Marketplace and Quality Assurance Presentation - Vincent Chirchir
The Only 3 Metrics That Matter in the Subscription Economy
1. Slide 1 − Zuora Confidential, not for distribution beyond intended recipientSlide 1 − Zuora Confidential, not for distribution beyond intended recipient
Why Zuora
Zuora Provides a BluePrint to Succeed in the Subscription
Economy!
The Only 3 Metrics
That Matter
T ien Tzu o, Co - Fou n d er & CEO
intheSubscriptionEconomy
t i e n @ z u o ra . c o m | @ t i e n t z u o
2. Confidential and Proprietary Information. Do not distribute beyond intended audience.
Five+ Years of Incredible Growth
Zuora founded
Series A; First
product launched
Series B, Zuora
featured in WSJ
Series C; Zuora
announces 1B in
contracted revenue
Series D,
Trademarks
Subscription
Economy; EMEA
expansion
Zuora wins
AlwaysOn Company
of the Year Award;
expands to Asia
TheLeaderinCommerce,BillingandFinance
SolutionsfortheSubscriptionEconomy
2
Zuora celebrates 50
product releases;
$15.5Bn contracted
invoice volume
2013201220112010200920082007
Offices: Silicon Valley, London, Sydney, Beijing, Chicago, Atlanta
$82M
Funding
500+
Customers
250+
Employees
95%
Customer Sat
3. Confidential and Proprietary Information. Do not distribute beyond intended audience.
A World of Innovations…
… All Offered as a Service
Qualcomm
Pettracker Box HP CloudAmex
The Times of
London Nest Kaplan AT&T Dollar Shave
Club
Swiss Car Club Xplornet Lowes IRISDriveCam
4. Confidential and Proprietary Information. Do not distribute beyond intended audience.
We Call This Shift the Subscription Economy
The Past The Future
BUY NOW Subscribe
5. Confidential and Proprietary Information. Do not distribute beyond intended audience.
BUY NOW SUBSCRIBE
Relationships
(Long-term, adoption, loyalty)
Growth Model Sell Units
Fixed, SKU Based
One-Time Transactions
Backwards Looking Metrics
Pricing Model
Flexible, Plan Based
(Editions, Bundles, Usage)
Commerce Model
Financial Model
This is a Completely Different Business Model
Recurring
(upgrades, add-ons, renewals)
Forward Looking
(ARR, MRR, Churn, Renewals)
6. Slide 6 − Zuora Confidential, not for distribution beyond intended recipient
You then end up
at a new ARR
level, kicking off
the next period
you invest in
growing ARR by
acquiring new
ACV
you do a good
job & minimize
the amount of
ARR that goes
away
you start the
period @ some
recurring
revenue rate
The Subscription Economy Business Model
7. Slide 7 − Zuora Confidential, not for distribution beyond intended recipient
1494 A.D.
Luca Bartolomeo Pacioli
Inventor of the system of
Double Entry
Bookkeeping
8. Slide 8 − Zuora Confidential, not for distribution beyond intended recipient
A $100 is a $100 is a
$100. The rules say it
all goes in the same
bucket.
Youneedtodifferentiatebetweenone-timeand
recurringamounts.
The Problem:
“ “
9. Slide 9 − Zuora Confidential, not for distribution beyond intended recipient
The rules don’t allow
me to spread these
amounts over time.
Now you’re just being
a rebel.
You want to spread revenue over time.
The Problem:
“ “
10. Slide 10 − Zuora Confidential, not for distribution beyond intended recipient
Your system doesn’t know what to do when
subscriptions change.
The Problem:
I don’t have a rule for
that. You’ve got
yourself into quite a
mess…
“ “
11. Slide 11 − Zuora Confidential, not for distribution beyond intended recipient
• Growing finance staffs
• Impossible to accurately
benchmark companies
• Lack of transparency
Thereturntospreadsheets…
The Result:
• Lack of information visibility
• Two sets of books
12. Slide 12 − Zuora Confidential, not for distribution beyond intended recipient
Lack of transparency on the most important
financial metrics…
Page 11
The Result:
13. Slide 13 − Zuora Confidential, not for distribution beyond intended recipient
And Wall Street fails to value subscription
businesses correctly…
“CRM shares look heavily overvalued
because rising revenue growth has actually
translated to falling net income.
“Maybe CEO Marc Benioff will one day be able to translate all
of this low-margin selling into huge profits, but for now it
kind of looks more like the Napster model than the iTunes
model, and that concerns us.
The Result:
“
“
14. Confidential and Proprietary Information. Do not distribute beyond intended audience.
giving you
your
recurring
profit margin
you spend to
service the
base
First,
you begin w/
ARR…
you then
anticipate
churn…
giving you an
expected
recurring
income
The Subscription Economy Income Statement
15. Confidential and Proprietary Information. Do not distribute beyond intended audience.
Margin Growth
You then get
to decide
what to do
with your
profit
Optimizing for Margin vs Growth
16. Confidential and Proprietary Information. Do not distribute beyond intended audience.
Retention
Rate
Recurring
Profit
Margin
Growth
Efficiency
Index
So, Then the 3 Metrics That Matter Are…
17. Slide 17 − Zuora Confidential, not for distribution beyond intended recipient
Top 10 Laws for Cloud Computing
How much of
your ARR you
keep every year
How much
margin to you
have left to
invest in
Growth
How much
does it costs to
acquire $1 of
ACV
Retention
Rate
Recurring Profit
Margin
Growth
Efficiency
The metrics for Cloud computing is fairly
different from traditional enterprise
software. - Top 10 Laws for Cloud Computing
The 3 Metrics That Matter Tell Us Everything
“ “
18. Confidential and Proprietary Information. Do not distribute beyond intended audience.
A company with 1.0 / 90% / 40% can grow
at 43% a year a 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)$
19. Confidential and Proprietary Information. Do not distribute beyond intended audience.
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$
Or it can have $0 growth, and have a net income of $30.
20. Slide 20 − Zuora Confidential, not for distribution beyond intended recipient
Benchmarking the
SaaS Leaders
Benchmarking the
SaaS Leaders
21. Confidential and Proprietary Information. Do not distribute beyond intended audience.
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%
22. Confidential and Proprietary Information. Do not distribute beyond intended audience.
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%
23. Confidential and Proprietary Information. Do not distribute beyond intended audience.
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%
24. Confidential and Proprietary Information. Do not distribute beyond intended audience.
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
25. Slide 25 − Zuora Confidential, not for distribution beyond intended recipient
Top 10 Laws for Cloud Computing
How much of
your ARR you
keep every year
How much
margin to you
have left to
invest in
Growth
How much
does it costs to
acquire $1 of
ACV
Retention
Rate
Recurring Profit
Margin
Growth
Efficiency
The metrics for Cloud computing is fairly
different from traditional enterprise
software. - Top 10 Laws for Cloud Computing
The 3 Metrics That Matter
“ “
26. Slide 26 − Zuora Confidential, not for distribution beyond intended recipient
Tien Tzuo
tien@zuora.com
@tientzuo
Thank
you.
Let me tell you a little bit about our companyWe were founded just over 5 years ago by visionaries from Salesforce and WebexWe’ve received a total of $82M in funding We have over 500 customers, 250+ employees ,and we are proud to maintain a 95% customer satisfaction ratio across our customer baseAnd we deliver our products monthly: an unprecedented pace of innovation even for the SaaS world. And just this May we celebrated our 50th product release.
It started with SaaS and cloud companies, but today, this shift has gained momentum across all industries. Business and consumers can now subscribe to anything. Gartner predicts that by 2015 35% of all the global 2000 companies will generate revenues through subscription based services and revenue models
I’d like to tell you a little about a major shift we’re seeing in the market that you yourselves are a part of. Over the past few years we’ve seen a seismic shift where businesses are now focusing their growth strategies around monetizing long term relationships rather than shipping products. This shift has been brought about by a growing preference of businesses and consumers to subscribe to services, rather than buy products. We call this the Subscription Economy, and in fact Zuora was the first company to coin this phrase and we even trademarked it in 2011.
The shift to the Subscription Economy brings with it the need for a completely different approach to building your business.It changes how you think about your growth model. Instead of growing by shipping more units, your growth model is based on monetizing long term relationshipsInstead of fixed, SKU based pricing models, your pricing needs to be flexible, plan based pricing.Instead of a commerce that consists of a discrete one time transactions, your commerce model is now a series of recurring interlinked transactionsInstead of financial metrics that are backwards looking and focused on past performance, your financial model is heavily reliant on forward looking metrics that give insight into future recurring revenue.
Around 1494, a monk in Venice by the name of Luca Pacioli wrote a book that defined a a system for merchants to record their business. That system was the “double entry accounting system”, and his book on it is the first known published text on this method of accounting. The double entry accounting system is THE cornerstone of modern day accounting.
And this system has worked! From the merchants of Venice, to the modern day CFO, everyone uses this.
The month end close process for subscription companies spans multiple time dimensions. You’re dealing with items billed in advance, billed in arrears, and mid-month cancellations …
Revenue recognition has become much harder. We’re not recognizing a known value over a fixed period of time. We’re recognizing a subscription that spans multiple dimensions of time, creates a series of transactions, and is constantly changing.
And this system has worked! From the merchants of Venice, to the modern day CFO, everyone uses this.
And this system has worked! From the merchants of Venice, to the modern day CFO, everyone uses this.
And this system has worked! From the merchants of Venice, to the modern day CFO, everyone uses this.