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The only 3 SaaS metrics that matter

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  • Annual Contract Value
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  • ACV = ? Actual Cash Value doesn't make sense in the equation. All commodity volume?
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The only 3 SaaS metrics that matter

  1. The Only Three Saas Metrics That Matter Tyler Sloat Zuora, CFO1
  2. 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)2
  3. Problem: Traditional Financial Systems Have Not Kept Up3
  4. 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 period4
  5. 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 expenses5
  6. 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 ARR6
  7. 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 $1307
  8. 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 $1308
  9. 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 Computing9
  10. 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)10
  11. Or it can have $0 growth, and have a net loss 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 $ 3011
  12. Benchmarking the SaaS Leaders12
  13. 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% Margin13
  14. 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% Margin14
  15. 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% Margin15
  16. 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% Margin16
  17. How Do You Achieve the Ideal Model17
  18. (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”18
  19. (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”19
  20. (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”20
  21. Thank You! Tyler Sloat tyler.sloat@zuora.com21

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