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
  • 3 SaaS Metrics That Matter

    1. 1. The Only Three Saas Metrics That Matter Tien Tzuo Zuora, Founder & CEO AlwaysOn OnDemand 100 4 April 20121
    2. 2. About Launch your business. Monetize any subscription-based offering. Scale your business from start-up to enterprise. Built by Experts Used by Leaders2
    3. 3. Enterprise Software: R.I.P. Enterprise Software 1980 - 20123
    4. 4. It’s Not Just the Software (SaaS) Industry Technology Transportation? Retail? Music? A Video? Voice? Legal? Healthcare?4
    5. 5. The Broader Picture: a Subscription Economy™ BUY NOW 1999 2012+5
    6. 6. 20th Century 21st Century Product Economy Subscription Economy Shipping Products Servicing Customers The model for the future is not the purchase of goods or services but an ongoing relationship between a customer and company.6
    7. 7. The Subscription Economy Requires 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 Bookings, Simple Financial Metrics Billings, & Revenue Why? All metrics are connected.7
    8. 8. The Basic Business Model of the Subscription Economy 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)8
    9. 9. Problem: Traditional Financial Systems Have Not Kept Up9
    10. 10. 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 period10
    11. 11. Problem #2: Traditional Income Statements are One-Time Focused Income Statement For Period Ending December 31, 2011 Traditional income statements do not differentiate one-time from recurring revenue or expenses11
    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. Investing for Margin vs Investing for Growth Optimizing for Optimizing for Margins 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 Growth (10) (40) Net New ARR 10 40 Ending ARR $100 $13013
    14. 14. The Three 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 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. The Zuora Subscription Commerce Platform Subscription Subscription Subscription Commerce Billing Finance Pricing Quotes Subscription Lifecycle Real-Time Bookings, Orders Billing Payments Cash & Revenue SAS 70 Type II Multi-Tenant Architecture PCI Level 1 Web Services API Full Disaster Recovery Automatic Monthly Releases Ecosystem Pre-Integration CRM Systems Accounting/GL Payment Gateways27
    28. 28. Our Customers High Tech SaaS/Cloud Media Consumer Services Devices Telecom We found Zuora and the light bulb went off: a business operations platform designed especially for subscription businesses like ours.28
    29. 29. Summary: Traditional finance systems are not built for today’s Subscription Economy The 3 Key Metrics that Matter Congrats to our AO100 Customers 1 Recurring Profit Margin 2 Retention Rate 3 Growth Efficiency In short order, Zuora has become the dominant player in cloud-based subscription systems.29
    30. 30. Thank You! Tien Tzuo ceo@zuora.com30

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