Zuora @ AlwaysOn 2012 - The Only 3 SaaS Metrics That Matter

Zuora, Inc.
Zuora, Inc.Social Media Marketing Manager at Zuora, Inc.
The Only Three Saas
    Metrics That Matter
              Tien Tzuo
        Zuora, Founder & CEO

             April 2012



1
Zuora Was Built on the Prediction
      of a “Subscription Economy”



     BUY NOW



     1999                    2012+


2
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
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
There’s a Fundamentally New Way
                     to Conduct Commerce
                 BUY NOW




    # Units            1 Order Type




                One-Time                On-Going
              Transactions            Subscriptions
5
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
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
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
Today’s GL’s Look Backwards, Not Forwards


                    Income Statement
                For Period Ending December 31, 2011




    Last Year                                         This Year




9
Today’s GL’s Confuse
                       One-Time and Recurring Items

                 : Subscriptions
     Revenues




                 1x: Services

                1x: Setup Fees


                   : TechOps
     Expenses




                1x: Marketing

                  1x: Sales



10
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
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
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
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
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
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
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
Benchmarking the SaaS Leaders




18
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%
     Margin



19
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%
     Margin



20
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%
     Margin



21
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%
     Margin




22
How Do You Achieve the
          Ideal Model




23
(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
(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
(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
Thank You!

        Tien Tzuo
     ceo@zuora.com



27
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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
  • 10. Today’s GL’s Confuse One-Time and Recurring Items : Subscriptions Revenues 1x: Services 1x: Setup Fees : TechOps Expenses 1x: Marketing 1x: Sales 10
  • 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
  • 18. Benchmarking the SaaS Leaders 18
  • 19. 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% Margin 19
  • 20. 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% Margin 20
  • 21. 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% Margin 21
  • 22. 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% Margin 22
  • 23. How Do You Achieve the Ideal Model 23
  • 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
  • 27. Thank You! Tien Tzuo ceo@zuora.com 27

Editor's Notes

  1. Yosh
  2. Yosh
  3. 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