Benioff redux? Maybe

Some time back, Marc Benioff had this crazy idea he was trying to sell about turning software into a service. After the collapse of so many application service providers during the Internet bubble, who was this guy kidding?

As it turned out, Benioff's only mistake was that his idea was slightly ahead of its time. Salesforce.com went on to become one of the most successful software companies of the decade.

So it is that I've become intrigued about the prospects for a start-up called Zuora that's taking a page out of the Salesforce playbook. Coincidentally, it was founded by a Salesforce alumnus. Zuora offers what its founder, Tien Tzuo, calls "on-demand subscription." The idea is quite straightforward: Zuora will handle subscription billing, thus freeing customers from having to invest time and resources grappling with the administrative chores related to billing procedures. Zuora makes money by charging a small percentage of the bills collected by the company.

In theory, it's a sweet idea, especially for start-ups that need to pour all their sweat and muscle into staying afloat. As my colleague Rafe Needleman pointed out when Zuora made its debut earlier in the year:

CEO Tien Tzuo

(Credit: Zuora)

"The whole idea of running a billing service for Web 2.0 companies is very smart. Small companies building Web apps shouldn't be saddled with creating billing software from scratch any more than they should write their own accounting software or e-mail apps...The downside to the model...is not so much a lack of customers but a lack of knowledge among potential customers that they should be working on integrating a Z-Billing-like solution sooner rather than later."

That's the biggest question mark hanging over this company. When I spoke recently with Tzuo, he acknowledged the point, but quickly added that nobody will know whether he's too early until after the fact.

"It's definitely a bet," he said. "Do you wait for people to want it and build the technology? It's never clear."

By way of example, Tzuo raised the what-might-have-been scenario for Quokka Sports, a now-defunct digital supplier of sports entertainment content, which at its zenith, generated $50 million in sales.

"(CEO) Al Ramadan started that company a couple of years early," he said, adding that Quokka might have survived had it launched later. "But it took online advertising another couple of years to get going. He was early. So was Opsware, for that matter."

Tzuo, who spent nine years working at Salesforce, said his former company wasn't an easy sell in its early days and required missionary work by Benioff for about seven years.

"It's only in the last couple of years that the tide has turned," he said. "Now we want to do same thing--not just for other software companies but for the entire economy."

Venture capital firm Benchmark Capital is buying into the idea. The company led a $6.5 million first round of funding in Zuora. Benioff is also an investor in his company.

"We think this business model is the future," Tzou told me. "It's the same stuff we had to do at Salesforce. You sit down with customers, one at a time."

[splendidcrm]

The risk here is that CRMs are starting to add subscription billing to their feature lists. SplendidCRM, for example, can be setup to automatically send a bill and charge a customer's credit card every month, quarter or year. So you have to ask, which is cheaper, the cost of the CRM licenses or 1% of your sales.

[srubenstein]

Marc Benioff was not the first SAAS company, even in the CRM space. Nor is Zuora the first in the ASP billing space. At Averum, we built a similar software product / hosted solution 4 years ago which offered sophisticated custom pricing, sales commissions and subscriptions. But it was definitely too soon then. Even at that time, we were not the first company in the space which Zuora claims to be now.

More importantly, we ran into a sales cycle issue. You are asking developers to replace their in-house built, hard-coded billing system with an outside product or service that requires significant integration and re-coding on their part. There are also concerns about data security and maintenance, such as if my client changes their company name or credit card. (We had a complete web services interface which made this easy, but it still requires effort.)

Regarding their revenue model, most of the competition charges a simple fee per customer, not a percentage of revenue which seems unjustified. The credit card gateways also offer a simple recurring billing option as well. I applaud Zuora for giving it a go, but I think they will find it difficult to win customers.