[Transcript] Subscribing to the future with Zuora’s Carl Gold
Dee Reddy: Carl, thanks so much for joining us on Inside Intercom today. You’re the Chief Data Scientist at Zuora. Can you kick things off by telling us a little bit about your background and how you ended up in your current role?
Carl Gold: Well, the truth is I have a little bit of an unusual path to becoming a data scientist or, maybe, it’s not that unusual for people of my age, to be honest. I started out professionally before data science was a thing. I went to graduate school and I did a PhD at the California Institute of Technology in an interdisciplinary program that combines neuroscience and artificial intelligence – a lot of neural networks and stuff like that. This was back before neural networks were cool, back before there were tons of people talking about it and lots of companies investing in it. But it was a great experience, and my PhD definitely laid the foundation for my later career.
After finishing my PhD, I went to work at a Wall Street company because, back then, Wall Street was the best bet for someone with an academic science training who didn’t want to stay in academia. So back then, if you didn’t want to stay in academia, I mean, Wall Street was pretty much the only option.
Dee: What sort of years were you working on Wall Street?
Carl: From right before the financial crash. I started in 2007 and worked on Wall Street until 2014 or 2015.
Dee: Interesting times to be working there, I would imagine.
Carl: Yeah, it was quite stressful because I was a relatively junior person, and that was when the financial markets just started blowing up and everything went crazy.
Dee: So then, in 2014, what made you decide to move out of that arena?
Carl: To be honest, there were a few reasons. One is that the finance industry changed post-crash. Before the crash, people saw the finance industry in a more positive light because the economy was booming and finance was booming. A lot of people at the time said, “Oh, look, finance is doing great things for the economy.” Then, when the crash came, everyone’s perceptions changed, my own included, because a lot of wrongdoing and bad business practices came to light. It became apparent that finance wasn’t contributing so much to the economy. In fact, it had just exploded the economy. So everyone’s perception of finance changed and also the business environment changed. It went from a bubble that was growing to one that was deflating, and that meant all the companies in the industry had to contend with a much less positive business environment. Everyone’s margins were tight and the competition was fierce.
So, it was a challenging environment. But, at the same time, in those intervening years, data science really came into its own. And with my background that included machine learning and statistics and programming, it was pretty natural to make that leap and join what I felt was a healthier industry.
Dee: So you’re at Zuora now and one impressive initiative that you guys have undertaken in recent years is that you launched the Subscribed Institute. You’re on the leadership team there along with your CEO Tien Tzuo and some other colleagues. Do you want to tell us how that initially came about?
Carl: It came from the urging and demands of some of our leading customers. Zuora had a big conference every year and the leaders at our customers’ companies felt like the big conference was a great way for Zuora to broadcast knowledge to all of our users, but it wasn’t a great way for them to meet each other and share best practices and actually learn from each other. That’s when the initiative was launched. Some of the first things in the Subscribed Institute were these executive summit events, which fill that need for subscription economy leaders to meet with each other and share their experiences and best practices.
Then, we brought in the scope to cover the research efforts, which is one of my main focuses. We were already doing some research on subscription economy data, but we merged the initiatives to make sure that the research was in touch with the needs of our customers.
Dee: I can only imagine that your own academic background must be a huge asset in pulling that type of research together.
Carl: Surprisingly, it’s a lot of my Wall Street background. Because my academic background is in neuroscience and machine learning, I have the background in statistics and research methods and things like that, but it’s the time that I spent on Wall Street that gives me the more practical knowledge that I can bring to those research questions.
Dee: Why do you think an industry-wide resource like that is important? Because I guess our understanding of the subscription community or subscription companies is ever broadening, isn’t it?
Carl: Absolutely. At Zuora, we know a lot about the subscription economy. We’re obviously one of the leaders, but we don’t know everything and we don’t claim to know the best practices or best answer to every question. So, it’s really important because it allows our customers to learn from each other in a peer network, rather than the broadcast from Zuora down to them. For companies that are already subscription-based, they want to hear from each other about best practices. For the companies that are just beginning the journey to subscription by transforming a legacy business, they need the input from other leaders who have gone on that journey.
Dee: One thing you’ve touched on in your writings that I was particularly interested in is those legacy companies and their perhaps unique approach to subscription models – one company you mentioned in a piece you wrote was Caterpillar.
Carl: There are different models for companies that have a legacy product. The simplest, of course, is just to take the existing product and sell it in annual contracts rather than in a perpetual license. Caterpillar is a good example because they’re not just offering their old leases on subscription – they’re actually offering new digitally enhanced products. And that’s what we see a lot of. Companies don’t just want to take their old product and sell it on a subscription instead of a license. They want to do new digital offerings where subscription is the most natural way to do it.
Dee: I suppose not every legacy company is going to have a business model that’s going to be an automatic fit in its original form to subscription.
Carl: Or people won’t necessarily be willing to buy the product that way. It really depends. There’s so much variety. We see offering the old product on subscription as just stage one because one of the most compelling things about the subscription business model is not just that there is recurring revenue. It’s that you have an ongoing relationship with your customer, and that gives you the opportunity to learn more from your customers and to offer upgrade and add-on services. For Caterpillar, a big part of their plan is to offer digital services on top of the existing equipment.
Dee: We actually had a customer experience guru – Shep Hyken – on recently who referenced your CEO [Tien Zuo] and did actually say that the future of customer support and that type of customer experience was actually going to be through subscription. So, it’s interesting that you say that. Let’s move on then to your work within the institute. I know you’re the creator of the Subscription Economy Index. Can you talk us through what this is?
Carl: The Subscription Economy Index is a collection of benchmarks created from aggregated and anonymized data that’s generated by the companies running on the Zuora platform. For example,one of the main things we look at in the Subscription Economy Index is the typical growth rates in revenue for subscription companies. To do that, we anonymize the data that’s in our system and we take aggregated statistics from all the different companies, and then we can answer questions like, “What’s the average growth rate of a subscription company that we see?”
Although the data is only based on companies that are running on Zuora, we have such a large pool of companies that we really think this is representative of what’s going on throughout the Subscription Economy. The advantage of working with companies that are on Zuora – well, for me as a data scientist – is that all the data is in a common format and it’s easy to know what all the numbers mean because we’re all on the same platform. It’s a lot harder, for example, to analyze companies according to their filings, because then they’ve all got a different meaning for something like churn rate.
Dee: Why do you think there is a need for that sort of industry-wide resource? Why is that important and what can businesses gain from taking part in that?
Carl: It’s clear to everyone in the subscription economy that subscriptions are the future of business and, across many industries, companies are undergoing big business transformations. But, just because you sell something by a subscription, it doesn’t guarantee success. That’s what we’ve seen, and we have the data to show it. Success starts with a great product, but there are many pitfalls when it comes to your go-to-market strategy, not to mention adopting the right technologies and transforming your company culture. It’s not easy. The Subscribed Institute works to solve those critical business problems for the companies in the subscription economy.
Dee: So, it’s about learning from the larger subscription community. But then there are companies involved that you wouldn’t necessarily consider them to be subscription businesses. You’ve given the example of Caterpillar.
Carl: It really cuts across industries and business models, because many of these companies want to offer new services. They don’t just want to be a manufacturer. With Caterpillar, they don’t just want to sell you the industrial equipment. But there are things like ongoing maintenance and service and digital service enhancements, which is where a lot more of the profit margin is going to come from in the future.
Dee: So engaging with something like the Subscribed Institute can help existing companies that are finding their feet, finding a subscription model within an existing business?
Carl: Yes, and they can learn from the companies at Zuora because we have been serving companies that have been going subscription for over a decade now. So many of the winners and the premier companies in the subscription economy are already with us.
Dee: That’s very true. So, within the Institute, you’re the creator of the Subscription Economy Index. Do you want to talk me through what it is? How you go by compiling it and what types of companies are involved?
Carl: The Subscription Economy Index is designed to measure the overall health and growth of subscription businesses across all the various industries. It’s compiled based on anonymized and aggregated data, which is the system-generated activity on Zuora’s billing service. It’s meant to be an indicative sample of the companies throughout the subscription economy. We can use that data to analyze things like trends and company health and benchmarking, things like growth rates and churn rates, and also best practices.
You asked about the companies involved, and it’s a wide range. We analyze industries, including SaaS (software as a service). IoT is a very big category for us now – that’s internet of things. Dropping the acronyms, there are traditional sectors like media, telecommunications, and even manufacturing companies. We also have a big category of manufacturing services companies, which is software and services in the manufacturing sector.
Dee: Your last biannual report recorded that the subscription economy grew by 350% over only seven and a half years. That’s a fairly remarkable growth to see. Can you paint us a picture of what’s behind that?
Carl: 350% growth in seven and a half years comes out to an 18% compound annual growth rate, which is the average we see in our companies. And that comes from the fact that these companies have both rapidly expanding subscriber bases, as well as the ability to upsell existing customers on new products. Those are the two pillars of subscription company growth. The sectors outlined in the Subscription Economy Index report are growing around two to five times faster than their comparable non-subscription benchmarks, and we see that across all the different industries that we track. It’s not limited to just one or two industries.
Dee: I’m curious about that as well because you do break down growth rates by industry or sector. Are there any really surprising or particularly impactful insights that you found on that point?
Carl: One surprise we saw was that business and manufacturing industry services had the lowest churn rates across all the sectors – lower than 20% churn rates, approximately. So that shows that offering subscriptions that serve business-critical functions really makes a sticky product, so the customers don’t churn.
Another interesting thing was that we compared the IoT sector to the regular hardware sector, and IoT was growing around five times faster than traditional hardware manufacturing companies. So the network products are just really growing much faster. And I mentioned the growth in upsell, in user spending – we measured that with the average revenue per account, and IoT had the fastest growth rate and average revenue per account, which shows that launching and then monetizing a new service drives greater individual account growth.
Dee: Some of the key takeaways that you give on the report are around how subscription-based companies can see a reduction in churn. There were three that jumped out at me: offering subscriptions that serve business-critical functions, launching and monetizing new services, and incorporating user-based pricing facilities. Is there anything there that you’d like to expand on?
Carl: Serving business-critical functions really does lower churn due to the sticky nature of B2B subscriptions. And we’ve seen that incorporating usage billing is a plus. It gives customers a kind of balance and flexibility due to that sort of pricing, and it keeps customers more engaged and retained longer. When you pay for what you use, you feel you’re getting a good value and that leads to better customer retention.
Dee: You’ve recently written a book called Fighting Churn with Data. In your experience, if someone’s going to fight churn with data, what are the metrics that matter that they should be looking into?
Carl: To fight churn with data, you need to assess your business and develop a set of great customer metrics. And every great customer metric is going to show a really strong relationship with customer engagement and retention on the one hand and customer churn on the other hand. The book is about the process of discovering and developing those kinds of metrics. In a nutshell, you have to really be monitoring the activities that give customers the most value from using your service. You want to capture the magical or “aha” moments that you’re delivering to your customers.
Overall, the use of data and customer metrics is critical to reducing churn. It lets you build stronger customer relationships through your understanding of the customer and it’s a communication path between your different departments because there’s no silver bullet for fighting churn. It’s the responsibility of many different groups that need to coordinate – that’s another area where customer metrics have a really important role.
Dee: It’s probably fair to assume that most of our audience are either working currently in a SaaS or a subscription-based company or, at the very least, they’ve done so in the past or hope to in the future. What can we all learn collectively? You have a great piece that you’ve written about this – what can we all learn collectively from the old fairy tale of Goldilocks?
Carl: Well, there are a couple of ways in subscription products and in your go-to-market where you need to get things just right. Because that’s the point of Goldilocks – not too hot, not too cold, just right. So one area is to allow customers to opt into and out of different features of your product and, generally, make changes in their product selection and things like payment terms. It really leads to better revenue and lower churn when customers make changes. We found that companies where customers make changes in their product offering commonly grow much faster than companies that don’t.
Dee: In making those changes, I presume you probably want to be careful that you’re not changing your product to the detriment of itself?
Carl: Sorry, if I wasn’t clear, I didn’t mean changing your product, but having options for customers to self-select different versions. Different features to upgrade oir downgrade without penalty or interruption of service.
Dee: That ties in then to the pricing being just right for them, because they’ve almost chosen the exact model that they want.
Carl: Then another area where the Goldilocks principle applies is in charging your customers for usage. That’s when you charge customers based on how much they use the product and not only a fixed fee. That helps you get the pricing just right for your customers. We found that subscription billing plans should include a little component of usage charges but not too much. If you’re charging them for everything they do, then it’s like a taxi meter. No one likes that. So, we found that having a small component of the charges be from usage billing, at the same time as having most of your billing plan recurring, that’s just the right balance.
Dee: Then where does the bear come into this?
Carl: The bears are your competitors. If you don’t give Goldilocks the right meal before the bear comes home, she’s going to run out the back door. How about that?
Dee: So your advice to people, though, is to be the bear, so that their competitors can’t get in there first.
Dee: This feels like a pretty important juncture with the work that you’re doing, across the industry, in terms of how we use data science. What do you think that the next 10 years might hold in store for that particular sector of the industry?
Carl: We definitely see in subscription services that there is an increasing need for customization to individuals, and data science plays a key role there in how companies are adapting their services to new user demands. Especially during this kind of crisis period that we’re having, the types of services and the demands that people place on them are evolving very rapidly. And so, using data and predictive analytics is key to keeping the pulse on your customers and figuring out what the next opportunity is, what the next threat is.
Dee: I think, now more than ever, you need that sort of consistent checking of how people are getting on. To go back to your Goldilocks approach, that initial just right pricing – the circumstances around them have changed so much, it may no longer make sense for them. That’s where the data can help?
Carl: Absolutely. Another area is in customer metrics, if you are tracking customer metrics and seeing where customers were finding value and not. If your user behavior is changing in the new market conditions, how are you going to know if you weren’t using metrics to begin with?
Dee: Because you can only get the insight from the point that you start tracking this.
Dee: Before we let you go, where can people keep up with your work in the meantime? Where can they get your book? Are you planning any webinars or any talks that people can take a look at?
Carl: For my book and the work on churn and conference presentations on churn, go to my website, which is fightchurnwithdata.com. And then for all the Zuora pieces on the Subscription Economy, they’re pretty easy to find on Zuora’s website.
Dee: Finally, with everything going on, we often ask people in these interviews if they’re inspired by a particular person or a business. Is there anything that you’ve seen that you find particularly inspiring in terms of how a company or an individual has reacted to what’s going on?
Carl: Honestly, I’ve been pretty inspired by my own company, by Zuora. In the last few months, some of our customers have seen such a huge spike because we support some of these products that are linking people together, and we’re seeing vastly expanded usage at home. And Zuora has risen to the challenge of meeting the needs of these customers.
Dee: Carl, it was an absolute pleasure chatting to you today. Thanks so much for joining us on the show.
Carl: It’s been a pleasure. Nice to talk to you, Dee.