The Only 3 Metrics That Matter in the Subscription Economy
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Zuora provides subscription billing and finance solutions to help companies succeed in the subscription economy. The presentation discusses the shift from traditional one-time purchases to recurring subscription models and the challenges of accounting for recurring revenue. It argues that the three key metrics for subscription businesses are retention rate, recurring profit margin, and growth efficiency. These metrics are more important than traditional accounting rules and allow companies to optimize growth versus profitability. Examples are given of how different levels of these metrics impact growth rates and net income over time.
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The Only 3 Metrics That Matter in the Subscription Economy
- 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Slide 12 − Zuora Confidential, not for distribution beyond intended recipient Lack of transparency on the most important financial metrics… Page 11 The Result:
- 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. 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. 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. 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. 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. 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. 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. Slide 20 − Zuora Confidential, not for distribution beyond intended recipient Benchmarking the SaaS Leaders Benchmarking the SaaS Leaders
- 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. 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. 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. 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. 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. Slide 26 − Zuora Confidential, not for distribution beyond intended recipient Tien Tzuo tien@zuora.com @tientzuo Thank you.
- 27. Confidential and Proprietary Information. Do not distribute beyond intended audience. q & a
Editor's Notes
- Let me tell you a little bit about our companyWe were founded just over 5 years ago by visionaries from Salesforce and WebexWe’ve received a total of $82M in funding We have over 500 customers, 250+ employees ,and we are proud to maintain a 95% customer satisfaction ratio across our customer baseAnd we deliver our products monthly: an unprecedented pace of innovation even for the SaaS world. And just this May we celebrated our 50th product release.
- It started with SaaS and cloud companies, but today, this shift has gained momentum across all industries. Business and consumers can now subscribe to anything. Gartner predicts that by 2015 35% of all the global 2000 companies will generate revenues through subscription based services and revenue models
- I’d like to tell you a little about a major shift we’re seeing in the market that you yourselves are a part of. Over the past few years we’ve seen a seismic shift where businesses are now focusing their growth strategies around monetizing long term relationships rather than shipping products. This shift has been brought about by a growing preference of businesses and consumers to subscribe to services, rather than buy products. We call this the Subscription Economy, and in fact Zuora was the first company to coin this phrase and we even trademarked it in 2011.
- The shift to the Subscription Economy brings with it the need for a completely different approach to building your business.It changes how you think about your growth model. Instead of growing by shipping more units, your growth model is based on monetizing long term relationshipsInstead of fixed, SKU based pricing models, your pricing needs to be flexible, plan based pricing.Instead of a commerce that consists of a discrete one time transactions, your commerce model is now a series of recurring interlinked transactionsInstead of financial metrics that are backwards looking and focused on past performance, your financial model is heavily reliant on forward looking metrics that give insight into future recurring revenue.
- Around 1494, a monk in Venice by the name of Luca Pacioli wrote a book that defined a a system for merchants to record their business. That system was the “double entry accounting system”, and his book on it is the first known published text on this method of accounting. The double entry accounting system is THE cornerstone of modern day accounting.
- And this system has worked! From the merchants of Venice, to the modern day CFO, everyone uses this.
- The month end close process for subscription companies spans multiple time dimensions. You’re dealing with items billed in advance, billed in arrears, and mid-month cancellations …
- Revenue recognition has become much harder. We’re not recognizing a known value over a fixed period of time. We’re recognizing a subscription that spans multiple dimensions of time, creates a series of transactions, and is constantly changing.
- And this system has worked! From the merchants of Venice, to the modern day CFO, everyone uses this.
- And this system has worked! From the merchants of Venice, to the modern day CFO, everyone uses this.
- And this system has worked! From the merchants of Venice, to the modern day CFO, everyone uses this.