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The Only 3 Metrics That Matter in the Subscription Economy

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The Only 3 Metrics That Matter in the Subscription Economy

  1. 1. Slide 1 − Zuora Confidential, not for distribution beyond intended recipientSlide 1 − Zuora Confidential, not for distribution beyond intended recipient Why Zuora Zuora Provides a BluePrint to Succeed in the Subscription Economy! The Only 3 Metrics That Matter T ien Tzu o, Co - Fou n d er & CEO intheSubscriptionEconomy t i e n @ z u o ra . c o m | @ t i e n t z u o
  2. 2. Confidential and Proprietary Information. Do not distribute beyond intended audience. Five+ Years of Incredible Growth Zuora founded Series A; First product launched Series B, Zuora featured in WSJ Series C; Zuora announces 1B in contracted revenue Series D, Trademarks Subscription Economy; EMEA expansion Zuora wins AlwaysOn Company of the Year Award; expands to Asia TheLeaderinCommerce,BillingandFinance SolutionsfortheSubscriptionEconomy 2 Zuora celebrates 50 product releases; $15.5Bn contracted invoice volume 2013201220112010200920082007 Offices: Silicon Valley, London, Sydney, Beijing, Chicago, Atlanta $82M Funding 500+ Customers 250+ Employees 95% Customer Sat
  3. 3. Confidential and Proprietary Information. Do not distribute beyond intended audience. A World of Innovations… … All Offered as a Service Qualcomm Pettracker Box HP CloudAmex The Times of London Nest Kaplan AT&T Dollar Shave Club Swiss Car Club Xplornet Lowes IRISDriveCam
  4. 4. Confidential and Proprietary Information. Do not distribute beyond intended audience. We Call This Shift the Subscription Economy The Past The Future BUY NOW Subscribe
  5. 5. Confidential and Proprietary Information. Do not distribute beyond intended audience. BUY NOW SUBSCRIBE Relationships (Long-term, adoption, loyalty) Growth Model Sell Units Fixed, SKU Based One-Time Transactions Backwards Looking Metrics Pricing Model Flexible, Plan Based (Editions, Bundles, Usage) Commerce Model Financial Model This is a Completely Different Business Model Recurring (upgrades, add-ons, renewals) Forward Looking (ARR, MRR, Churn, Renewals)
  6. 6. Slide 6 − Zuora Confidential, not for distribution beyond intended recipient You then end up at a new ARR level, kicking off the next period you invest in growing ARR by acquiring new ACV you do a good job & minimize the amount of ARR that goes away you start the period @ some recurring revenue rate The Subscription Economy Business Model
  7. 7. Slide 7 − Zuora Confidential, not for distribution beyond intended recipient 1494 A.D. Luca Bartolomeo Pacioli Inventor of the system of Double Entry Bookkeeping
  8. 8. Slide 8 − Zuora Confidential, not for distribution beyond intended recipient A $100 is a $100 is a $100. The rules say it all goes in the same bucket. Youneedtodifferentiatebetweenone-timeand recurringamounts. The Problem: “ “
  9. 9. Slide 9 − Zuora Confidential, not for distribution beyond intended recipient The rules don’t allow me to spread these amounts over time. Now you’re just being a rebel. You want to spread revenue over time. The Problem: “ “
  10. 10. Slide 10 − Zuora Confidential, not for distribution beyond intended recipient Your system doesn’t know what to do when subscriptions change. The Problem: I don’t have a rule for that. You’ve got yourself into quite a mess… “ “
  11. 11. Slide 11 − Zuora Confidential, not for distribution beyond intended recipient • Growing finance staffs • Impossible to accurately benchmark companies • Lack of transparency Thereturntospreadsheets… The Result: • Lack of information visibility • Two sets of books
  12. 12. Slide 12 − Zuora Confidential, not for distribution beyond intended recipient Lack of transparency on the most important financial metrics… Page 11 The Result:
  13. 13. Slide 13 − Zuora Confidential, not for distribution beyond intended recipient And Wall Street fails to value subscription businesses correctly… “CRM shares look heavily overvalued because rising revenue growth has actually translated to falling net income. “Maybe CEO Marc Benioff will one day be able to translate all of this low-margin selling into huge profits, but for now it kind of looks more like the Napster model than the iTunes model, and that concerns us. The Result: “ “
  14. 14. Confidential and Proprietary Information. Do not distribute beyond intended audience. giving you your recurring profit margin you spend to service the base First, you begin w/ ARR… you then anticipate churn… giving you an expected recurring income The Subscription Economy Income Statement
  15. 15. Confidential and Proprietary Information. Do not distribute beyond intended audience. Margin Growth You then get to decide what to do with your profit Optimizing for Margin vs Growth
  16. 16. Confidential and Proprietary Information. Do not distribute beyond intended audience. Retention Rate Recurring Profit Margin Growth Efficiency Index So, Then the 3 Metrics That Matter Are…
  17. 17. Slide 17 − Zuora Confidential, not for distribution beyond intended recipient Top 10 Laws for Cloud Computing How much of your ARR you keep every year How much margin to you have left to invest in Growth How much does it costs to acquire $1 of ACV Retention Rate Recurring Profit Margin Growth Efficiency The metrics for Cloud computing is fairly different from traditional enterprise software. - Top 10 Laws for Cloud Computing The 3 Metrics That Matter Tell Us Everything “ “
  18. 18. Confidential and Proprietary Information. Do not distribute beyond intended audience. A company with 1.0 / 90% / 40% can grow at 43% a year a 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)$
  19. 19. Confidential and Proprietary Information. Do not distribute beyond intended audience. 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$ 30$ Or it can have $0 growth, and have a net income of $30.
  20. 20. Slide 20 − Zuora Confidential, not for distribution beyond intended recipient Benchmarking the SaaS Leaders Benchmarking the SaaS Leaders
  21. 21. Confidential and Proprietary Information. Do not distribute beyond intended audience. Ending ARR Renewals Recurring Profit Margin 83% 3% $70 M 83% 41% 2001 $37 M $129 M 83% 58% 2002 2003 2004 Growth Efficiency 0.80:10.93:1 0.75:1 $231 M 83% 0.76:1 61%
  22. 22. Confidential and Proprietary Information. Do not distribute beyond intended audience. Ending ARR Renewals Recurring Profit Margin 86% (27%) $43 M 86% 6% 2004 $22 M $71 M 86% 35% 2005 2006 2007 Growth Efficiency 1.65:12.02:1 1.28:1 $105 M 86% 1.26:1 47%
  23. 23. Confidential and Proprietary Information. Do not distribute beyond intended audience. Ending ARR Renewals Recurring Profit Margin 92% (29%) $73 M 92% (16%) 2006 $40 M $108 M 92% 19% 2005 2008 2009 Growth Efficiency 1.90:11.41:1 2.15:1 $147 M 92% 1.62:1 43%
  24. 24. Confidential and Proprietary Information. Do not distribute beyond intended audience. Growth Efficiency Renewals Recurring Profit Margin 83% 58% 1.26:1 86% 47% 1:1 90% 50% 0.75:1 2.15:1 92% 19% Best Practice Model
  25. 25. Slide 25 − Zuora Confidential, not for distribution beyond intended recipient Top 10 Laws for Cloud Computing How much of your ARR you keep every year How much margin to you have left to invest in Growth How much does it costs to acquire $1 of ACV Retention Rate Recurring Profit Margin Growth Efficiency The metrics for Cloud computing is fairly different from traditional enterprise software. - Top 10 Laws for Cloud Computing The 3 Metrics That Matter “ “
  26. 26. Slide 26 − Zuora Confidential, not for distribution beyond intended recipient Tien Tzuo tien@zuora.com @tientzuo Thank you.
  27. 27. Confidential and Proprietary Information. Do not distribute beyond intended audience. q & a

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