zuora @ alwayson 2012 - the only 3 saas metrics that matter
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The Only Three Saas Metrics That Matter
Tien TzuoZuora, Founder & CEO
April 2012
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Zuora Was Built on the Prediction of a “Subscription Economy”
1999 2012+
BUY NOW
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Today, Subscriptions are Everywhere
Technology Transportation Retail Music
Video Voice Legal?
A
Healthcare
By 2015, 35% of Global 2000 companies will generate revenue through subscription-based services and revenue models.
April 2011: Building a Strategy for the Subscription Economy
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Price $29.99Price * Unit
Editions
One-Time Fees
Recurring Fees
Usage Fees
Free Trials
Bundles
Pay-as-you-Go
There’s a Fundamentally New Way to Price
BUY NOW
SKU Based Plan Based
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1 Order Type# Units Change Order
Add-On Order
Initial Order
Cancellation
UpgradeRenewal
TransferSuspension
Free Trial
There’s a Fundamentally New Way to Conduct Commerce
BUY NOW
One-TimeTransactions
On-GoingSubscriptions
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$100 $100Σn=1
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There’s Even a Fundamentally New Way to Think About Finance
BUY NOW
One-TimeMetrics
RecurringMetrics
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ARRn – Churn + ACV = ARRn+1
The Subscription Business Model is Built on Future Recurring Costs & Revenues
You start the period @ some
recurring revenue run rate
You then end up at a new ARR level as
you kick off the next period
You spend some % of that ARR to
service the base (COGS, G&A) and to reinvest in R&D
You invest to grow that ARR by acquiring new ACV (including
both new customers and upsells)
Hopefully you do a good job, and
minimize the amount of that ARR that goes
away
The metrics for Cloud computing are fairly different from traditional enterprise software. Top 10 Laws for Cloud Computing
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But Today’s GL’s Don’t Speak This Language
Backwards Looking, Not Forwards Looking
No Concept ofSubscription Metrics
The Pre-SubscriptionIncome Statement
Income StatementFor Period Ending December 31, 2011
No Separation of Recurring vs. 1-Time
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Today’s GL’s Look Backwards, Not Forwards
Income StatementFor Period Ending December 31, 2011
Last Year This Year
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Today’s GL’s Confuse One-Time and Recurring Items
: Subscriptions
1x: Services
1x: Setup Fees
: TechOps
1x: Marketing
1x: Sales
Rev
enue
sE
xpen
ses
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Today’s GL’s Give You Product, Not Subscription Metrics
# UnitsAverage Selling Price
Annual Gross RevenueGross Margins
Close Rates
# CustomersCustomer Lifetime ValueRecurring Profit MarginsGrowth EfficiencyRenewal & 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.
SaaS Showcase: Keeping the Customer Happy, July 11, 2010
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The Subscription Economy Income Statement would start with ARR vs Revenue
Annual Recurring Revenue $100
Churn (10)
Net ARR 90
COGS (20)
G&A (10)
R&D (20)
Recurring Profit 40
Q: But what about Sales & Marketing?A: Sales & Marketing are one-time costs related to growing ARR
You start with an ARR level
You anticipate Churn
This gives you an expected income or
cash flow to play with
You spend to service the base
This gives you your recurring profit margin
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Annual Recurring Revenue $100
Churn (10)
Net ARR 90
COGS (20)
G&A (10)
R&D (20)
Recurring Profit 40
Your Choice: Spend on Growth or Take Profits
Growth (Sales & Marketing) (10) (40)
Net New ARR 10 40
Net Income $30 $0
Ending ARR $100 $130
Optimizing for Margins
Optimizing for Growth
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Subscription Economy Companies Run Their Businesses With 3 Key Metrics
Annual Recurring Revenue $100
Churn (10)
Net ARR 90
COGS (20)
G&A (10)
R&D (20)
Recurring Profit 40
Growth (40)
Net New ARR 40
Net Income $0
Ending ARR $130
Retention Rate
GrowthEfficiency Index
Recurring ProfitMargin
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When looking at a Subscription Economy company, only these 3 metrics matter
ARR less Churn less Non-Growth
Spend
Recurring Profit Margin
How much of your ARR you
keep every year.
How much does it cost you to acquire $1 of
ACV
RetentionRate
Growth Efficiency
The metrics for Cloud computing is fairly different from traditional enterprise software. Top 10 Laws for Cloud Computing
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A company with 1.0 / 90% / 40% can grow at 43% a year at breakeven
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Or it can have $0 growth, and have a net income of $30.
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Benchmarking the SaaS Leaders
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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%
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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%
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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%
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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
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How Do You Achieve the Ideal Model
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1
2
3
(1) Maximize your Recurring Profit Margins
“How do you cost effectively service the base”
Take Credit Card Payments No touch, bring cash in the door immediately
Automate Quote-to-Cash-to-Renewals Seamless, eliminate manual errors
Drive Multi-Year Commitments Multi-Year Pricing Tiers, Term Discounts
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1
2
3
(2) Focus on sustaining high Retention Rates
“How much ARR you keep every year”
Make Renewals Really Easy Auto-Renewals, Early Bird Renewal Incentives
Enable Your CSRs to Renew CustomersChurn defense, ARR preservation
Prevent Churn with New Price Plans Monthly vs. Annual, Discounted, Lower Tiers
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Tune Your Pricing Strategies Freemium, Editions, Pay-as-you-Go, Tiers 1
2
3
(3) Optimize your business for Growth Efficiency
“How much does it cost you to acquire a $ of ACV”
Increase Total Customer Value Upsells, Cross-Sells, Add-ons
Make Doing Business Simple Self-Service, Promotions, Free Trials
