It’s easy to be blinded by the obvious. It happens in business all the time. Something is right in front of you, but you attribute its effect to a different cause. I see this most typically when observing a paradigm shift — the reason for the shift is not always the obvious causative agent.
For example, Dell became a great producer of PCs — despite the company’s recent shortcomings, which mirror the entire industry — by mastering the logistics of just-in-time inventory, highly flexible manufacturing techniques and great logistics.
You can call Dell or go to its website and custom design a machine perfect for your needs, and it will arrive at your door in a few days. The impressive bit is not that your PC got delivered but that millions of others also did at the same time. So, while Dell looks like the master of PC manufacturing, it got there by mastering a lot of arcane disciplines related to logistics and inventory management.
Another example is McDonald’s. The company built a template for a successful fast food outlet, but you could say its major strength has been in franchising and real estate management.
A third example might be Salesforce.com. It wasn’t the first CRM company on the street, but it was the first to figure out how to deliver a competent business application across the Internet, and it excelled at marketing it.
The unifying idea in all of this is not simply having a good idea, but in being first to market and executing better than others in your space. The first mover advantage has been the stuff of legend and lore for a long time, and there’s a great deal of validity to it, which is why it’s legendary.
The 3 Imperatives
Today, I am seeing more first movers than I can ever remember — at least since the dot-com boom. As usual, it’s not the obvious thing that accounts for a company’s success; it’s something else. Today, the hottest idea in business seems to be subscriptions, and all manner of companies are trying their hands at the business model.
Everywhere you look you see new subscription companies springing up, and not just to peddle some new software app either. There is a growing cohort of companies that deliver goods as a subscription service — from the obvious like wine on a monthly basis to the utilitarian like shaving supplies and clothing.
The commonality for all of these companies is not the quality or quantity of goods sold, though they are important, but the back-office operations that make the subscription model possible. These companies all know — or they should — how important it is to get the customer’s order right. However, they are also fanatics about three other things — what I call “imperatives.”
First, they are good at managing churn, the propensity of customers to leave a service over time. They measure churn and attrition, but they also understand the average customer’s lifetime value and can forecast value remaining.
Second, they know where their recurring revenue comes from. Whether it’s cash in the bank or cash promised in a contract, they can calculate to a high degree of certainty what’s in the pipeline once things like churn are factored in.
Finally, they have a keen grasp on the cost of revenue. A wise man once told me you can’t eat revenue, you can only eat margin, and that idea is on full display in a subscription company. New customers require some handholding. So do older customers — though not as much. Subscription companies are adept at understanding how much their revenue costs them and what the margin really is.
Now, it would be nice if everyone understood all of this — but they don’t. There are lots of subscription companies that are not fanatics about these three imperatives, and they are the companies most likely to fail. Wherever you look — whether it’s Dell, McDonald’s or Salesforce — each company had a raft of competitors when it got started, but the winners were the ones who understood their paradigm better than the rest and executed within it.
Owning a Market
The expansion of the subscription business model is likely to continue for many years as new niches open up to subscription vendors — but the niches are tiny. There might be a lot of fast food companies today, but as you look at the modern business landscape, the ideal niche for a subscription company seems to have room for only one vendor.
There’s only one Amazon, one Facebook, and the number of solo market niches is growing. The company that owns the niche has the most descriptive name of the niche. Unlike department stores, the subscription companies quickly iterate on a model and once set, there’s little room for a competitor, regardless of how big the market is.
So, if you intend to own a market in a subscription world, you only have one shot at it. You need to manage the back-end operations like your life depends on it, because it does.
This week kicks off the third annual Zuora user meeting, Subscribed. Zuora is one of many companies providing billing, finance and payment solutions for subscription companies. It has made a science of mastering the big three imperatives, and that mastery will be on display at the Intercontinental Hotel in San Francisco.
A couple of weeks ago, the venture capital world signaled its approval with the company’s US$50 million series E tranche of funding. Stay tuned for more.