Zuora @ AlwaysOn 2012 - The Only 3 SaaS Metrics That Matter

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  • Invest in systems and a framework to produce a scalable and rentention maximizing account mgt function Reliance on systems will allow you to scale your biz without scaling G&A Every incremental $ spent should be rationalized based on hot it makes you more cost effective next year
  • Zuora @ AlwaysOn 2012 - The Only 3 SaaS Metrics That Matter

    1. 1. The Only Three Saas Metrics That Matter Tien Tzuo Zuora, Founder & CEO April 20121
    2. 2. Zuora Was Built on the Prediction of a “Subscription Economy” BUY NOW 1999 2012+2
    3. 3. Today, Subscriptions are Everywhere Technology Transportation Retail Music A Video Voice Legal? Healthcare By 2015, 35% of Global 2000 companies will generate revenue through subscription-based services and revenue models.3April 2011: Building a Strategy for the Subscription Economy
    4. 4. There’s a Fundamentally New Way to Price BUY NOW Editions One-Time Fees Price $29.99 Recurring Fees Price * Unit Usage Fees Free Trials Bundles Pay-as-you-Go SKU Based Plan Based4
    5. 5. There’s a Fundamentally New Way to Conduct Commerce BUY NOW # Units 1 Order Type One-Time On-Going Transactions Subscriptions5
    6. 6. There’s Even a Fundamentally New Way to Think About Finance BUY NOW Σ $100 8 $100 n=1 One-Time Recurring Metrics Metrics6
    7. 7. The Subscription Business Model is Built on Future Recurring Costs & Revenues ARRn – Churn + ACV = ARRn+1 You spend some % Hopefully you do a You invest to grow You start the You then end up at of that ARR to good job, and that ARR by acquiring period @ some a new ARR level as service the base minimize the amount new ACV (including recurring revenue you kick off the (COGS, G&A) and of that ARR that goes both new customers run rate next period to reinvest in R&D away and upsells) The metrics for Cloud computing are fairly different from traditional enterprise software. Top 10 Laws for Cloud Computing7
    8. 8. But Today’s GL’s Don’t Speak This Language Income Statement For Period Ending December 31, 2011 Backwards Looking, Not Forwards Looking No Separation of Recurring vs. 1-Time No Concept of Subscription Metrics The Pre-Subscription Income Statement8
    9. 9. Today’s GL’s Look Backwards, Not Forwards Income Statement For Period Ending December 31, 2011 Last Year This Year9
    10. 10. Today’s GL’s Confuse One-Time and Recurring Items : Subscriptions Revenues 1x: Services 1x: Setup Fees : TechOps Expenses 1x: Marketing 1x: Sales10
    11. 11. Today’s GL’s Give You Product, Not Subscription Metrics # Units # Customers Average Selling Price Customer Lifetime Value Annual Gross Revenue Recurring Profit Margins Gross Margins Growth Efficiency Close Rates Renewal & Churn Rates The best in class software model operators will measure their business not by revenue or bookings, not by current profitability, but rather by recurring profit.11SaaS Showcase: Keeping the Customer Happy, July 11, 2010
    12. 12. The Subscription Economy Income Statement would start with ARR vs Revenue You start with an ARR level Annual Recurring Revenue $100 You anticipate Churn Churn (10) Net ARR 90 This gives you an expected income or COGS (20) cash flow to play with G&A (10) You spend to service the base R&D (20) Recurring Profit 40 This gives you your recurring profit margin Q: But what about Sales & Marketing? A: Sales & Marketing are one-time costs related to growing ARR12
    13. 13. Your Choice: Spend on Growth or Take Profits Annual Recurring Revenue $100 Churn (10) Net ARR 90 COGS (20) G&A (10) R&D (20) Recurring Profit 40 Optimizing for Optimizing for Margins Growth Growth (Sales & Marketing) (10) (40) Net New ARR 10 40 Net Income $30 $0 Ending ARR $100 $13013
    14. 14. Subscription Economy Companies Run Their Businesses With 3 Key Metrics Annual Recurring Revenue $100 Churn (10) Retention Rate Net ARR 90 COGS (20) G&A (10) R&D (20) Recurring Profit Recurring Profit 40 Margin Growth (40) Growth Efficiency Index Net New ARR 40 Net Income $0 Ending ARR $13014
    15. 15. When looking at a Subscription Economy company, only these 3 metrics matter Retention Recurring Growth Rate Profit Margin Efficiency How much of ARR less Churn How much does your ARR you less Non-Growth it cost you to keep every year. Spend acquire $1 of ACV The metrics for Cloud computing is fairly different from traditional enterprise software. Top 10 Laws for Cloud Computing15
    16. 16. A company with 1.0 / 90% / 40% can grow at 43% a year at breakeven Assumptions Year 1 Year 2 Year 3 Year 4 Year 5 % of ARR spent on Growth 52.9% 52.9% 52.9% 52.9% 52.9% % of ARR spent on non-Growth 60.0% 60.0% 60.0% 60.0% 60.0% Growth Efficiency Index (cost to acquire $1) $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Renewal Rate (percent of ARR we renew) 90% 90% 90% 90% 90% Bookings Year 1 Year 2 Year 3 Year 4 Year 5 ARR (starting) $ 100 $ 143 $ 204 $ 292 $ 417 ACV (new, upsell) $ 53 $ 76 $ 108 $ 154 $ 221 Churn $ (10) $ (14) $ (20) $ (29) $ (42) ARR (exiting) $ 143 $ 204 $ 292 $ 417 $ 596 ARR Growth Rate 43% 43% 43% 43% 43% Income Subscription Revenue $ 113 $ 161 $ 230 $ 329 $ 471 Expenses Growth $ 53 $ 76 $ 108 $ 154 $ 221 Non-Growth $ 60 $ 86 $ 123 $ 175 $ 250 Total Expenses $ 113 $ 161 $ 231 $ 329 $ 471 Core Business Income (Loss) $ (0) $ (0) $ (0) $ (0) $ (0) PS Income (Loss) $ - $ - $ - $ - $ - Net Income (Loss) $ (0) $ (0) $ (0) $ (0) $ (0)16
    17. 17. Or it can have $0 growth, and have a net income of $30. Assumptions Year 1 Year 2 Year 3 Year 4 Year 5 % of ARR spent on Growth 10.0% 10.0% 10.0% 10.0% 10.0% % of ARR spent on non-Growth 60.0% 60.0% 60.0% 60.0% 60.0% Growth Efficiency Index (cost to acquire $1) $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Renewal Rate (percent of ARR we renew) 90% 90% 90% 90% 90% Bookings Year 1 Year 2 Year 3 Year 4 Year 5 ARR (starting) $ 100 $ 100 $ 100 $ 100 $ 100 ACV (new, upsell) $ 10 $ 10 $ 10 $ 10 $ 10 Churn $ (10) $ (10) $ (10) $ (10) $ (10) ARR (exiting) $ 100 $ 100 $ 100 $ 100 $ 100 ARR Growth Rate 0% 0% 0% 0% 0% Income Subscription Revenue $ 100 $ 100 $ 100 $ 100 $ 100 Expenses Growth $ 10 $ 10 $ 10 $ 10 $ 10 Non-Growth $ 60 $ 60 $ 60 $ 60 $ 60 Total Expenses $ 70 $ 70 $ 70 $ 70 $ 70 Core Business Income (Loss) $ 30 $ 30 $ 30 $ 30 $ 30 PS Income (Loss) $ - $ - $ - $ - $ - Net Income (Loss) $ 30 $ 30 $ 30 $ 30 $ 3017
    18. 18. Benchmarking the SaaS Leaders18
    19. 19. 2001 2002 2003 2004 Ending ARR $37 M $70 M $129 M $231 M Growth Efficiency 0.93:1 0.80:1 0.75:1 0.76:1 Renewals 83% 83% 83% 83% Recurring Profit 3% 41% 58% 61% Margin19
    20. 20. 2004 2005 2006 2007 Ending ARR $22 M $43 M $71 M $105 M Growth Efficiency 2.02:1 1.65:1 1.28:1 1.26:1 Renewals 86% 86% 86% 86% Recurring Profit (27%) 6% 35% 47% Margin20
    21. 21. 2006 2005 2008 2009 Ending ARR $40 M $73 M $108 M $147 M Growth Efficiency 1.41:1 1.90:1 2.15:1 1.62:1 Renewals 92% 92% 92% 92% Recurring Profit (29%) (16%) 19% 43% Margin21
    22. 22. Best Practice Model Growth Efficiency 0.75:1 1.26:1 2.15:1 1:1 Renewals 83% 86% 92% 90% Recurring Profit 58% 47% 19% 50% Margin22
    23. 23. How Do You Achieve the Ideal Model23
    24. 24. (1) Maximize your Recurring Profit Margins 1 Automate Quote-to-Cash-to-Renewals Seamless, eliminate manual errors Take Credit Card Payments 2 No touch, bring cash in the door immediately 3 Drive Multi-Year Commitments Multi-Year Pricing Tiers, Term Discounts “How do you cost effectively service the base”24
    25. 25. (2) Focus on sustaining high Retention Rates 1 Make Renewals Really Easy Auto-Renewals, Early Bird Renewal Incentives 2 Enable Your CSRs to Renew Customers Churn defense, ARR preservation 3 Prevent Churn with New Price Plans Monthly vs. Annual, Discounted, Lower Tiers “How much ARR you keep every year”25
    26. 26. (3) Optimize your business for Growth Efficiency 1 Tune Your Pricing Strategies Freemium, Editions, Pay-as-you-Go, Tiers 2 Increase Total Customer Value Upsells, Cross-Sells, Add-ons 3 Make Doing Business Simple Self-Service, Promotions, Free Trials “How much does it cost you to acquire a $ of ACV”26
    27. 27. Thank You! Tien Tzuo ceo@zuora.com27

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