The Business Model for the Subscription Economy (Accelerate East)

2,094 views

Published on

The CFO's Guide

Published in: Technology, Business

The Business Model for the Subscription Economy (Accelerate East)

  1. 1. The  Business  Model   For  the  Subscrip/on  Economy   Tyler  Sloat   CFO   @TylerSloat 1 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  2. 2. In  The  Subscrip:on  Economy,     Focus  Is  On  Rela:onships   BUY NOW Product 2 SUBSCRIBE Relationships Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  3. 3. …Requiring  a  Completely  Different     Approach  to  Building  Businesses.   Product Economy Subscription Economy Mone,zing  Customer  Rela,onships   Sell  Units     Why?  Customer  in  the  middle.     Price  Per  Unit   One-­‐Time  Orders   Pay-­‐as-­‐you-­‐Go  Pricing  Plans   Why?  Flexibility,  Edi/ons,  Try  before  Buy.     Mul,ple  Orders  Over  a  Life,me   Why?    Add-­‐ons,  Upgrades,  Renewals.     Forced  to  Pick  a   Customer  Segment   Simple  Financial   Metrics   Sell  to  Consumers  &  Businesses   Why?  Support  B2C,  B2B  and  B2Any.     Complex,  Interrelated  Bookings,   Billings,  &  Revenue   Why?  All  metrics  are  connected.     3 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  4. 4. This  Approach  is  Best  Represented  by   The  Nine  Keys   When  a  Company  executes   against  this  model,  it   GROWS.       That  Growth  is  measured  by   the  increase  in     RECURRING  REVENUE.       4 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  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.   5 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  6. 6. Problem  1   Tradi:onal  Income  Statements  are  Backwards   Income  Statement   For  Period  Ending  December  31,  2012     6 Tradi,onal  income  statements  measure  income  based    on  Zuora confidential, shared under non-disclosureade  this  past  pnotice how  much  money  you  m and subject to disclaimer eriod.  
  7. 7. Problem  2   Tradi:onal  Income  Statements  are  One-­‐Time  Focused   Income  Statement   For  Period  Ending  December  31,  2012     7 Tradi,onal  income  statements  do  not  differen,ate  one-­‐,me  from   Zuora confidential, shared under non-disclosurer  expenses.   recurring  revenue  o and subject to disclaimer notice
  8. 8. Problem  3   Wall  Stret  Uses  GAAP  to  Get  the  ARR  &  the  Three  Metrics…   Imperfect  Data  Leads  to  Es:mates   8 Revenue  is  the  only  relevant  growth  informa,on  in  GAAP…   Zuora confidential, is  just  a  piece  of  the  picture.   notice but  it   shared under non-disclosure and subject to disclaimer
  9. 9. At  Zuora,  Annual  Recurring  Revenue  (ARR)  is   the  Cornerstone  of  our  Business  Model   ARRn – Churn + ACV = ARRn+1 you  start  the   period  @  some   recurring   revenue  rate     9 you  do  a  good   job  &  minimize   the  amount  of   ARR  that  goes   away     you  invest  in   growing  ARR  by   acquiring  new   ACV   Zuora confidential, shared under non-disclosure and subject to disclaimer notice You  then  end   up  at  a  new   ARR  level,   kicking  off  the   next  period  
  10. 10. That  Business  Model  is  Centered  on  ARR  and   has  Three  Main  components   GROWTH   Recurring  Expense   One  Time  Events   10 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  11. 11. When  ARR  Governs  the  Business  Model,   Increasing  ARR  is  Top  Priority   How Fast Can We Grow? Growth   What Should We Spend? How Should We Measure? 11 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  12. 12. While  we  invest  in  Growth,  Disciplined   Investment  in  all  Recurring  Func,ons  is   Paramount…     What to include? Recurring   Expense   What is the right margin? But we need to innovate 12 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  13. 13. Even  if  We  Solve  for  Growth  and  Recurring,   Without  Predictability  of  any  One  Time  the   Model  is  at  Risk!   Can we predict? One  Time   Expenses   Model impact? Who to own? 13 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  14. 14. A  new  Income  Statement     &     Three  Metrics  that  represent  the   health  of  a  business       14 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  15. 15. The  Subscrip:on  Economy  Income  Statement   First,   Annual Recurring Revenue $100 Churn (10) Net ARR 90 COGS (20) Recurring Profit 15 giving  you   an   expected   recurring   income   (10) R&D you  then   an,cipate   churn…   (20) G&A you  begin   w/  ARR…   40 you  spend   to  service   the  base   Zuora confidential, shared under non-disclosure and subject to disclaimer notice giving  you   your   recurring   profit   margin  
  16. 16. So,  then  your  Three  Metrics  That  MaPer  are…   Annual Recurring Revenue Churn $100 (10) Net ARR 90 COGS (20) G&A (10) R&D (20) Recurring Profit Recurring Profit Margin Growth Expense Net New ARR Ending ARR 16 Reten,on   Rate   40 Recurring   Profit   Margin   40% (40) 40 $130 Zuora confidential, shared under non-disclosure and subject to disclaimer notice Growth   Efficiency   Index  
  17. 17. The  Three  Metrics  That  MaPer     Tell  Us  Everything   Retention Rate Recurring Profit Margin Growth Efficiency 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   The metrics for Cloud computing is fairly different from traditional enterprise software. 17 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  18. 18. Expanding  the  Three  Metrics   Annual  Recurring  Revenue   Retention Rate Recurring Profit Margin Growth Efficiency   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   Professional  Services   18 Cash   Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  19. 19. Your  Calcula,ons…   ARR   Entering ARR + New ACV - Churn = EXITING ARR Growth  Efficiency   Sales & Marketing Expense / New ACV Recurring  Profit  Margin   (Entering ARR – COGS – G&A – R&D) / 19 Entering Zuora confidential, shared under non-disclosure and subject to disclaimer notice ARR
  20. 20. How  Are  You  Calcula,ng  Your  GEI?   Sales   Mgmt   Web   Visits   Inbound  &   Outbound   Events   +   Marke,ng   Sales   Ops   SDRs   AEs   Sales   BD   ACV   20 Zuora confidential, shared under non-disclosure and subject to disclaimer notice ?   Acct   Mgmt  
  21. 21. Reten,on   Churn   21 Increase   Increase   Usage   Usage   Go     Live   Close   Deal   Churn   Churn   Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  22. 22. Recurring  Profit  Margin   ARR Tech  Ops Acct  Mgmt/Support Total  COGS Eng/Qa Product Total  R&D Finance/Ops HR Total  G&A Recurring  Expense Recurring  Profit  Margin 22 Last  Year $90 13% 7% 20% 22% 8% 30% 14% 6% 20% 70% 30% $   12 $       6 $   18 $   20 $       7 $   27 $   13 $       5 $   18 Next  Year $135 11% 7% 18% 18% 7% 25% 12% 5% 17% 60% 40% Zuora confidential, shared under non-disclosure and subject to disclaimer notice $     15 $         9 $     24 $     24 $         9 $     34 $     16 $         7 $     23
  23. 23. Now,  Opera,onalize  It   CFO  W ebinar Starting  ARR Bookings PS  Churn Live  Churn/Ramp Net  ARR  Growth Ending  ARR FY11    35,200    15,864            (350)      (2,656)    12,858    48,058 FY12    48,058    25,977      (1,661)      (3,294)    21,023    69,080 Q1  FY13    69,080        9,139            (520)      (1,036)        7,582    76,662 ARR  Growth  Rate S&M  Spend Non-­‐S&M  Spend 37% 44%    17,450    27,276        9,139    21,085    31,447        9,499 Q2  FY13    76,662    10,052            (598)      (1,150)        8,304    84,967    10,052    10,541 Q3  FY13    84,967    11,058            (688)      (1,274)        9,095    94,062    11,058    11,683 Pre  S&M  margin 40% 35% 45% 45% 45% GEI            1.10            1.05            1.00            1.00            1.00 PS  Churn  (off  prior  bookings) 13% 10% 10% 10% 10% Live  Churn  (Annualized) 8% 7% 6% 6% 6% Cash  In Cash  Out Net  Cash Ending  Cash 23    41,348  (38,535)        2,813    25,313    57,528  (58,723)      (1,195)    24,118    18,218  (18,637)            (419)    23,699    20,204  (20,593)            (390)    23,309    22,379  (22,741)            (362)    22,947 Zuora confidential, shared under non-disclosure and subject to disclaimer notice Q4  FY13      94,062      12,163              (791)        (1,411)          9,961  104,023 FY13      69,080      42,412        (2,598)        (4,872)      34,943  104,023      12,163      12,933 51%      42,412      44,656 45% 1.00 10% 6% 35% 1.00 10% 7%      24,761    (25,097)              (336)      22,610      85,561    (87,068)        (1,507)      22,610
  24. 24. Detailed  Modeling   L2  Growth  Formula   #Aes  on  Jan  31,  2013   NA   ROW   NA   ROW   NA   ROW   APAC   Total  /     Emerging   Emerging   Commercial   Commercial   Enterprise   Enterprise   Enterprise   Average   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   4.0   $200k   4.0   $275k   $275k   $400k   $400k   $400k   $301k   2.8   2.8   2.0   2.0   2.0   2.8   $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   $5,246k   $4,409k   $7,496k   $4,498k   $2,549k   $31,483k   #  Deals  /  Qtr   ASP   Total  Annual  Sales  Cost   Mktg  %  of  Sales   $4,247k   $3,038k   75%   75%   75%   75%   75%   75%   75%   Total  Annual  Mktg  Costs   $3,185   $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)   24 75%   1.3   1.2   1.0   1.0   0.9   0.9   1.0   1.0   Expecta,on  should  be  that  these  might  shig  based  on     maturity  oZuoraegion,  type  of  sale  and  maturity  of  market.     f  r confidential, shared under non-disclosure and subject to disclaimer notice
  25. 25. Report  and  Measure   PADRE / PPM Pipeline Acquire • Web • Social • AR / PR • Events • Product Launches • Demand Gen Deploy • Field Enablement • BD • Emerging • Enterprise • Int’l • Sales Eng. • Self Service • Squads • Partners • Methodology Run Expand • Tech Ops • Support • Renewals • Account Management • Adoption • Training Product • PM / PMM • R&D • Docs People • Recruiting • Onboarding • Training • Help Desk Money • Finance • Operations • Legal 25 Zuora confidential, shared under non-disclosure and subject to disclaimer notice • Upsell • Expansion
  26. 26. Report  and  Measure   Bookings   Billings   REPORT:     What   Happened   Accounts  Receivable   Cash   Revenue   Deferred  Revenue   Backlog   26 Zuora confidential, shared under non-disclosure and subject to disclaimer notice FORECAST:     What  to   Expect  
  27. 27. The  CFO  Perspec:ve   Meet  The  Panelists   Chartbeat   Antonia  Abraham,  CFO   Bazaarvoice   Marisa  Massie,  Controller   @marisamassie Zuora   Tyler  Sloat,  CFO   27 @tsloat Zuora confidential, shared under non-disclosure and subject to disclaimer notice
  28. 28. END 28 Zuora confidential, shared under non-disclosure and subject to disclaimer notice

×