SlideShare uses cookies to improve functionality and performance, and to provide you with relevant advertising. If you continue browsing the site, you agree to the use of cookies on this website. See our User Agreement and Privacy Policy.
SlideShare uses cookies to improve functionality and performance, and to provide you with relevant advertising. If you continue browsing the site, you agree to the use of cookies on this website. See our Privacy Policy and User Agreement for details.
Successfully reported this slideshow.
Activate your 14 day free trial to unlock unlimited reading.
Zuora @ AlwaysOn 2012 - The Only 3 SaaS Metrics That Matter
Zuora @ AlwaysOn 2012 - The Only 3 SaaS Metrics That Matter
1.
The Only Three Saas
Metrics That Matter
Tien Tzuo
Zuora, Founder & CEO
April 2012
1
2.
Zuora Was Built on the Prediction
of a “Subscription Economy”
BUY NOW
1999 2012+
2
3.
Today, Subscriptions are Everywhere
Technology Transportation Retail Music
A
Video Voice Legal? Healthcare
By 2015, 35% of Global 2000 companies will generate revenue
through subscription-based services and revenue models.
3
April 2011: Building a Strategy for the Subscription Economy
4.
There’s a Fundamentally New Way to Price
BUY NOW
Editions
One-Time Fees
Price $29.99 Recurring Fees
Price * Unit Usage Fees
Free Trials
Bundles
Pay-as-you-Go
SKU Based Plan Based
4
5.
There’s a Fundamentally New Way
to Conduct Commerce
BUY NOW
# Units 1 Order Type
One-Time On-Going
Transactions Subscriptions
5
6.
There’s Even a Fundamentally New Way
to Think About Finance
BUY NOW
Σ $100
8
$100
n=1
One-Time Recurring
Metrics Metrics
6
7.
The Subscription Business Model is Built on
Future Recurring Costs & Revenues
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)
The metrics for Cloud computing are fairly
different from traditional enterprise software.
Top 10 Laws for Cloud Computing
7
8.
But Today’s GL’s Don’t Speak This Language
Income Statement
For Period Ending December 31, 2011
Backwards Looking, Not
Forwards Looking
No Separation of
Recurring vs. 1-Time
No Concept of
Subscription Metrics
The Pre-Subscription
Income Statement
8
9.
Today’s GL’s Look Backwards, Not Forwards
Income Statement
For Period Ending December 31, 2011
Last Year This Year
9
11.
Today’s GL’s Give You Product, Not Subscription Metrics
# Units # Customers
Average Selling Price Customer Lifetime Value
Annual Gross Revenue Recurring Profit Margins
Gross Margins Growth Efficiency
Close Rates Renewal & Churn Rates
The best in class software model operators will measure their
business not by revenue or bookings, not by current
profitability, but rather by recurring profit.
11
SaaS Showcase: Keeping the Customer Happy, July 11, 2010
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 ARR
12
13.
Your Choice: Spend on Growth or Take Profits
Annual Recurring Revenue $100
Churn (10)
Net ARR 90
COGS (20)
G&A (10)
R&D (20)
Recurring Profit 40
Optimizing for Optimizing for
Margins Growth
Growth (Sales & Marketing) (10) (40)
Net New ARR 10 40
Net Income $30 $0
Ending ARR $100 $130
13
14.
Subscription Economy Companies Run Their
Businesses With 3 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
Net Income $0
Ending ARR $130
14
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 Computing
15
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.
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 $ 30
17
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.
(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.
(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
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