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The Business
Model for the
Subscription
Economy
Iain Hassall
VP Finance
Zuora, Inc.
In The Subscription Economy, Focus Is On
Relationships

BUY NOW

Product
2

© 2014 Proformative

SUBSCRIBE

Relationships
…Requiring a Completely Different Approach
to Building Businesses.

3

© 2014 Proformative
This Approach is Best Represented by
The Nine Keys

4

© 2014 Proformative
But there’s a problem(s)

We are still using legacy financial
formats to present our Company’s
results and help our Execut...
Problem 1

Traditional Income Statements are Backwards Looking

6

© 2014 Proformative
Problem 2

Traditional Income Statements are One-Time Focused

7

© 2014 Proformative
Problem 3

Public Markets Use GAAP/IFRS to Get the ARR & the
Three Metrics … Imperfect Data Leads to Estimates

8

© 2014 ...
At Zuora, Annual Recurring Revenue (ARR) is
the Cornerstone of our Business Model

ARRn – Churn + ACV = ARRn+1

you start ...
That Business Model is Centered on ARR and
has Three Main components

GROWTH
Recurring
Expense

One Time Events
10

© 2014...
When ARR Governs the Business Model,
Increasing ARR is Top Priority

11

© 2014 Proformative
While we invest in Growth, Disciplined Investment
in all Recurring Functions is Paramount….

12

© 2014 Proformative
Even if We Solve for Growth and Recurring, Without
Predictability of any One Time the Model is at Risk!

13

© 2014 Profor...
A new Income Statement
&
Three Metrics that represent the
health of a business
14

© 2014 Proformative
The Subscription Economy Income Statement
First,
you begin
w/ ARR…

Annual Recurring Revenue $100
Churn
Net ARR

(10)
90

...
So, then your Three Metrics That Matter are…
Annual Recurring Revenue

$100

Churn

(10)

Net ARR

90

COGS

(20)

G&A

(1...
The Three Metrics That Matter Tell Us
Everything

17

© 2014 Proformative
Expanding the Three Metrics

18

© 2014 Proformative
Your Calculations…

19

© 2014 Proformative
How Are You Calculating Your GEI?

Web
Visits
Inbound &
Outbound

Events

Sales
Mgmt

+

Sales
Ops

SDRs
AEs

BD

Marketin...
Retention… (almost) as important as bookings

Go
Live

Close Deal

Churn

21

© 2014 Proformative

Increase
Usage

Churn

...
Recurring Profit Margin
ARR
Tech Ops
Acct Mgmt/Support
Total COGS
Eng/Qa
Product
Total R&D
Finance/Ops
HR
Total G&A
Recurr...
Now, Operationalize It
CFO Webinar
Starting ARR
Bookings
PS Churn
Live Churn/Ramp
Net ARR Growth
Ending ARR

FY11
35,200
1...
Detailed Modeling

© 2014 Proformative
Report and Measure
PADRE / PPM
Pipeline

•Web
•Social
•AR / PR
•Events
•Product
Launches
•Demand Gen

Acquire

•Field Enab...
Report and Measure

REPORT:
What
Happened

© 2014 Proformative

Bookings
Billings
Accounts Receivable
Cash
Revenue
Deferre...
Contact Details

Iain Hassall
VP Finance
Zuora, Inc.
iain.hassall@zuora.com
650-241-0658

27

© 2014 Proformative
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ProformaTech: Embracing the Subscription Economy – a CFO’s guide

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http://bit.ly/Oa6dIv Companies like Zipcar, Netflix and Amazon Web Services have shaken up the business landscape. Subscription-based / recurring revenue businesses are redefining how companies are going to market and monetizing their products. Has your company already embraced this approach or are you contemplating pivoting your business? If so, the technological aspects of running a business in the Subscription Economy are just the beginning.

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Transcript of "ProformaTech: Embracing the Subscription Economy – a CFO’s guide"

  1. 1. The Business Model for the Subscription Economy Iain Hassall VP Finance Zuora, Inc.
  2. 2. In The Subscription Economy, Focus Is On Relationships BUY NOW Product 2 © 2014 Proformative SUBSCRIBE Relationships
  3. 3. …Requiring a Completely Different Approach to Building Businesses. 3 © 2014 Proformative
  4. 4. This Approach is Best Represented by The Nine Keys 4 © 2014 Proformative
  5. 5. But there’s a problem(s) We are still using legacy financial formats to present our Company’s results and help our Executives plan for the future. 5 © 2014 Proformative
  6. 6. Problem 1 Traditional Income Statements are Backwards Looking 6 © 2014 Proformative
  7. 7. Problem 2 Traditional Income Statements are One-Time Focused 7 © 2014 Proformative
  8. 8. Problem 3 Public Markets Use GAAP/IFRS to Get the ARR & the Three Metrics … Imperfect Data Leads to Estimates 8 © 2014 Proformative
  9. 9. At Zuora, Annual Recurring Revenue (ARR) is the Cornerstone of our Business Model ARRn – Churn + ACV = ARRn+1 you start the period @ some recurring revenue rate 9 © 2014 Proformative you do a good job & minimize the amount of ARR that goes away you invest in growing ARR by acquiring new ACV You then end up at a new ARR level, kicking off the next period
  10. 10. That Business Model is Centered on ARR and has Three Main components GROWTH Recurring Expense One Time Events 10 © 2014 Proformative
  11. 11. When ARR Governs the Business Model, Increasing ARR is Top Priority 11 © 2014 Proformative
  12. 12. While we invest in Growth, Disciplined Investment in all Recurring Functions is Paramount…. 12 © 2014 Proformative
  13. 13. Even if We Solve for Growth and Recurring, Without Predictability of any One Time the Model is at Risk! 13 © 2014 Proformative
  14. 14. A new Income Statement & Three Metrics that represent the health of a business 14 © 2014 Proformative
  15. 15. The Subscription Economy Income Statement First, you begin w/ ARR… Annual Recurring Revenue $100 Churn Net ARR (10) 90 COGS (10) R&D (20) Recurring Profit 15 giving you an expected recurring income (20) G&A you then anticipate churn… © 2014 Proformative 40 you spend to service the base giving you your recurring profit margin
  16. 16. So, then your Three Metrics That Matter are… Annual Recurring Revenue $100 Churn (10) Net ARR 90 COGS (20) G&A (10) R&D (20) Recurring Profit Recurring Profit Margin Growth Expense Net New ARR Ending ARR 16 Retention Rate © 2014 Proformative 40 Recurring Profit Margin 40% (40) 40 $130 Growth Efficiency Index
  17. 17. The Three Metrics That Matter Tell Us Everything 17 © 2014 Proformative
  18. 18. Expanding the Three Metrics 18 © 2014 Proformative
  19. 19. Your Calculations… 19 © 2014 Proformative
  20. 20. How Are You Calculating Your GEI? Web Visits Inbound & Outbound Events Sales Mgmt + Sales Ops SDRs AEs BD Marketing Sales ACV 20 © 2014 Proformative ? Acct Mgmt
  21. 21. Retention… (almost) as important as bookings Go Live Close Deal Churn 21 © 2014 Proformative Increase Usage Churn Upsell
  22. 22. Recurring Profit Margin ARR Tech Ops Acct Mgmt/Support Total COGS Eng/Qa Product Total R&D Finance/Ops HR Total G&A Recurring Expense Recurring Profit Margin 22 © 2014 Proformative Last Year Next Year $90 $135 13% $12 11% $ 15 7% $ 6 7% $ 9 20% 22% 8% 30% 14% 6% 20% 70% 30% $18 $20 $ 7 $27 $13 $ 5 $18 18% 18% 7% 25% 12% 5% 17% 60% 40% $ $ $ $ $ $ $ 24 24 9 34 16 7 23
  23. 23. Now, Operationalize It CFO Webinar Starting ARR Bookings PS Churn Live Churn/Ramp Net ARR Growth Ending ARR FY11 35,200 15,864 (350) (2,656) 12,858 48,058 FY12 Q1 FY13 Q2 FY13 Q3 FY13 48,058 69,080 76,662 84,967 25,977 9,139 10,052 11,058 (1,661) (520) (598) (688) (3,294) (1,036) (1,150) (1,274) 21,023 7,582 8,304 9,095 69,080 76,662 84,967 94,062 ARR Growth Rate S&M Spend Non-S&M Spend 37% 17,450 21,085 44% 27,276 31,447 40% 1.10 13% 8% 35% 1.05 10% 7% 45% 1.00 10% 6% 45% 1.00 10% 6% 45% 1.00 10% 6% 45% 1.00 10% 6% 35% 1.00 10% 7% 41,348 (38,535) 2,813 25,313 57,528 (58,723) (1,195) 24,118 18,218 (18,637) (419) 23,699 20,204 (20,593) (390) 23,309 22,379 (22,741) (362) 22,947 24,761 (25,097) (336) 22,610 85,561 (87,068) (1,507) 22,610 Pre S&M margin GEI PS Churn (off prior bookings) Live Churn (Annualized) Cash In Cash Out Net Cash Ending Cash 23 © 2014 Proformative 9,139 9,499 10,052 10,541 11,058 11,683 Q4 FY13 94,062 12,163 (791) (1,411) 9,961 104,023 12,163 12,933 FY13 69,080 42,412 (2,598) (4,872) 34,943 104,023 51% 42,412 44,656
  24. 24. Detailed Modeling © 2014 Proformative
  25. 25. Report and Measure PADRE / PPM Pipeline •Web •Social •AR / PR •Events •Product Launches •Demand Gen Acquire •Field Enablement •BD •Emerging •Enterprise •Int’l •Sales Eng. Deploy •Self Service •Squads •Partners •Methodology Product •PM / PMM •R&D •Docs People •Recruiting •Onboarding •Training •Help Desk Money •Finance •Operations •Legal © 2014 Proformative Run •Tech Ops •Support •Renewals •Account Management •Adoption •Training Expand •Upsell •Expansion
  26. 26. Report and Measure REPORT: What Happened © 2014 Proformative Bookings Billings Accounts Receivable Cash Revenue Deferred Revenue Backlog FORECAST: What to Expect
  27. 27. Contact Details Iain Hassall VP Finance Zuora, Inc. iain.hassall@zuora.com 650-241-0658 27 © 2014 Proformative
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