Zuora @ AlwaysOn 2012 - The Only 3 SaaS Metrics That Matter
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This document discusses key metrics for subscription-based businesses: 1) Annual Recurring Revenue (ARR) measures the recurring revenue run rate at a point in time and is a better indicator than total revenue which includes one-time fees. 2) Retention Rate measures what percentage of ARR is retained from existing customers year-over-year. 3) Recurring Profit Margin shows ARR less costs of goods sold and operating expenses to measure profitability of recurring business. 4) Growth Efficiency Index measures the cost to acquire $1 of new ARR through sales and marketing spend. These four metrics, especially ARR, Retention Rate, and Recur
Zuora @ AlwaysOn 2012 - The Only 3 SaaS Metrics That Matter
- 1. The Only Three Saas Metrics That Matter Tien Tzuo Zuora, Founder & CEO April 2012 1
- 2. Zuora Was Built on the Prediction of a “Subscription Economy” BUY NOW 1999 2012+ 2
- 3. Today, Subscriptions are Everywhere Technology Transportation Retail Music A Video Voice Legal? Healthcare By 2015, 35% of Global 2000 companies will generate revenue through subscription-based services and revenue models. 3 April 2011: Building a Strategy for the Subscription Economy
- 4. There’s a Fundamentally New Way to Price BUY NOW Editions One-Time Fees Price $29.99 Recurring Fees Price * Unit Usage Fees Free Trials Bundles Pay-as-you-Go SKU Based Plan Based 4
- 5. There’s a Fundamentally New Way to Conduct Commerce BUY NOW # Units 1 Order Type One-Time On-Going Transactions Subscriptions 5
- 6. There’s Even a Fundamentally New Way to Think About Finance BUY NOW Σ $100 8 $100 n=1 One-Time Recurring Metrics Metrics 6
- 7. The Subscription Business Model is Built on Future Recurring Costs & Revenues ARRn – Churn + ACV = ARRn+1 You spend some % Hopefully you do a You invest to grow You start the You then end up at of that ARR to good job, and that ARR by acquiring period @ some a new ARR level as service the base minimize the amount new ACV (including recurring revenue you kick off the (COGS, G&A) and of that ARR that goes both new customers run rate next period to reinvest in R&D away and upsells) The metrics for Cloud computing are fairly different from traditional enterprise software. Top 10 Laws for Cloud Computing 7
- 8. But Today’s GL’s Don’t Speak This Language Income Statement For Period Ending December 31, 2011 Backwards Looking, Not Forwards Looking No Separation of Recurring vs. 1-Time No Concept of Subscription Metrics The Pre-Subscription Income Statement 8
- 9. Today’s GL’s Look Backwards, Not Forwards Income Statement For Period Ending December 31, 2011 Last Year This Year 9
- 10. Today’s GL’s Confuse One-Time and Recurring Items : Subscriptions Revenues 1x: Services 1x: Setup Fees : TechOps Expenses 1x: Marketing 1x: Sales 10
- 11. Today’s GL’s Give You Product, Not Subscription Metrics # Units # Customers Average Selling Price Customer Lifetime Value Annual Gross Revenue Recurring Profit Margins Gross Margins Growth Efficiency Close Rates Renewal & 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. 11 SaaS Showcase: Keeping the Customer Happy, July 11, 2010
- 12. The Subscription Economy Income Statement would start with ARR vs Revenue You start with an ARR level Annual Recurring Revenue $100 You anticipate Churn Churn (10) Net ARR 90 This gives you an expected income or COGS (20) cash flow to play with G&A (10) You spend to service the base R&D (20) Recurring Profit 40 This gives you your recurring profit margin Q: But what about Sales & Marketing? A: Sales & Marketing are one-time costs related to growing ARR 12
- 13. Your Choice: Spend on Growth or Take Profits Annual Recurring Revenue $100 Churn (10) Net ARR 90 COGS (20) G&A (10) R&D (20) Recurring Profit 40 Optimizing for Optimizing for Margins Growth Growth (Sales & Marketing) (10) (40) Net New ARR 10 40 Net Income $30 $0 Ending ARR $100 $130 13
- 14. Subscription Economy Companies Run Their Businesses With 3 Key Metrics Annual Recurring Revenue $100 Churn (10) Retention Rate Net ARR 90 COGS (20) G&A (10) R&D (20) Recurring Profit Recurring Profit 40 Margin Growth (40) Growth Efficiency Index Net New ARR 40 Net Income $0 Ending ARR $130 14
- 15. When looking at a Subscription Economy company, only these 3 metrics matter Retention Recurring Growth Rate Profit Margin Efficiency How much of ARR less Churn How much does your ARR you less Non-Growth it cost you to keep every year. Spend acquire $1 of ACV The metrics for Cloud computing is fairly different from traditional enterprise software. Top 10 Laws for Cloud Computing 15
- 16. A company with 1.0 / 90% / 40% can grow at 43% a year at 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) 16
- 17. Or it can have $0 growth, and have a net income of $30. 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 17
- 18. Benchmarking the SaaS Leaders 18
- 19. 2001 2002 2003 2004 Ending ARR $37 M $70 M $129 M $231 M Growth Efficiency 0.93:1 0.80:1 0.75:1 0.76:1 Renewals 83% 83% 83% 83% Recurring Profit 3% 41% 58% 61% Margin 19
- 20. 2004 2005 2006 2007 Ending ARR $22 M $43 M $71 M $105 M Growth Efficiency 2.02:1 1.65:1 1.28:1 1.26:1 Renewals 86% 86% 86% 86% Recurring Profit (27%) 6% 35% 47% Margin 20
- 21. 2006 2005 2008 2009 Ending ARR $40 M $73 M $108 M $147 M Growth Efficiency 1.41:1 1.90:1 2.15:1 1.62:1 Renewals 92% 92% 92% 92% Recurring Profit (29%) (16%) 19% 43% Margin 21
- 22. Best Practice Model Growth Efficiency 0.75:1 1.26:1 2.15:1 1:1 Renewals 83% 86% 92% 90% Recurring Profit 58% 47% 19% 50% Margin 22
- 23. How Do You Achieve the Ideal Model 23
- 24. (1) Maximize your Recurring Profit Margins 1 Automate Quote-to-Cash-to-Renewals Seamless, eliminate manual errors Take Credit Card Payments 2 No touch, bring cash in the door immediately 3 Drive Multi-Year Commitments Multi-Year Pricing Tiers, Term Discounts “How do you cost effectively service the base” 24
- 25. (2) Focus on sustaining high Retention Rates 1 Make Renewals Really Easy Auto-Renewals, Early Bird Renewal Incentives 2 Enable Your CSRs to Renew Customers Churn defense, ARR preservation 3 Prevent Churn with New Price Plans Monthly vs. Annual, Discounted, Lower Tiers “How much ARR you keep every year” 25
- 26. (3) Optimize your business for Growth Efficiency 1 Tune Your Pricing Strategies Freemium, Editions, Pay-as-you-Go, Tiers 2 Increase Total Customer Value Upsells, Cross-Sells, Add-ons 3 Make Doing Business Simple Self-Service, Promotions, Free Trials “How much does it cost you to acquire a $ of ACV” 26
- 27. Thank You! Tien Tzuo [email protected] 27
Editor's Notes
- #7: Yosh
- #12: Yosh
- #27: Invest in systems and a framework to produce a scalable and rentention maximizing account mgt function Reliance on systems will allow you to scale your biz without scaling G&A Every incremental $ spent should be rationalized based on hot it makes you more cost effective next year