understanding the financial health of your subscription business

Understanding the Financial Health of your Subscription Business Presented by:

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.

Subscription Finance New Model, New Metrics

Tyler Sloat, CFO, Zuora

@tylersloat

Executing against today’s subscription business model requires an understanding

of a whole new set of metrics.

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

ARR GOVERNS ALL A R R n – Churn + A C V = A R R n + 1

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?

“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

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.

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.

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


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.

“ “

Hubspot

NetSuite

ServiceNow

Zendesk

…So how do you operationalize across your company?

P A D R E

P P M

100+ survey respondents

100+ survey questions

10,000+ points of data

RUN: Are your customers committed?

15% Monthly

4% Semi-Annual

73% 1-2 years

> 2 years 7%

Contract Terms

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

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

INITIAL REVENUE FROM

NEW CUSTOMER ACQUISITION

RENEWAL & UPSELL REVENUE

of revenue comes after the initial sale

70-80%

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

“ ”

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

•  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

“ ”

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


1. Track your customer retention spend

2. Understand your retention cost relative to revenue

3. Compare your retention cost vs. industry guidelines

Staffing Systems & Technology

Customer Retention Programs

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

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

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

4. Evaluate retention cost together with acquisition cost

CRC

CAC

VS.

Comparing CAC and CRC to guide investment decisions

4. Evaluate retention cost together with acquisition cost

CRC + CAC

Combining CAC and CRC to understand financial health

COGS, G&A, R&D

50% Recurring

Profit Margin


BREAK EVEN

0%

100%

50%

ARR Non-Growth Expense

Growth Expense

BREAK EVEN INVEST IN FIELD & GROW FASTER


OR

Source: Zuora, 2015

Public SaaS Company Metrics

Over the longer term, SaaS companies will have to aim for a P&L that will look like this:


Q&A

Tyler Sloat

@tylersloat

[email protected]

Kaiser Mulla-Feroze

@KaiserMF

[email protected]

@totango

[email protected]

@zuora

www.zuora.com

understanding the financial health of your subscription business

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