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Understanding the Financial Health of your Subscription Business

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Industry leaders, Zuora and Totango, present which metrics truly give an accurate picture of the health of your subscription business. Which metrics should you calculate and optimize on - ARR, GEI, CRC or other ratios?

Chief Financial Officer, Tyler Sloat from Zuora shares 3 metrics they measure for their company and track against other best-in-class subscription companies. Chief Marketing Officer, Kaiser Mulla-Feroze from Totango, also presents a couple key metrics he finds missing from the boardroom discussions.

Visit totango.com to view the entire webinar and hear their insightful commentary that accompanies these slides and Q&A.

Published in: Software
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Understanding the Financial Health of your Subscription Business

  1. 1. Understanding the Financial Health of your Subscription Business Presented by:
  2. 2. builds modern, flexible, and easy- to-use enterprise software that enables companies to manage all aspects of their relationship with their subscribers. is a customer success platform that helps subscription businesses take a data-driven approach to reducing churn, driving adoption, and maximizing lifetime revenue.
  3. 3. Subscription Finance New Model, New Metrics Tyler Sloat, CFO, Zuora @tylersloat
  4. 4. Executing against today’s subscription business model requires an understanding of a whole new set of metrics.
  5. 5. The new model is complex. Build a widget. Recognize your revenue.Sell the widget. Acquire customers & monetize relationships. free trial paid subscriptions add on upgrade renewal
  6. 6. ARR GOVERNS ALL A R R n – Churn + A C V = A R R n + 1
  7. 7. The 3 Metrics… That will keep you up at night. Growth Efficiency Churn Rate Recurring Profit Margin How do you know if your metrics are effective?
  8. 8. “How much new ACV can we get out of growth investment?” What’s my strategy? Invest at least enough money in Growth to acquire enough ACV to offset churn. With what’s left, you have to continue to invest or bring profits to the bottom line. “How much of our recurring revenue should we invest in growth?” Growth Efficiency Index
  9. 9. Churn Rate “What’s the maximum GEI I should accept to warrant continued investment in Growth?” Connecting GEI & Churn If your GEI is 1.0 (spend $1 to generate $1 of ACV) and your churn rate is 10%, a Company can justify continued investment in Growth Expense.
  10. 10. Recurring Profit Margins “What is best in class Recurring Profit Margin based on my Company’s size?” Your strategy… The lower the recurring costs, the more money you have to play with – book as profit or invest back in growth.
  11. 11. The model interpreted… COGS, G&A, R&D 50% Recurring Profit Margin Sales, Marketing, Customer Success BREAK EVEN 0% 100% 50% ARR Non-Growth Expense Growth Expense BREAK EVEN INVEST IN FIELD & GROW FASTER Sales, Marketing, Customer Success OR With a GEI of 1.0 and churn at 15%, you’ll have 35% growth while maintaining break even. But only if deals are collected upfront and you’re cash flow positive. But, if your GEI is 2.0 you’re growth will slow to 10% to break even. “ “
  12. 12. Box
  13. 13. Hubspot
  14. 14. NetSuite
  15. 15. ServiceNow
  16. 16. Zendesk
  17. 17. …So how do you operationalize across your company?
  18. 18. P A D R E P P M
  19. 19. 100+survey respondents 100+survey questions
  20. 20. 10,000+points of data
  21. 21. RUN: Are your customers committed? 15%Monthly 4%Semi-Annual 73%1-2 years > 2 years 7% Contract Terms
  22. 22. EXPAND Upsells are important – over 40% 20% >60% 14% of respondents generate more than of their bookings from upsells of companies are changing pricing at least annually Only every 3 years Sales reps are the key – companies generating higher upsells assign reps to manage
  23. 23. CUSTOMER RETENTION COST The Missing Metric for Subscription Businesses KAISER MULLA-FEROZE CMO @KaiserMF Full report available at: www.slideshare.net/totango/customer-retention-cost-report
  24. 24. INITIAL REVENUE FROM NEW CUSTOMER ACQUISITION RENEWAL & UPSELL REVENUE of revenue comes after the initial sale 70-80%
  25. 25. The economics of customer retention is critical in determining the financial health of a subscription business. As companies adopt recurring revenue models, the CRC ratio must become a key topic in every Board session. – Bruce Cleveland, InterWest Partners “ ”
  26. 26. 0% 10% 20% 30% 40% 50% 60% 70% CUSTOMER RETENTION CUSTOMER ACQUISITION Metrics currently tracked Metrics you plan to track CUSTOMER ACQUISITION Vs. RETENTION COSTS 298 159 185 248 Source: SaaS Metrics Survey, Totango, 2014
  27. 27. •  Should incremental investment go to acquire new customers or retain existing customers? •  What is the right level of investment in customer retention? •  Are we under-investing in customer retention vs. customer acquisition? •  How should our relative spend on customer acquisition vs. retention change over time? A lot of great CAC metrics have been developed over the years, but good metrics on the cost of retaining customers have been missing. – Mark Klebanoff, CFO, PayScale “ ”
  28. 28. what you are spending on customer retention TRACK your retention cost to revenue ratio UNDERSTAND your retention cost versus industry guidelines COMPARE Four steps to assess, manage, and optimize your customer retention efforts cost of retention together with cost of acquisition EVALUATE Full report available at: www.slideshare.net/totango/customer-retention-cost-report
  29. 29. 1. Track your customer retention spend
  30. 30. 2. Understand your retention cost relative to revenue
  31. 31. 3. Compare your retention cost vs. industry guidelines Staffing Systems & Technology Customer Retention Programs
  32. 32. 3a. Staffing Customer Success Staffing Based on Product & Business Complexity * Assuming $300k fully loaded cost of a CSM (incl allocation of management) 10-30% of revenue
  33. 33. 3b. Systems and technology CSM Productivity Tools Workflow and business process tools §  CSMs manage their portfolios and customer touchpoints §  Executives manage their teams Customer Success Monitoring Systems Consumption and adoption monitoring §  Early warning system for churn §  Compute predictive health §  Spot growth/upsell opportunities 1% of staff costs 0.5%-1% of revenue
  34. 34. 3c. Customer retention programs Customer Nurture & Retention Programs Critical part of scaling customer retention efforts §  Best practice development and sharing §  Campaigns to drive product adoption and engagement §  New feature webinars and training §  Building a customer community 1-2% of revenue
  35. 35. 4. Evaluate retention cost together with acquisition cost CRC CAC VS. Comparing CAC and CRC to guide investment decisions
  36. 36. 4. Evaluate retention cost together with acquisition cost CRC + CAC Combining CAC and CRC to understand financial health
  37. 37. COGS, G&A, R&D 50% Recurring Profit Margin Sales, Marketing, Customer Success BREAK EVEN 0% 100% 50% ARR Non-Growth Expense Growth Expense BREAK EVEN INVEST IN FIELD & GROW FASTER Sales, Marketing, Customer Success OR Source: Zuora, 2015
  38. 38. Public SaaS Company Metrics
  39. 39. Over the longer term, SaaS companies will have to aim for a P&L that will look like this: Full report available at: www.slideshare.net/totango/customer-retention-cost-report
  40. 40. Q&A Tyler Sloat @tylersloat CFO@zuora.com Kaiser Mulla-Feroze @KaiserMF kaisermf@totango.com @totango info@totango.com @zuora www.zuora.com

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