1. The Only Three Saas
Metrics That Matter
Tyler Sloat
Zuora, CFO
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2. The Basic Business Model of the Subscription Economy
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)
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3. Problem: Traditional
Financial Systems
Have Not Kept Up
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4. Problem #1:
Traditional Income Statements are Backward Looking
Income Statement
For Period Ending December 31, 2011
Traditional income statements measure revenue based
on how much money you made this past period
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5. Problem #2:
Traditional Income Statements are One-Time Focused
Income Statement
For Period Ending December 31, 2011
Traditional income statements do not differentiate
one-time from recurring revenue or expenses
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6. 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
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7. Investing for Margin vs Investing for Growth
Optimizing for Optimizing for
Margins Growth
Annual Recurring Revenue $100 $100
Churn (10) (10)
Net ARR 90 90
COGS (20) (20)
G&A (10) (10)
R&D (20) (20)
Recurring Profit 40 40
Growth (10) (40)
Net New ARR 10 40
Ending ARR $100 $130
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8. The Three 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
Ending ARR $130
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9. 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
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10. 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)
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11. Or it can have $0 growth, and have a net loss 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
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12. Benchmarking the SaaS Leaders
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13. 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
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14. 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
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15. 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
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16. 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
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17. How Do You Achieve the
Ideal Model
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18. (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”
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19. (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”
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20. (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”
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21. Thank You!
Tyler Sloat
tyler.sloat@zuora.com
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