Making cash with SaaS and Web 2.0

Making cash with SaaS and Web 2.0

Ever wondered why so many Web 2.0 or SaaS offerings are free or bundled? It’s because the vendors can’t work out how to bill for them. Don’t believe me? Here are some real-life examples:

  • A monitoring vendor that switched a $10,000-a-year data extraction option to free because it had no way to measure usage and so couldn’t tell its auditors when to recognize the revenue
  • A leading SaaS vendor where new product ideas with usage-based pricing schemes never see the light of day because of the $1+ million it would cost to re-engineer the billing system
  • Another SaaS vendor where it takes up to 8 hours for a sales rep to work through the process of pricing, setting up and approving a customer order for an add-on to an existing subscription

No wonder most Web 2.0 vendors prefer to monetize with ads — or else just hope to exit before the VC cash runs out. For SaaS offerings, per-user per-month is the default charging basis simply because it’s relatively straightforward to track and calculate. Or so you’d think. But even such a simple system rapidly gets complex for vendors that are growing rapidly.

Let’s say you have a thousand customers growing at 25% a year and you offer two products and three license plans. Sounds simple enough, except that life is never that simple. Even if you’re doing well, you’ll lose around 1 in 10 customers a year because of natural churn. With any luck, you’ll upsell 2 in 10 of those who remain. Remember too that your subscriber base is constantly shifting because your customers, through recruitment, transfers and promotions, will change details on at least one in five user accounts each year.

So of the 200,000-plus monthly invoices you’re going to issue in the coming year, how many of them do you expect will trigger a customer query? Especially when the effects of churn, upsell and user migration leave as many as a third of them showing a different bottom-line figure than they did the previous month.

Does it start to sound like a headache? Now you can understand how you’d react when some bright spark in product marketing suggests a new service option with utility-style pay-by-the-drink pricing.

That’s when Tien Tzuo, CEO and co-founder of Zuora, hopes you’ll call in his company (if not before). “We see a lot of deer-in-the-headlights,” he said. The company today announces $6.5 million in Series A funding from Benchmark Capital, and has also attracted seed funding from Salesforce.com’s Marc Benioff and WebEx co-founder Min Zhu. Its first announced customer is online marketing SaaS vendor Coremetrics.

Tzuo (pictured) was employee number 11 at Salesforce.com and was chief marketing officer and then chief strategy officer before leaving to found Zuora. His two co-founders are ex-WebEx alumni, including Cheng Zou, the architect of WebEx’s subscription management and collection systems. They believe they’re creating the first purpose-built subscription management system for the on-demand business applications market, which will itself be delivered as a service.

There are other players competing in the space. Aria Systems is probably the best known, and LeCayla Technologies, recently acquired by SaaS hosting specialist OpSource, is also a player [disclosure: OpSource is a recent client]. Tzuo told me last night that these companies owe too much to consumer billing models and don’t fully address the kind of issues seen by SaaS vendors in the business software market. “These companies are built too much with telcos in mind [rather than] more complex B2B environments,” he said. For example, Zuora will automate processes for handling payment against invoice or setting policies that govern how much discount each layer of sales management can authorize, on what products.

A lot of the capabilities Zuora is building into the product is based on feedback from AppExchange partners as well as the founders’ prior experience. “We’re seeing a lot of pent-up demand for what we’re doing,” Zuora told me. The bulk of its early customers will be SaaS vendors (and it goes without saying that Zuora plans to integrate with Salesforce.com for CRM and Intacct for financials, among others). However Tzuo sees a wider opportunity emerging:

“It’s not just software that’s moving to [a subscription-service model], it’s entire industries. Within 5, 10 or 15 years, you’re going to find yourself buying less and less stuff, you’re going to be subscribing to things,” he told me. “We really believe the Internet is just going to accelerate the shift from manufacturing to services, and that lends itself to a subscription-based services model.”

Zuora therefore aims to be “a generalized billing platform that any company can use,” and is being pitched as the PayPal of online business services. Nor does Tzuo shy away from the notion of one day selling its services to industry giants such as Saleforce.com and Amazon. “As these SaaS companies grow up, they discover their back-office requirements are completely different in a subscription business,” he said. Salesforce.com is probably a more likely prospect, but it’s evident Tzuo intends Zuora to become a category-killer. “Eventually we hope to go back to Amazon and say, why build your own?”

My take? I’ve said often enough that on-demand vendors have got to make the pay-as-you-go model work, and that includes moving beyond the static and inflexible per-user-per-month formula. Thus far, the industry has succeeded in running away from the problem, but there are two factors that will likely bring this to a head in the coming year.

First of all, SaaS vendors and business-oriented Web 2.0 players are beginning to step up to the kind of scale where homegrown subscription and collection systems simply don’t cut the mustard any more.

Secondly, if we’re facing a business downturn, it’s no longer enough to rely on cash reserves or customer goodwill to make up for shortcomings in your billing and settlement systems. If cash is going to be king, the ability of on-demand vendors to collect cash is about to become paramount.

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