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Metrics: Talking about Churn and Retention in the Board Room

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Speakers:
David Spitz, Managing Director at Pacific Crest
Marc Linden, CFO at Intacct
Kathy Lord, VP Sales & CSM at Intacct
Dave Kellogg, CEO at Host Analytics
Alison Homlund, VP CSM at Host Analytics

Presented at Pulse Conference 2015.

Published in: Technology
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Metrics: Talking about Churn and Retention in the Board Room

  1. 1. ©2015 Gainsight. All Rights Reserved. Metrics: Talking About Churn And Retention In The Board Room Moderator: David Spitz – PacCrest Marc Linden, CFO at Intacct Kathy Lord, VP Sales/CSM at Intacct Dave Kellogg, CEO at Host Analytics Alison Homlund, VP CSM at Host Analytics
  2. 2. Materials Prepared for Panel Discussion Metrics: Talking about Churn and Retention in the Boardroom
  3. 3. LTV vs. CAC 3 LTV CAC ? ARR  Gross Margin Churn $ Cost to Acquire a Customer
  4. 4. COMPANY METRIC METRIC FORMULA Recurring revenue retention rate Retention rate (net dollar retention rate) Annual dollar retention rate Recurring dollar retention rate Net churn Note: Includes only customers with >$5k ACV and annual / multi-year contracts $ implied ACV customers t-1 end t end $ implied ACV customers t-1 end t-1 end Selected Public SaaS Company Churn Reporting Methodologies Source: Company filings COMPANY METRIC METRIC FORMULA Subscription revenue retention rate Revenue retention rate Renewal rate Annual subscription revenue retention rate Dollar-based net expansion rate Note: Excludes commissions owed and customers with sidekick-only subscriptions $ sub revenue customers q-4 q $ sub revenue customers q-4 q-4 ( )Trailing 4 Qtr. Avg. $ implied MRR customers t-1 end t end $ implied MRR customers t-1 end t-1 end $ recurring revenue customers t-1 t $ recurring revenue customers t-1 t-1 # vehicles added customers t beg t - # vehicles customers t beg t beg # vehicles lost customers t beg t )( $ recurring rev customers t-1 end t $ recurring rev customers t-1 end t-1 $ ACV non-renewing $ ACV expiring 100% - t t $ annualized sub revenue customers t-1 end t end $ annualized sub revenuet-1 end customers t-1 end $ agg. MRR customers t-1 end t end $ agg. MRR customers t-1 end t-1 end $ contracted MRR customers m beg m end ( )Wtd Avg. $ contracted MRR customers m beg m beg * 12 4
  5. 5. Apples & Oranges! 5 Source: Company filings Company Name Value at IPO Q2 128.0% Q2 3.5% Rally Software 127.0% Responsys >100% RingCentral ~99% SciQuest 100.0% ServiceNow 96.0% SuccessFactors >90% The Ultimate Software Group 96.0% Veeva 187.0% Workiva 97.3% Workiva 108.4% Yodlee 123.0% Zendesk 120.0% Zendesk 122.0% Company Name Value at IPO 2U 144.4% Amber Road 102.0% athenahealth 97.0% Bazaarvoice 89.7% / 91.9% (9 mo.) Benefitfocus >95.0% Box 130.0% Brightcove 93.0% Carbonite 82.0% Carbonite 85.0% Castlight 109.0% ChannelAdvisor >100% Constant Contact 97.4% Cornerstone OnDemand 95.8% Cvent 97% Subscription 115% Marketing Demandware >100% Company Name Value at IPO Eloqua >100% ExactTarget 110.0% Five9 100.0% Fleetmatics 1.8% HubSpot 90.3% Jive Software 95.3%, excluding upsells 113.6%, including upsells Kenexa 89.6% LifeLock 85.4% LogMeIn ~80% Marin Software >100% Marketo ~100% New Relic 115.0% Paycom 91.0% Paylocity >92% Proofpoint 90.0%
  6. 6. Key Factors to Question 6 Source: Company filings • External vs. internal? • Gross vs. net? • GAAP vs. ACV / ARR? • What is the base period? • Dollar vs. unit / customer? • Pure subscription vs. inclusion of other potentially recurring business? • Bonus: Costs to acquire / support upsells & expansions?
  7. 7. 156 respondents Note: Survey responses as of June / July 2014 Annual Gross Dollar Churn “What percentage of total ACV on a dollar basis churns in a given year (excluding upsells)?” # of Responses AnnualGrossDollarChurn Median ≈6% 59 48 20 13 16 0 10 20 30 40 50 60 70 <5% 5-10% 10-15% 15-20% >20% 7 Results from 2014 Pacific Crest Private SaaS Company Survey Results
  8. 8. 243 respondents Note: Survey responses as of June / July 2014 30 15 15 39 34 35 75 0 20 40 60 80 <90% 90-95% 95-100% ~100% 100-105% 105-110% >110% Median ≈ 103% 100%+NetRetention (Upsellsgreater thanchurn) NetChurn (Churngreater thanupsells) Net Dollar Retention (Including Upsells and Expansions) “How much do you expect your ACV from existing customers to change, including the effect of both churn and upsells?” # of Responses Results from 2014 Pacific Crest Private SaaS Company Survey Results 8
  9. 9. CAC on New Customers vs. Upsells vs. Renewals 9 “How much do you spend on a fully-loaded sales & marketing cost basis to acquire $1 of ACV from a customer?” Source: 2014 Pacific Crest Private SaaS Company Survey Note: Survey responses as of June / July 2014 Respondents: New ACV from New Customer: 159, Upsell to Existing Customer: 151, Renewals: 153 $0.60 $0.10 $0.06 $1.44 $0.46 $0.26 $1.07 $0.18 $0.12 $0.00 $0.25 $0.50 $0.75 $1.00 $1.25 $1.50 New ACV from New Customer Upsell to Existing Customer Renewals 75th percentile 25th percentile Median
  10. 10. 10 KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC (“KBCMI”), and KeyBank National Association (“KeyBank N.A.”), are marketed. Pacific Crest Securities is a division of KBCMI. This document has been prepared by Pacific Crest Securities, a division of KeyBanc Capital Markets Inc., herein known as “PCS”. The material contained herein is based on data from sources considered to be reliable, however PCS does not guarantee or warrant the accuracy or completeness of the information. This document is for informational purposes only. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. This document may contain forward-looking statements, which involve risk and uncertainty. Actual results may differ significantly from the forward-looking statements. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity. Individuals associated with PCS or PCS itself may have a position (long or short) in the securities covered in this document and may make purchases and/or sales of those securities in the open market or otherwise without notice. The firm does not, and is unable to, make promises about research coverage. Research will be initiated, updated and ceased solely at the discretion of PCS Research Management. This communication is intended solely for the use by the recipient. The recipient agrees not to forward or copy the information to any other person outside their organization without the express written consent of PCS. 10 Disclosures
  11. 11. ©2015 Gainsight. All Rights Reserved. VP of Customers for Life Host Analytics Alison Holmlund CEO Host Analytics Dave Kellogg
  12. 12. ©2015 Gainsight. All Rights Reserved. Host Analytics Background • Modeling, planning / budgeting, consolidation and reporting / analytics • Sold to Office of the CFO • VC-backed, late-stage startup ($85M+ in VC) • 100% SaaS model • 500 customers • Up-market focus (the Hyperion of the cloud) Leader in cloud enterprise performance management (EPM)
  13. 13. ©2015 Gainsight. All Rights Reserved. How We Calculate Churn and Renewal Rates • Simple churn • (Net change in ARR from existing customers / starting-ARR) * 4 • Net ARR renewal rate • (ATR – churn) / ATR • ATR = available to renew • Gross ARR renewal rate • (ATR – churn + expansion) / ATR
  14. 14. ©2015 Gainsight. All Rights Reserved. Product-Level vs. Account-Level Churn • Sum first = product-level churn • Shines a bright light on product issues • Net first = account-level churn • Keeps focused on customer level of investment
  15. 15. ©2015 Gainsight. All Rights Reserved. Timing Issues • Preliminary churn numbers issued at end of quarter • Forecast whether late renewals will happen or not • May revise numbers if we get surprised (which rarely happens) • Upsell is taken in the quarter it happens • Period churn vs. contract churn • Early renewals have no effect on net churn/renewal rates
  16. 16. ©2015 Gainsight. All Rights Reserved. Survivor Bias
  17. 17. ©2015 Gainsight. All Rights Reserved. How We Account for Customer Success Costs • Customer support = COGS • Customer success (CSM + TAM) = sales expense • Aside: can ergo calculate two CAC ratios • One inclusive of CS costs and expansion (all new ARR) • One exclusive of CS costs and expansion (new business ARR)
  18. 18. ©2015 Gainsight. All Rights Reserved. What We Report to the Board • Simple churn • Net ARR churn • Gross ARR churn • Count-based churn • Churn by reason • Save % •Renewing ARR from accounts “at risk” since last renewal
  19. 19. ©2015 Gainsight. All Rights Reserved. Cheap Plug for Kellblog (Dave’s Blog)
  20. 20. Marc Linden, CFO at Intacct Kathy Lord, VP Sales/CSM at Intacct
  21. 21. ©2015 Gainsight. All Rights Reserved. Intacct Background • Kathy & Marc have been at this as a team since 2008 • Bessemer an early investor (2008) and we drank the Kool-Aid • SMB & mid-market, multiple channels • Sell to the CFO – very considered purchase (high CAC, long customer life) • B2B, annual contracts • Now large & robust Customer Success team
  22. 22. ©2015 Gainsight. All Rights Reserved. How Intacct Calculates Churn • What are you measuring – contract or customer? • Renewal Rates - # vs $ • Define what expected renewals are (CMRR) • Define what is a lost customer • Define period of measurement and frequency • Monthly measurement, reported as annualized rate • Reported in period where contract is due (not pure CMRR) • # lost if not normal renewal; $ equals delta CMRR (archive makes it >$0) • Suspected/At Risk Churn
  23. 23. ©2015 Gainsight. All Rights Reserved. How Intacct Calculates Churn cont. • Handling Early renewals • Reps are encouraged to get renewals ASAP • Count in the period when renewal is due for both # & $ • Quota & commission in period when renewal is due. Can’t game compensation • Handling Late renewals • Expected # & $ moved into the next period (no change in subscription period) • 20% commission penalty for reps & no accelerators (e.g. 80%) • Still working to separate up-sells/downgrades & price increases/decreases at line item.
  24. 24. ©2015 Gainsight. All Rights Reserved. How Intacct Calculates Churn cont.
  25. 25. ©2015 Gainsight. All Rights Reserved. How Intacct Calculates Churn cont. Net Change in CMRR ($000s) Subscriptions: Direct New Bookings Direct Debooks Direct Renewals Upgrades Downgrades First Time Archives Cancellations Total Direct Renewals Direct Add-ons Direct Subtotal VAR New Bookings VAR Debooks VAR Renewals Upgrades Downgrades First Time Archives Cancellations Total VAR Renewals VAR Add-ons VAR Subtotal CPA/BPO/ISV Total Subscriptions
  26. 26. ©2015 Gainsight. All Rights Reserved. How Intacct Accounts for Customer Success Costs • Tracked by Channel • Support costs are CoGS • Customer Success (renewal reps, SAMs, Community) costs are Sales • Customer Success costs excluded from CAC. Planned and reported as a % cost of renewal (reflected this way in CLV model)
  27. 27. ©2015 Gainsight. All Rights Reserved. Customer Success Metrics Intacct Reports to the Board • By channel • $ & # churn • Churn components trended • Voluntary/involuntary churn • Total Installed Base performance (Add-ons + $ Churn) • $ add-ons/installed base customer • % Cost of Renewals
  28. 28. ©2015 Gainsight. All Rights Reserved. And now…from Intacct ERP!
  29. 29. THANK YOU

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