Profitable Cloud Business with SAP S/4HANA Cloud

Successful Cloud Business
Cloud Economics
Go-To-Market with Partners - Cloud
Choice: Profit

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Cloud Economics: A Summary
Metrics for data-driven operating and strategic decisions
Benchmarks
Annual Margin ≥ CAC
Annual Churn < 10%
3 year LTV ≥ 3x CAC
Life-time value (LTV) is a
prediction of the net profit
from the entire future
relationship with a customer
Annual Recurring Revenue (ARR) is
the value of the contracted recurring
revenue components of your term
subscriptions
Increase Life Time
Value with high
retention and margins
Drive down
new customer
selling costs
Grow Annual Recurring
Revenue through up-
and cross-sell
Manage churn
to de-risk profits
Customer Acquisition Cost
(CAC) is the total sales and
marketing cost to acquire a
new customer
CAC
Margin
Subs. &
Renewal
Up-sell
Cross
-sell
ARR
Churn
Develop high margins
through fixed price and
repeatability
∑ LTV

Profitability
Customer Lifetime Value & Margins
Lifetime Value
▪ In any as-a-service business model,
profitability is determined by optimising
Customer Lifetime Value (or LTV)
▪ Typically, LTV is expressed as a 3-year
future profit forecast, discounted (NPV)
▪ It is the sum of all profits earned from a
customer, or an average of all customers
Margins
Margins or contributions can and should be
earned from several different service streams,
and can include:
▪ Recurring solution subscription
▪ One-off solution deployment services
▪ One-off business consulting, transformation
change management
▪ One-off technology integration
▪ One-off customer apps development
▪ Recurring support services (key user, help desk,
application management, health checks, …)
▪ Recurring apps subscription
“We only want to win the customers we can keep”

Cloud creates a range of revenue opportunity
Recurring
Subscription
Revenue
On initial sale
On upsell
On renewal
Services
Program, BPR &
change
management
Business case &
project strategy
Integration & Data
migration
Training and key
user support
Premium support
& App. Mgt.
Intellectual
Property
Develop and
market one
offs
Develop
formal add
ons
Other
Revenue from
3rd party apps
Services ratio is 1 to 5 times
ACV, varying by:
• Country, people costs
• Solution, scope, number of
countries
• Customer complexity
• Level of integration, API’s,
add-on apps
Margins can improve with off-
site delivery

Customer Acquisition Costs
CAC, Retention & Upsell
Customer Acquisition Costs
▪ The cost of acquiring new customers
(CAC) must be proportionate to the future
expected profitability potential (forecast
LTV)
▪ CAC is the sum of all costs to acquire a
new customer, or the average of the sum
of all costs (on an annualised basis)
▪ Average CAC = [All Marketing Costs + All
Sales Costs] / Number of new customers
p.a.
Retention & Upsell
▪ Optimising LTV depends on maximising
customer retention plus upsell and cross
sell of incremental value (services)
▪ The best retention rates are achieved
simultaneously with proactive customer
engagement, optimising customer value
and maximising service profitability
▪ Retention is calculated by comparing the
current annual recurring revenue with that
of the previous period (not contract value).

Why Customer Lifecycle Management Matters: Customer Retention
 Greater Long-Term Profitability
More cost effective to renew and
upsell
For cloud, revenue retention is primary
source of operating margin and business
value
Engaged customers more likely to
renew
Consistent and positive customer
experience critical to long-term profitability

Key Ratios
Operational management pays attention to key ratios, including:
▪ [LTV : CAC] at minimum [3 : 1]
▪ LTV should be at least 3 times average CAC
▪ CAC recovery ≤ 12 to 18 months
▪ Recover CAC from profits within 12 to 18 months
▪ Retention ≥ 90%
▪ Compare like-for-like ARR excluding upsell
▪ Retention + Upsell ≥ 125%
▪ “Land & expand” strategy enables upsell with significantly lower sales costs (<15% CAC)

Cloud Economics
What Stays the Same and What Changes
Dimension Stays the Same Cloud Changes
Up-Sell  Important to grow the customer  Where the incremental revenue lies, primary lever of
profitability, do it every quarter with every new release
Gross
Margins
 Pressure on costs, mix
junior/senior, utilization
 Opportunity to do more remote, Partners use more generalist
and fixed fee pricing to drive margins
Revenues  Services business
 All about people, projects,
and products
 Still about being a reseller
 Up-front billing
 Revenue recognized by ‘days of service’
 Time to revenue more important than size of deal
 Margins on recurring revenues very important
 Size and Growth of Average Recurring Revenue (ARR) is a
key valuation metric
Number and
Size of Deals
 Size of deals is reduced  Develop a digital marketing/sales strategy to fill funnel and
reduce CAC
Cash Flow  Attention to payment terms,
charge 1Y upfront for subscription
 Have to finance first two years as in a start-up
 Takes 12 months to recover CAC (per transaction)
Valuation  All about EBITDA  Size and growth of ARR,
 Adjusted by Churn, and LTV

Successful Cloud Business
with SAP S/4HANA Cloud
Cloud Economics
Go-To-Market with Partners - Cloud
Choice: Profit

Customer Engagement Process
Customer Lifecycle Management in the Cloud
Objectives
• Protect Renewal Revenue
• Up/cross sell revenue growth
• Adoption & Ability to Reference
Key Players
• Customer Engagement Executive
• Cloud Renewal Manager
• Account Executive
• Value Engineering / Presales
• Customer Success Managers
• Digital Business Services
• Virtual account team
• Etc.
Customer

Cloud Choice: Profit
Helping SAP Partners Accelerate Cloud Sales and Profit
Partner
Benefits
Easier for Partners to
Step into or Transition
to the Cloud; Reduced
Financial Risk
Customer
Benefits
Combined Resources
of Partner and SAP
Rewards When
You Win
Predictable Payments
and No Guess Work
$
Cloud Choice Profit at PartnerEdge
Details

Reseller Discount vs. Cloud Choice: Profit
A brief comparison
Cloud Reseller Discount 30%
▪ Reseller records gross transaction value
(top line sales/ revenue)
▪ Reseller pays to SAP 70% of MSRP list
price, subject to any deal-specific discount
terms for all transactions (new, upsell,
renewal)
▪ Resulting margin indicates profitability,
which will vary depending on the actual
customer price negotiated (up or down)
▪ Reseller is liable for full debt owed to SAP,
irrespective of Customer payments to
Reseller
▪ Reseller records the Cloud Choice: Profit
payment as income at 100% profitability
(20% of all new and upsell transactions,
and at 15% for renewals)
▪ The amount will always be calculated as
20% (new) and 15% (renewal) of the
transaction value (consistent &
predictable)
▪ SAP manages debt directly with end-
Customer, and Reseller is paid on receipt
of payments from Customer

So…Where is the Money for Partners
Services
Design +
Implementation
Services
• Program & Change
Management
• Business Case &
Project Strategy
• Business Process
Improvement
• Data Migration
• Training & Key User
Support
• Value Realization (*)
Recurring
Subscription
Revenue
• Cloud Choice Profit (**) –
Q3 2016
• Referral tbc (Q4 2016)
Cloud
• Reselling evaluated for
2017(tbd) **
(**) Program requirements to be met, no
automatism
Extension (IP)
Co-innovation
• Develop & market one-
offs
• Develop formal
extension on HCP (*)
• Special integration (*)
Partner Revenue Streams
Other
• Revenues from 3rd party
apps (*)
• Example: walk me
(*) Represent services that can be packaged and sold as recurring revenue streams over
the lifetime of the usage of the service
Service Attach Rate typically 1 to 2x Annual Contract
Value. Function of
 Country as the subscription is the same everywhere yet
people cost vary a lot from one country to the other
 Scope, number of countries, sales org etc in scope
 Level of integration with backend, interfaces, add-on
 Effort for change management

Profitable Cloud Business with SAP S/4HANA Cloud

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