0
The Business Model
For the Subscription Economy
Iain Hassall
VP Finance & Corporate
Controller
In The Subscription Economy,
Focus Is On Relationships
Product Relationships
BUY NOW SUBSCRIBE
…Requiring a Completely Different
Approach to Building Businesses.
Sell	
  Units	
  	
  
Product Economy Subscription Econ...
ThisApproachisBestRepresentedby
TheNineKeys
When	
  a	
  Company	
  executes	
  
against	
  this	
  model,	
  it	
  
GROWS...
But	
  there’s	
  a	
  problem(s).	
  	
  
We	
  are	
  s,ll	
  using	
  legacy	
  
financial	
  formats	
  to	
  present	
...
Problem	
  1	
  
Tradi&onal	
  Income	
  Statements	
  are	
  Backwards
Income	
  Statement	
  
For	
  Period	
  Ending	
 ...
Problem	
  2	
  
Tradi&onal	
  Income	
  Statements	
  are	
  One-­‐Time	
  Focused	
  
Tradi,onal	
  income	
  statements...
Problem	
  3	
  
Public	
  Markets	
  Use	
  GAAP/IFRS	
  to	
  Get	
  the	
  ARR	
  &	
  the	
  Three	
  
Metrics	
  …	
 ...
Problem	
  3	
  
$150B $6B $50B 0.33$150B $6B $50B 0.33
Revenue
Net(
Income/(Loss)
Market(Cap
Revenue(
Multiple
$37B $11B ...
At	
  Zuora,	
  Annual	
  Recurring	
  Revenue	
  (ARR)	
  is	
  
the	
  Cornerstone	
  of	
  our	
  Business	
  Model
You...
That	
  Business	
  Model	
  is	
  Centered	
  on	
  ARR	
  and	
  has	
  
Three	
  Main	
  components
Recurring	
  
Expen...
When	
  ARR	
  Governs	
  the	
  Business	
  Model,	
  
Increasing	
  ARR	
  is	
  Top	
  Priority
Growth	
  
How	
  Fast	...
While	
  we	
  invest	
  in	
  Growth,	
  Disciplined	
  Investment	
  in	
  all	
  
Recurring	
  Func,ons	
  is	
  Paramo...
Even	
  if	
  We	
  Solve	
  for	
  Growth	
  and	
  Recurring,	
  Without	
  
Predictability	
  of	
  any	
  One	
  Time	...
A	
  new	
  Income	
  Statement	
  
	
  
&	
  
	
  
Three	
  Metrics	
  that	
  represent	
  
the	
  health	
  of	
  a	
  ...
The	
  Subscrip,on	
  Economy	
  Income	
  Statement
giving	
  you	
  
your	
  
recurring	
  
profit	
  
margin	
  
you	
  ...
So,	
  then	
  your	
  Three	
  Metrics	
  That	
  Maber	
  are…
Annual Recurring Revenue $100
Churn (10)
Net ARR 90
COGS ...
The	
  Three	
  Metrics	
  That	
  Maber	
  Tell	
  Us	
  Everything	
  
The metrics for Cloud computing is fairly differe...
Expanding	
  the	
  Three	
  Metrics
	
  
How	
  much	
  of	
  
your	
  ARR	
  you	
  
keep	
  every	
  
year	
  	
  
	
  ...
YourCalculations…
Entering ARR + New ACV - Churn = EXITING ARR
ARR	
  
Growth	
  Efficiency	
  
Sales & Marketing Expense / ...
How	
  Are	
  You	
  Calcula&ng	
  Your	
  GEI?
Web	
  
Visits	
  
Inbound	
  &	
  
Outbound	
   Events	
  
Sales	
  Mgmt	...
Retention
Go	
  	
  
Live	
  
Close	
  Deal	
   Increase	
  
Usage	
  
Churn	
   Churn	
  
RecurringProfitMargin
Last	
  Year Next	
  Year
ARR $90 $135
Tech	
  Ops 13% 12$	
   11% 15$	
  	
  
Acct	
  Mgmt/Support ...
Now,OperationalizeIt
CFO	
  Webinar FY11 FY12 Q1	
  FY13 Q2	
  FY13 Q3	
  FY13 Q4	
  FY13 FY13
Starting	
  ARR 35,200	
  	...
DetailedModeling
Expecta,on	
  should	
  be	
  that	
  these	
  might	
  shif	
  based	
  on	
  	
  
maturity	
  of	
  reg...
ReportandMeasure
Product	
  
People	
  
• Recruigng	
  
• Onboarding	
  
• Training	
  
• Help	
  Desk	
  
Money	
  
• Fin...
ReportandMeasure
Bookings	
  
Billings	
  
Cash	
  
Revenue	
  
Deferred	
  Revenue	
  
Backlog	
  
Accounts	
  Receivable...
Q&A Session
END
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The Finance Perspective: The Business Model for the Subscription Economy

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Learn best practices for subscription financial management, with a focus on the ‘Three Metrics That Matter’, the new income statement for the Subscription Economy and how to apply it to your business. Learn best practices for subscription financial management, with a focus on the ‘Three Metrics That Matter’, the new income statement for the Subscription Economy and how to apply it to your business.

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Transcript of "The Finance Perspective: The Business Model for the Subscription Economy"

  1. 1. The Business Model For the Subscription Economy Iain Hassall VP Finance & Corporate Controller
  2. 2. In The Subscription Economy, Focus Is On Relationships Product Relationships BUY NOW SUBSCRIBE
  3. 3. …Requiring a Completely Different Approach to Building Businesses. Sell  Units     Product Economy Subscription Economy Mone,zing  Customer  Rela,onships   Why?  Customer  in  the  middle.     Forced  to  Pick  a   Customer  Segment   Price  Per  Unit   One-­‐Time  Orders   Simple  Financial   Metrics   Pay-­‐as-­‐you-­‐Go  Pricing  Plans   Why?  Flexibility,  Edi8ons,  Try  before  Buy.     Mul,ple  Orders  Over  a  Life,me   Why?    Add-­‐ons,  Upgrades,  Renewals.     Sell  to  Consumers  &  Businesses   Why?  Support  B2C,  B2B  and  B2Any.     Complex,  Interrelated  Bookings,   Billings,  &  Revenue   Why?  All  metrics  are  connected.    
  4. 4. ThisApproachisBestRepresentedby TheNineKeys When  a  Company  executes   against  this  model,  it   GROWS.       That  Growth  is  measured  by   the  increase  in     RECURRING  REVENUE.      
  5. 5. But  there’s  a  problem(s).     We  are  s,ll  using  legacy   financial  formats  to  present   our  Company’s  results  and   help  our  Execu,ves  plan  for   the  future.  
  6. 6. Problem  1   Tradi&onal  Income  Statements  are  Backwards Income  Statement   For  Period  Ending  December  31,  2012     Tradi,onal  income  statements  measure  income  based    on  how  much  money  you  made  this  past  period.  
  7. 7. Problem  2   Tradi&onal  Income  Statements  are  One-­‐Time  Focused   Tradi,onal  income  statements  do  not  differen,ate     one-­‐,me  from  recurring  revenue  or  expenses.     Income  Statement   For  Period  Ending  December  31,  2012    
  8. 8. Problem  3   Public  Markets  Use  GAAP/IFRS  to  Get  the  ARR  &  the  Three   Metrics  …  Imperfect  Data  Leads  to  Es,mates
  9. 9. Problem  3   $150B $6B $50B 0.33$150B $6B $50B 0.33 Revenue Net( Income/(Loss) Market(Cap Revenue( Multiple $37B $11B $150B 4.00$37B $11B $150B 4.00 $4B $600M $26B 6.50$4B $600M $26B 6.50 $3B ($270M) $30B 10.00$3B ($270M) $30B 10.00 Revenue  is  the  only  relevant  growth  informa,on  in  GAAP/IFRS…   but  it  is  just  a  piece  of  the  picture.  
  10. 10. At  Zuora,  Annual  Recurring  Revenue  (ARR)  is   the  Cornerstone  of  our  Business  Model You  then  end  up   at  a  new  ARR   level,  kicking  off   the  next  period   you  invest  in   growing  ARR  by   acquiring  new  ACV   you  do  a  good  job   &  minimize  the   amount  of  ARR   that  goes  away     ARRn – Churn + ACV = ARRn+1 you  start  the   period  @  some   recurring  revenue   rate    
  11. 11. That  Business  Model  is  Centered  on  ARR  and  has   Three  Main  components Recurring   Expense   GROWTH   One  Time   Events  
  12. 12. When  ARR  Governs  the  Business  Model,   Increasing  ARR  is  Top  Priority Growth   How  Fast   Can  We   Grow?   What   Should  We   Spend?   How   Should  We   Measure?  
  13. 13. While  we  invest  in  Growth,  Disciplined  Investment  in  all   Recurring  Func,ons  is  Paramount…. Recurring   Expense   What  to   include?   What  is   the  right   margin?   But  we   need  to   innovate  
  14. 14. Even  if  We  Solve  for  Growth  and  Recurring,  Without   Predictability  of  any  One  Time  the  Model  is  at  Risk!   One  Time   Expenses   Can  we   predict?   Model   impact?   Who  to   own?  
  15. 15. A  new  Income  Statement     &     Three  Metrics  that  represent   the  health  of  a  business      
  16. 16. The  Subscrip,on  Economy  Income  Statement giving  you   your   recurring   profit   margin   you  spend   to  service   the  base   First,   you  begin   w/  ARR…   you  then   an,cipate   churn…   giving  you   an   expected   recurring   income   Annual Recurring Revenue $100 Churn (10) Net ARR 90 COGS (20) G&A (10) R&D (20) Recurring Profit 40
  17. 17. So,  then  your  Three  Metrics  That  Maber  are… Annual Recurring Revenue $100 Churn (10) Net ARR 90 COGS (20) G&A (10) R&D (20) Recurring Profit 40 Recurring Profit Margin 40% Growth Expense (40) Net New ARR 40 Ending ARR $130 Reten,on   Rate   Recurring   Profit   Margin   Growth   Efficiency   Index  
  18. 18. The  Three  Metrics  That  Maber  Tell  Us  Everything   The metrics for Cloud computing is fairly different from traditional enterprise software. How  much  of   your  ARR  you   keep  every   year     Entering  ARR   less  annualized   Non-­‐growth   spend   How  much   does  it  costs  to   acquire  $1  of   ACV   Retention Rate Recurring Profit Margin Growth Efficiency
  19. 19. Expanding  the  Three  Metrics   How  much  of   your  ARR  you   keep  every   year       Entering  ARR   less  annualized   Non-­‐growth   spend   How  much   does  it  costs  to   acquire  $1  of   ACV   Annual  Recurring  Revenue   Professional  Services/One-­‐,me   Cash   Retention Rate Recurring Profit Margin Growth Efficiency
  20. 20. YourCalculations… Entering ARR + New ACV - Churn = EXITING ARR ARR   Growth  Efficiency   Sales & Marketing Expense / New ACV Recurring  Profit  Margin   (Entering ARR – COGS – G&A – R&D) / Entering ARR
  21. 21. How  Are  You  Calcula&ng  Your  GEI? Web   Visits   Inbound  &   Outbound   Events   Sales  Mgmt   Sales   Ops   AEs   BD   SDRs   Marke,ng   Sales   +   ACV   Acct   Mgmt   ?  
  22. 22. Retention Go     Live   Close  Deal   Increase   Usage   Churn   Churn  
  23. 23. RecurringProfitMargin 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%
  24. 24. Now,OperationalizeIt 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      
  25. 25. DetailedModeling Expecta,on  should  be  that  these  might  shif  based  on     maturity  of  region,  type  of  sale  and  maturity  of  market.     L2  Growth  Formula   NA   Emerging   ROW   Emerging   NA   Commercial   ROW   Commercial   NA   Enterprise   ROW   Enterprise   APAC   Enterprise   Total  /     Average   #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   Qtrly  Quota   $200k   $200k   $275k   $275k   $400k   $400k   $400k   $301k   #  Deals  /  Qtr   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   2   2   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   $3,185k   $2,278k   $3,935k   $3,307k   $5,622k   $3,373k   $1,912k   $55,094k   Total  Growth  Costs  (Feb  1)   $7,432k   $5,316   $9,181k   $7,716k   $13,118k   $7,871k   $4,460k   $55,094k   Total  Corp  Capacity   $5,760k   $4,608   $9,504   $7,920k   $12,824k   $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  
  26. 26. ReportandMeasure Product   People   • Recruigng   • Onboarding   • Training   • Help  Desk   Money   • Finance   • Operagons   • Legal   • PM  /  PMM   • R&D   • Docs   Pipeline   Acquire   Deploy   Run   Expand   • Field  Enablement   • BD   • Emerging   • Enterprise   • Int’l   • Sales  Eng.   • Self  Service   • Squads   • Partners   • Methodology   • Tech  Ops   • Support   • Renewals   • Account  Management   • Adopgon   • Training   • Upsell   • Expansion   • Web   • Social   • AR  /  PR   • Events   • Product  Launches   • Demand  Gen   PADRE  /  PPM  
  27. 27. ReportandMeasure Bookings   Billings   Cash   Revenue   Deferred  Revenue   Backlog   Accounts  Receivable  REPORT:     What   Happened   FORECAST:     What  to   Expect  
  28. 28. Q&A Session
  29. 29. END
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