less obvious customer base are millennial con-

SnackNation.

sumers, who not only snack more than any other generation, but who also care about things like health and sus-

Why did you opt for the membership model for SnackNa-

tainability and are always on the go. They’re spending less

tion?

and less time in grocery stores, and love the convenience of ordering online and the thrill of discovering their next

We see ourselves as a membership model which means

favorite snack via our subscription boxes.

that we’re continually adding value for our members. The key here is that the relationships and the value we provide

You operate in a very interesting space of catering to indi-

to members gets better over time, creating a level of loyalty

vidual needs via large companies. What’s your subscriber

and stickiness you can’t get any other way.

acquisition strategy?

A membership model also provides a level of convenience

A big part of the value our snack boxes provide is in cre-

SUBSCRIBED

| SPRING 2017

ating the right company culture, one that fosters growth

preferences than they do themselves.

and productivity, and helps with things like recruiting and retention.

While snacking is obviously a primary concern (we want to make our members smile through their stomachs, so to

So part of our acquisition strategy is to create a community

speak), our overarching goal here is to help our members

and a dialogue around office culture. We do this through our

create an awesome office however we can. Very often, our

content marketing — through channels like our blog, social

Snack Concierges are answering questions and providing

media, video content, email marketing, webinars, and even a

solutions for things that have little or nothing to do with

podcast. In fact, up to one half of our acquisition comes from

snacks.

inbound marketing, which is content driven. One of the keys is to establish consistent communication. The idea is to be a resource for the stewards of company

Every new member has a kickoff call, during which the Snack

culture in these offices, and provide so much value via our

Concierge learns more about the office’s taste preferences,

content that we’ve influenced them well before they become

consumption habits, and general culture. This is followed by

a member.

a check-in after the first delivery to make sure the experience went smoothly and the office was excited about what was in

Tell us a little about your Snack Concierges and other per-

the box.

sonalization strategies and how they help you boost customer engagement.

We also have a Do Not Send list that ensures that if on the rare occasion a member doesn’t love a particular product (or

Our Snack Concierges are there to make sure that the Snack-

if there are dietary restrictions to consider), they won’t receive

Nation experience works for each individual office. Their goal

that type of snack again.

is to have a better understanding of our members snacking

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What were some of the challenges you faced early on and

Madness” competition (narrowly beating last year’s finalist

how did you overcome them?

Jackson’s Honest), a snack bracket competition where consumers voted for their favorite snack online.

Our biggest challenge is always finding the right people. I truly believe there’s nothing that determines the success of

Our products team does hundreds of tasting panels, so very

your business more than the caliber of the people you bring

rarely do we include a snack that totally flops.

into your organization. That’s even more true in a predominantly B2B space like ours, where customer acquisition relies

What are your future plans?

so heavily on great inside salespeople and member success reps.

We’re opening a new fulfillment center on the East Coast which will improve our experience for members in that region

What’s your most popular snack? Was there one that simply

of the country, and will soon be soft-launching additional

flopped?

services like beverage and coffee delivery in select markets.

The great thing about our platform is that not only do we col-

Are there any other Subscription Economy companies that

lect feedback that we service right back to the brands, but if a

you find inspiring?

particular product resonates with our members, they see a lift in sales and are able to scale more quickly themselves. We’ve

Sun Basket provides a fantastic customer experience. Five

seen this first hand with brands like Dang Coconut Chips,

Four Club has superb curation and great branding. Dollar

Paqui, and Ag Standard Almonds.

Shave Club really helped everyone understand that upstart membership companies can take on the giants of their indus-

Hippeas, an organic puffed chickpea snack is hugely popu-

tries.

lar. Likewise, Skinny Dipped Almonds just won our “Munchie

SUBSCRIBED

SPRING 2017

Subscriptions Are for the Dogs (and Cats, and Birds, andâ&#x20AC;Ś) by Erika Malzberg

Subscriptions make life easier â&#x20AC;&#x201C; and pets make lives better. So subscriptions for your furred, feathered, and scaled best friends make perfect sense. From pet food to insurance, toys, and grooming supplies, check out what some of the top pet subscription services have for your beloved family members from all corners of the animal kingdom.

SUBSCRIBED

| SPRING 2017

Learning about health insurance for humans is difficult enough, and pet insurance is no easier. Trupanion has been taking care of pets and pet owners for over a decade by offering simple, fair, and affordable pet insurance. Trupanion wants to make sure that you know what you’re getting with a pet insurance plan and welcomes dogs and cats of every shape, size, and breed. www.trupanion.com

Royal Canin isn’t just a pet food subscription service; it’s a global leader in pet health nutrition. At Royal Canin, they make the most precise and effective nutrition for cats and dogs based on size, age, lifestyle, breed and to address specific dietary and health needs. Royal Canin does more than feed your pet; they satisfy the needs of your pet. www.royalcanin.com

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For humans, BarkBox is a monthly delivery of four to six all-natural treats and super fun toys curated around a surprise theme to match your dog’s unique needs. For dogs, BarkBox is like the joy of a million belly scratches! By subscribing to BarkBox, you’re not just getting treats; you’re joining a community of dog-obsessed people and gaining access to their stories, videos, events, and “pawties.” www.barkbox.com

Pet Circle is Australia’s largest online pet food delivery service with a simple mission to help you care for your pet because “Pet happiness is our happiness.” In addition to their one-off purchasing options, they offer a subscription service for toys, food, treats, and even medication for your dogs, cats, fish, small pets, birds, and reptiles — but, sadly, not for kangaroos! www.petcircle.com.au

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| SPRING 2017

Pet Gift Box's tagline just about says it all: Sniff, Play, Love! In this monthly themed gift box, you'll find toys, treats, and goodies for dogs and cats. Pamper your BFF (Best Furry Friend) with the highest quality chews, toys, treats, and accessories with irresistible names like Bow Wow Pet Flip Flop and Isle of Dog Chillout Treats. And with every purchase you help feed 10 rescue pets. www.petgiftbox.com

PetSmart, Inc. is the largest specialty pet retailer of services and solutions for the lifetime needs of pets. In late 2016, PetSmart started offering subscriptions through their auto-ship feature. Simply choose your product and your delivery schedule for a wide range of regular pet staples from food to medicines, grooming supplies, litter and bedding, toys, treats, and more. You can also feel good about subscribing to PetSmart which helps to save the lives of more than 500,000 homeless pets each year. www.petsmart.com

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The 10 Things I'd Tell My Younger CEO Self to Do Better Next Time by Jason M. Lemkin, Founder of SaaStr

SUBSCRIBED

| SPRING 2017

Jason Lemkin is the Founder of SaaStr and was the Co-

CHARGE FROM DAY ONE. Free users and “customers”

founder and CEO of EchoSign. SaaStr is a social community

provide terrible, distracting feedback.

of 100,000+ SaaS founders organized around taking SaaS business from start to initial traction, to scale, and beyond.

PAY UP. Even when cash it tight, paying an extra $20k a

As a VC, Jason has been behind many investments in SaaS

year or more for a resource that is 2x-5x better is the best

startups like Talkdesk, Algolia, Greenhouse, Automile,

investment you will ever make.

Betterworks, RainforestQA, and others which are collectively worth over 1B dollars. Budding CEOs can clearly learn a thing or ten from him. If he could go back in time, here's what he'd tell his younger CEO self:

SLOW DOWN BIG DECISIONS WHEN YOU AREN’T SURE. You have to move fast and break things, but if the pit in your stomach says “maybe don’t do that” — slow that decision down. My biggest mistakes were when I said roll the dice, but my gut wasn’t sure the downside risk was worth it.

BUDGET AN EXTRA SIX TO TWELVE MONTHS BEYOND THE LONGEST TIMEFRAME YOU HAVE

CHARGE MORE. Your product either has value, or it doesn’t. Charging 20 percent or 50 percent or 100 percent more than you’d planned will help you learn that faster, and get to a viable business faster. Don’t charge less to get the ball rolling. That only helps with commodities.

FIRE ANYONE THAT ISN’T 100 PERCENT CUSTOMER-CENTRIC. Later, not everyone has to care about customers. But in the early days, everyone does. They will let the whole company down in SaaS if they don’t.

RESOLVE FOUNDER CONFLICT. Founder conflict kills start-ups, though often slowly. You've got to fix this early.

PAY YOURSELF AS SOON AS YOU CAN. Working for

BUDGETED. We raised eighteen months of seed money.

free is okay in the early days, but later, it gives you an excuse

We needed 30, or at least, 24 months to get to a true

to just “do your best”. Your best isn’t good enough. Winning

business. It always takes longer.

the market is good enough.

SLOW DOWN THE INITIAL TEAM FORMATION

GET BETTER MENTORS — AND PAY THEM. You

PHASE IF YOU DON’T HAVE IT RIGHT. Fire fast

haven’t done it all before, at least not everyone. And even if

doesn’t work so well with co-founders. No one has a perfect

they are centimillionaires — pay them (at least in equity). A

team to start, or ever. But if the initial team’s goals aren’t

so-so mentor or advisor is in the end, a waste of time. But

aligned...that never gets fixed. It’s okay to wait another three

one or two folks that can truly help you think through the

months to say GO if that means the team is stronger.

tough decisions — they are worth their weight in gold.

SUBSCRIBED

| SPRING 2017

Heard on the Subscribed Podcast by Aarthi Rayapura

Today, one of the most exciting opportunities is the transformation of how we consume video content online. I can’t think of any other industry that has gone through, or is about to go through, a transition such as this. It’s absolutely fascinating to watch how our ecosystem, and how our industry, is changing. Kevin Towes, Head of Business Development at Adobe Video and Advertising Solutions

SUBSCRIBED

| SPRING 2017

You need systems and measures in place that focus on the customer. If you have customers you interact with, and you’re trying to differentiate from your competition on some measure other than price, this is something that you absolutely need to be paying attention to. The irony is that lots of companies don’t, but you look at some of the best companies in the world, companies like Apple and Uber, this is something that they are paying super-close attention to. James Allworth, Former Director of Strategy at Medallia, New York Times best-selling author, and co-host of exponent.fm podcast

zuora.com/podcast

The core reason why most new products actually fail from a monetization standpoint is because people postpone their pricing decisions to the very end and slap a price onto whatever they’ve built. I think we’re at a place that’s really healthy with regard to IPOs and I think what I see looking forward is a very robust 2017. There are a variety of reasons for that but probably the biggest are that a lot of growth stocks have been taken out of the marketplace. You’ve got large appetite on the part of institutional investors and a lot of companies that actually are at very significant maturity stage that are ready to go public. Jason Pressman, Venture Capitalist at Shasta Ventures

Madhavan Ramanujam, Partner and Board member at Simon-Kucher & Partners

People are going to stay with you based on their experience. Companies need to capture the hearts, the minds, and the loyalty of customers for the long term. And if you’re going to do that, you need to look at all angles of your business and figure out how to capture customers, how to excite them, and how to keep them excited to have them stay loyal to your brand. Catherine Courage, VP, Ads and Commerce User Experience at Google

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| SPRING 2017

A luxury travel destination club. A pet insurance provider. A farming equipment provider in

lunch program. A wedding publisher. A French home furnishing company. A restaurant reser

vice. A plumbing & handyman service. A major American airline. A major American automob

rental service. A cable TV company. A foreign language learning program. A standardized tes

interior design community. A salon & spa management platform. A radio network. A hospita lock manufacturer. A smart phone manufacturer. A private jet service. A toothbrush delive ing company. A food takeout delivery service. A real estate agent community. A Swiss travel

cial newspaper. A recreational marketplace. A home security company. A French restauran

A farming equipment provider in New Zealand. A personal meditation app. A professional s

nishing company. A restaurant reservation seating system. A streaming Japanese anime prov

can airline. A major American automobile manufacturer. A smart thermostat. A credit card c A cable TV company. A

SUBSCRIPTION BUSINESS

provement and interior

RUNS ON ZUORA.

foreign language learning program. A st

design community. A salon & spa manag

tional telecom. A legal contract resource. A lock manufacturer. A smart phone manufacture

beauty supply company. A mobile gaming company. A food takeout delivery service. A real e

vice. A 160 year-old British financial newspaper. A recreational marketplace. A home secu

club. A pet insurance provider. A farming equipment provider in New Zealand. A personal

publisher. A French home furnishing company. A restaurant reservation seating system. A st man service.A major American airline. A major American automobile manufacturer. A smart

company. A foreign language learning program. A standardized test preparation service. A 13

A salon & spa management platform. A radio network. A hospital mews publisher. An Ivy Lea

phone manufacturer. A private jet service. A toothbrush delivery service. A multinational O

livery service. A real estate agent community. A Swiss travel agency. A streaming music servi

A recreational marketplace. A home security company. A French restaurant guide. A visual

n New Zealand. A personal meditation app. A professional soccer scouting service. A school

rvation seating system. A streaming Japanese anime provider. A fashion industry marketing ser-

bile manufacturer. A smart thermostat. A credit card company. A textbook publisher. A home

st preparation service. A 131 year-old cash register manufacturer. A home improvement and

al mews publisher. An Ivy League university. A national telecom. A legal contract resource. A ry service. A multinational OEM. An 83 year-old beauty supply company. A mobile gamagency. A streaming music service. A weather data service. A 160 year-old British finan-

nt guide. A visual effects studio. A luxury travel destination club. A pet insurance provider.

soccer scouting service. A school lunch program. A wedding publisher. A French home fur-

vider. A fashion industry marketing service. A plumbing & handyman service. A major Ameri-

company. A textbook publisher. A home rental service. A salon & spa management platform.

tandardized test preparation service. A 131 year-old cash register manufacturer. A home im-

gement platform. A radio network. A hospital mews publisher. An Ivy League university. A na-

er. A private jet service. A toothbrush delivery service. A multinational OEM. An 83 year-old

estate agent community. A Swiss travel agency. A streaming music service. A weather data ser-

urity company. A French restaurant guide. A visual effects studio. A luxury travel destination

l meditation app. A professional soccer scouting service. A school lunch program. A wedding

treaming Japanese anime provider. A fashion industry marketing service. A plumbing & handythermostat. A credit card company. A textbook publisher. A home rental service. A cable TV

31 year-old cash register manufacturer. A home improvement and interior design community.

ague university. A national telecom. A legal contract resource. A lock manufacturer. A smart

OEM. An 83 year-old beauty supply company. A mobile gaming company. A food takeout de-

ice. A weather data service. A 160 year-old British financial newspaper.

l effects studio. A restaurant reservation seating system.

U SD $20 .07

Subscribed Magazine, Spring 2017

Articles inside

7 Ways to Wrap Your Business Model Around Your Customer

How to Get 500,000 Businesses Using Your Product While Burning Almost Nothing