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The Subscription Economy Operating Plan
 

The Subscription Economy Operating Plan

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Due to the massive demand, we are replaying this webinar on 3/12. Register here: http://info.zuora.com/ZuoraOperatingPlan.html ...

Due to the massive demand, we are replaying this webinar on 3/12. Register here: http://info.zuora.com/ZuoraOperatingPlan.html

In the Subscription Economy, your business' operating plan must be based on maximizing and maintaining recurring revenue. But there are metrics that need to be considered when creating the right operating plan for recurring revenue businesses. In fact, we call these The Only 3 Metrics that Matter in the Subscription Economy.

Key Metric #1:
Churn Rate

Key Metric #2:
Recurring Profit Margin

Key Metric #3:
Growth Efficiency

However, creating an operating plan around these key metrics and delivering a profitable and sustainable business is easier said than done.

Check out our slide deck, The Subscription Economy Operating Plan to see how CFOs in the subscription world are translating the most critical metrics into an efficient and scalable operating plan.

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  • Of the 19 software IPOs from 2011 through 2012, 14 of them were SaaS
  • Smaller professional services and cash, and side by side
  • The ultimate purpose of the operating plan….To define desired results in a quantifiable manner. Once defined, an organization can work within the guidelines defined by that plan to create functional Missions that when accomplished in aggregate will create results that meet the plan goals.
  • Companies calculate ARR differently. The most important thing is to be consistent. Since it is the basis for all other metrics, if you take a conservative or aggressive approach to your calculation you should take that into account when setting other goals.Be conservative.ARR is contracted revenue (e.g. it does not include overages or estimates of future upsell)If multi-year contracts have ramps, those ramps are reflected in ARR at the time they become effectiveACV increases ARR at the initiation of a contracted service periodChurn decrements ARR at the time recognized

The Subscription Economy Operating Plan The Subscription Economy Operating Plan Presentation Transcript

  • The Subscription Economy Operating Plan Tyler Sloat, Zuora, CFO1
  • BUY NOW Subscribe The Past The Future We call this shift the Subscription Economy™2
  • What’s driving the Subscription Economy ? Technology Trends Demand Business Model Smart Money Cloud Consumers want to It’s a better business Mobile subscribe to services model for growth Social Businesses want to subscribe to services Wall St. and Sand Hill Value Subscription-Based Companies Subscribe3 3
  • 4
  • …but ’s not just the SaaS industry. Technology Transportation Retail Music A Video Voice Legal Healthcare5
  • Product Focused Relationship Focused BUY NOW Subscribe The Subscription Economy is about customer relationships...6
  • …requiring a completely different approach to building businesses. Product Economy Subscription Economy Sell Units Monetizing Customer Relationships Why? Customer in the middle. Pay-as-you-Go Pricing Plans Price Per Unit Why? Flexibility, Editions, Try before Buy. One-Time Orders Multiple Orders Over a Lifetime Why? Add-ons, Upgrades, Renewals. Forced to Pick a Sell to Consumers & Businesses Customer Segment Why? Support B2C, B2B and B2Any. Complex, Interrelated Simple Financial Metrics Bookings, Billings, & Revenue Why? All metrics are connected.7
  • But there’s a problem…8
  • Problem 1 Traditional Income Statements are Backward Looking Income Statement For Period Ending December 31, 2011 Traditional income statements measure revenue based on how much money you made this past period.9
  • Problem 2 Traditional Income Statements are One-timed Focused Income Statement For Period Ending December 31, 2011 Traditional income statements do not differentiate one-time from recurring revenue or expenses.10
  • Problem 3 Wall Street Uses GAAP to get to ARR & the Three Metrics Revenue is the only relevant information in GAAP…but it is just a piece of the picture.11
  • Problem 3 (cont) Imperfect data leads to Estimates Wall Street knows it is not really about revenue. So, they try to back into The 3 Metrics that Matter… but it is really just an estimate.12
  • It begins with ARR… ARRn – Churn + ACV = ARRn+1 you do a good you start the you invest in You then end up job & minimize period @ some growing ARR by at a new ARR the amount of recurring acquiring new level, kicking off ARR that goes revenue rate ACV the next period away13
  • The Subscription Economy Income Statement First, you begin w/ ARR… Annual Recurring Revenue $100 you then Churn (10) anticipate churn… Net ARR 90 giving you an COGS (20) expected recurring G&A (10) income R&D (20) you spend to Recurring Profit 40 service the base giving you your recurring profit margin14
  • Optimizing for Margin vs Growth Margin Growth Annual Recurring Revenue $100 $100 Churn (10) (10) Net ARR 90 90 COGS (20) (20) G&A (10) (10) R&D (20) (20) Recurring Profit 40 40 You then get Growth (10) to decide (40) what to do Net New ARR 10 with your 40 profit Ending ARR $100 $13015
  • So, then your 3 Metrics That Matter are… Annual Recurring Revenue $100 Retention Churn (10) Rate Net ARR 90 COGS (20) G&A (10) Recurring R&D (20) Profit Margin Recurring Profit 40 Recurring Profit Margin 40% Growth (40) Growth Net New ARR 40 Efficiency Index Ending ARR $13016
  • The 3 Metrics That Matter Tell Us Everything Retention Recurring Profit Growth Rate Margin Efficiency How much of Entering ARR How much your ARR you less annualized does it costs to keep every year Non-growth acquire $1 of spend ACV The metrics for Cloud computing is fairly different from traditionalLaws for Cloud Computing Top 10 enterprise software. - Top 10 Laws for Cloud Computing17
  • Expanding the 3 Metrics Annual Recurring Revenue Retention Recurring Profit Growth Rate Margin Efficiency How much of Entering ARR How much your ARR you less annualized does it costs to keep every year Non-growth acquire $1 of spend ACV Professional Services Cash18
  • Now, the Subscription Economy Operating Plan…19
  • The budgeting process at most companies has to be the most ineffective practice in management. It sucks the energy, fun and big dreams out of an organization. It10 Laws opportunity and Top hides for Cloud Computing stunts growth. In fact when companies win, in most cases it is despite their budgets, not because of them. - Jack Welch Purpose: To identify, communicate and monitor progress on key priorities for the year that advance the strategic plan. - 352Express Top 10 Laws for Cloud Computing20
  • Operationalizing, Step by Step Alignment & Educate Goals Report & Measure Accountability21
  • Educate Traditional Business Model Consolidated Statement 12/31/11 12/31/10 12/31/09 Revenue $ 73,022 $ 43,731 $ 29,322 Subscription Revenue Cost of revenue 21,285 14,280 8,676 Usage Revenue Gross profit 51,737 29,451 Professional Services 20,646 Revenue Operating expenses: Cost of Subscription Selling and marketing 45,773 28,134 18,886 Cost of Professional Services Research and development 10,149 5,602 2,791 General and administrative 15,122 8,555 4,329 Total operating expenses 71,044 42,291 26,006 Loss from operations (19,307) (12,840) (5,360)22
  • Translating GAAP to… Educate The Subscription Income Statement Subscription Income GAAP 2011 2011 Statement Revenue $ 73,022 ARR $60,000 Churn ($7,000) Net ARR $53,000 Cost of Revenue 21,285 Cost of Subscription Revenue $11,985 Gross Profit 51,737 Research & Development $10,149 Operating Expenses: General & Administrative $15,122 Sales & Marketing 45,773 Recurring Expense $37,256 Research & Development 10,149 Recurring Profit $15,744 General & Administrative 15,122 Recurring Profit Margin 26% Total Operating Expenses 71,044 Growth Expense $45,773 Loss from Operations -19,307 Net New ARR (GEI of 0.9) $50,859 Ending ARR 103,85923
  • Educate Your Calculations ARR Entering ARR + New ACV - Churn = EXITING ARR Growth Efficiency Sales & Marketing Expense / New ACV Recurring Profit Margin (Entering ARR – COGS – G&A – R&D) / Entering ARR24
  • Alignment & Goals What drives your ARR? 300 250 200 150 100 50 ACV Accelerates ARR 0 2010 2011 2012 2013 2014 Churn Curbs ARR (50% Growth Business / 10% Churn / 30% Growth in Recurring Expense / 1.0 Growth Efficiency)25
  • Alignment & Goals How are you measuring churn? Successfactors S-1: During 2005, 2006, 2007 and the three months ended March 31, 2008, our customer retention rate was greater than 90%, which rate excludes our Manager’s Edition application which provides us with an insignificant amount of revenue. We calculate our customer retention rate by subtracting our attrition rate from 100%. We calculate our attrition rate for a period by dividing the number of customers lost during the period by the sum of the number of customers at the beginning of the period and the number of new customers acquired during the period. Cornerstone OnDemand S-1: We define annual dollar retention rate as the implied monthly recurring revenue under client agreements at the end of a fiscal year, divided by the implied monthly recurring revenue, for that same client base, at the end of the prior fiscal year. This ratio does not reflect implied monthly recurring revenue for new clients added nor incremental sales to that same client base at the end of the prior fiscal year during the current fiscal year. We define implied monthly recurring revenue as the total amount of minimum recurring revenue contractually committed to, under each of our client agreements over the entire term of the agreement, but excluding non-recurring support, consulting and maintenance fees, divided by the number of months in the term of the agreement. Implied monthly recurring revenue is substantially comprised of subscriptions to our solution. We believe that our annual dollar retention rate is an important metric to measure the long-term value of client agreements and our ability to retain our clients.26
  • Alignment & Goals How are you calculating your GEI? Sales Mngmnt Web Visits + Opps Inbound SDRs & Outbound Events AEs BD Marketing Sales ACV27
  • Alignment & Goals What is the right GEI Goal 1.5 0.5028
  • Alignment & Goals Retention Close Go Increase Deal Live Usage Churn Churn29
  • Alignment & Goals Recurring Profit Margin Last Year Next Year ARR $90 $135 Tech Ops 13% $12 11% $ 15 Acct Mgmt/Support 7% $ 6 7% $ 9 Total COGS 20% $18 18% $ 24 Eng/Qa 22% $20 18% $ 24 Product 8% $ 7 7% $ 9 Total R&D 30% $27 25% $ 34 Finance/Ops 14% $13 12% $ 16 HR 6% $ 5 5% $ 7 Total G&A 20% $18 17% $ 23 Recurring Expense 70% 60%Recurring Profit Margin 30% 40%30
  • Alignment & Goals Now, Operationalize it CFO Webinar FY11 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 FY13 Starting ARR 35,200 48,058 69,080 76,662 84,967 94,062 69,080 Bookings 15,864 25,977 9,139 10,052 11,058 12,163 42,412 PS Churn (350) (1,661) (520) (598) (688) (791) (2,598) Live Churn/Ramp (2,656) (3,294) (1,036) (1,150) (1,274) (1,411) (4,872) Net ARR Growth 12,858 21,023 7,582 8,304 9,095 9,961 34,943 Ending ARR 48,058 69,080 76,662 84,967 94,062 104,023 104,023 ARR Growth Rate 37% 44% 51% S&M Spend 17,450 27,276 9,139 10,052 11,058 12,163 42,412 Non-S&M Spend 21,085 31,447 9,499 10,541 11,683 12,933 44,656 Pre S&M margin 40% 35% 45% 45% 45% 45% 35% GEI 1.10 1.05 1.00 1.00 1.00 1.00 1.00 PS Churn (off prior bookings) 13% 10% 10% 10% 10% 10% 10% Live Churn (Annualized) 8% 7% 6% 6% 6% 6% 7% Cash In 41,348 57,528 18,218 20,204 22,379 24,761 85,561 Cash Out (38,535) (58,723) (18,637) (20,593) (22,741) (25,097) (87,068) Net Cash 2,813 (1,195) (419) (390) (362) (336) (1,507) Ending Cash 25,313 24,118 23,699 23,309 22,947 22,610 22,610 Stay at a macro level, making sure everyone understands the basic fundamental driver. This also magnifies the three metrics and their impact.31
  • Alignment & Detailed Modeling Goals NA ROW NA ROW NA EMEA APAC L2 Growth Formula Emerging Emerging Commercial Commercial Enterprise Enterprise Enterprise Total / Avg # AEs on Jan 31, 2013 10 8 12 10 12 8 4 64 Annual Quota $800k $800k $1,100k $1,100k $1,600k $1,600k $1,600k $1,203k Quarterly Quota $200k $200k $275k $275k $400k $400k $400k $301k # Deals / Quarter 4.0 4.0 2.8 2.8 2.0 2.0 2.0 2.8 ASP $50.0k $50.0k $100k $100k $200k $200k $200k $123.4k Annual Base Salary $63k $63k $85k $85k $125k $125k $125k $94k Annual OTE $125k $125k $170k $170k $250k $250k $250k $187k AE:SE 5 5 3 3 2 3 3 AE:ZBR 1 1 2 2 2 2 2 AE:Mgr 7 7 6 6 6 6 6 Total Annual Sales Cost $4,247k $3,038k $5,246k $4,409k $7,496k $4,498k $2,549k $31,483k Mktg % of Sales 75% 75% 75% 75% 75% 75% 75% 75% Total Annual Mktg Costs $3,185 $2,278k $3,935k $3,307k $5,622k $3,373k $1,912k $23,612k Total Growth Costs (Feb 1) $7,432k $5,316k $9,181k $7,716k $13,118k $7,871k $4,460k $55,094k Total Corp Capacity $5,760k $4,608k $9,504k $7,920k $13,824k $9,216k $4,608k $55,440k Implied GEI (Feb 1) 1.3 1.2 1.0 1.0 0.9 0.9 1.0 1.0 Expectation should be that these might shift based on maturity of region, type of sale, maturity of market32
  • Report & Measure PADRE - PPM33
  • Accountability The Answer is the Whole Company $Millions (P)ipeline Starting Pipeline + New Pipe (S1) - Closed Won Marketing - Closed Lost +/- Change in Pipe Ending Pipeline (A)cquire Starting ARR + New + Upsell Bookings Sales - Net Churn Ending ARR R&D/G&A (D)eploy Starting Backlog + New Bookings + Upsell Bookings +/- Ramp/Downsell Professional Services PS Bookings - Go-Lives - PS Churn Ending Backlog (R)un Starting Live + Upsell Bookings +/- Ramp/Downsell Account Management + Go-Lives - Live Churn Ending Live34
  • q&a35
  • Thank You! Tyler Sloat tyler.sloat@zuora.com36
  • Extra slides37