The Business Model for the Subscription Economy (Accelerate East)
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The Business Model for the Subscription Economy (Accelerate East)
- 1. The Business Model For the Subscrip/on Economy Tyler Sloat CFO @TylerSloat 1 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 2. In The Subscrip:on Economy, Focus Is On Rela:onships BUY NOW Product 2 SUBSCRIBE Relationships Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 3. …Requiring a Completely Different Approach to Building Businesses. Product Economy Subscription Economy Mone,zing Customer Rela,onships Sell Units Why? Customer in the middle. Price Per Unit One-‐Time Orders Pay-‐as-‐you-‐Go Pricing Plans Why? Flexibility, Edi/ons, Try before Buy. Mul,ple Orders Over a Life,me Why? Add-‐ons, Upgrades, Renewals. Forced to Pick a Customer Segment Simple Financial Metrics Sell to Consumers & Businesses Why? Support B2C, B2B and B2Any. Complex, Interrelated Bookings, Billings, & Revenue Why? All metrics are connected. 3 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 4. This Approach is Best Represented by The Nine Keys When a Company executes against this model, it GROWS. That Growth is measured by the increase in RECURRING REVENUE. 4 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 5. But there’s a problem(s). We are s,ll using legacy financial formats to present our Company’s results and help our Execu,ves plan for the future. 5 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 6. Problem 1 Tradi:onal Income Statements are Backwards Income Statement For Period Ending December 31, 2012 6 Tradi,onal income statements measure income based on Zuora confidential, shared under non-disclosureade this past pnotice how much money you m and subject to disclaimer eriod.
- 7. Problem 2 Tradi:onal Income Statements are One-‐Time Focused Income Statement For Period Ending December 31, 2012 7 Tradi,onal income statements do not differen,ate one-‐,me from Zuora confidential, shared under non-disclosurer expenses. recurring revenue o and subject to disclaimer notice
- 8. Problem 3 Wall Stret Uses GAAP to Get the ARR & the Three Metrics… Imperfect Data Leads to Es:mates 8 Revenue is the only relevant growth informa,on in GAAP… Zuora confidential, is just a piece of the picture. notice but it shared under non-disclosure and subject to disclaimer
- 9. At Zuora, Annual Recurring Revenue (ARR) is the Cornerstone of our Business Model ARRn – Churn + ACV = ARRn+1 you start the period @ some recurring revenue rate 9 you do a good job & minimize the amount of ARR that goes away you invest in growing ARR by acquiring new ACV Zuora confidential, shared under non-disclosure and subject to disclaimer notice You then end up at a new ARR level, kicking off the next period
- 10. That Business Model is Centered on ARR and has Three Main components GROWTH Recurring Expense One Time Events 10 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 11. When ARR Governs the Business Model, Increasing ARR is Top Priority How Fast Can We Grow? Growth What Should We Spend? How Should We Measure? 11 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 12. While we invest in Growth, Disciplined Investment in all Recurring Func,ons is Paramount… What to include? Recurring Expense What is the right margin? But we need to innovate 12 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 13. Even if We Solve for Growth and Recurring, Without Predictability of any One Time the Model is at Risk! Can we predict? One Time Expenses Model impact? Who to own? 13 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 14. A new Income Statement & Three Metrics that represent the health of a business 14 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 15. The Subscrip:on Economy Income Statement First, Annual Recurring Revenue $100 Churn (10) Net ARR 90 COGS (20) Recurring Profit 15 giving you an expected recurring income (10) R&D you then an,cipate churn… (20) G&A you begin w/ ARR… 40 you spend to service the base Zuora confidential, shared under non-disclosure and subject to disclaimer notice giving you your recurring profit margin
- 16. So, then your Three Metrics That MaPer are… Annual Recurring Revenue Churn $100 (10) Net ARR 90 COGS (20) G&A (10) R&D (20) Recurring Profit Recurring Profit Margin Growth Expense Net New ARR Ending ARR 16 Reten,on Rate 40 Recurring Profit Margin 40% (40) 40 $130 Zuora confidential, shared under non-disclosure and subject to disclaimer notice Growth Efficiency Index
- 17. The Three Metrics That MaPer Tell Us Everything Retention Rate Recurring Profit Margin Growth Efficiency How much of your ARR you keep every year Entering ARR less annualized Non-‐growth spend How much does it costs to acquire $1 of ACV The metrics for Cloud computing is fairly different from traditional enterprise software. 17 Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 18. Expanding the Three Metrics Annual Recurring Revenue Retention Rate Recurring Profit Margin Growth Efficiency How much of your ARR you keep every year Entering ARR less annualized Non-‐growth spend How much does it costs to acquire $1 of ACV Professional Services 18 Cash Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 19. Your Calcula,ons… ARR Entering ARR + New ACV - Churn = EXITING ARR Growth Efficiency Sales & Marketing Expense / New ACV Recurring Profit Margin (Entering ARR – COGS – G&A – R&D) / 19 Entering Zuora confidential, shared under non-disclosure and subject to disclaimer notice ARR
- 20. How Are You Calcula,ng Your GEI? Sales Mgmt Web Visits Inbound & Outbound Events + Marke,ng Sales Ops SDRs AEs Sales BD ACV 20 Zuora confidential, shared under non-disclosure and subject to disclaimer notice ? Acct Mgmt
- 21. Reten,on Churn 21 Increase Increase Usage Usage Go Live Close Deal Churn Churn Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 22. Recurring Profit Margin ARR Tech Ops Acct Mgmt/Support Total COGS Eng/Qa Product Total R&D Finance/Ops HR Total G&A Recurring Expense Recurring Profit Margin 22 Last Year $90 13% 7% 20% 22% 8% 30% 14% 6% 20% 70% 30% $ 12 $ 6 $ 18 $ 20 $ 7 $ 27 $ 13 $ 5 $ 18 Next Year $135 11% 7% 18% 18% 7% 25% 12% 5% 17% 60% 40% Zuora confidential, shared under non-disclosure and subject to disclaimer notice $ 15 $ 9 $ 24 $ 24 $ 9 $ 34 $ 16 $ 7 $ 23
- 23. Now, Opera,onalize It CFO W ebinar Starting ARR Bookings PS Churn Live Churn/Ramp Net ARR Growth Ending ARR FY11 35,200 15,864 (350) (2,656) 12,858 48,058 FY12 48,058 25,977 (1,661) (3,294) 21,023 69,080 Q1 FY13 69,080 9,139 (520) (1,036) 7,582 76,662 ARR Growth Rate S&M Spend Non-‐S&M Spend 37% 44% 17,450 27,276 9,139 21,085 31,447 9,499 Q2 FY13 76,662 10,052 (598) (1,150) 8,304 84,967 10,052 10,541 Q3 FY13 84,967 11,058 (688) (1,274) 9,095 94,062 11,058 11,683 Pre S&M margin 40% 35% 45% 45% 45% GEI 1.10 1.05 1.00 1.00 1.00 PS Churn (off prior bookings) 13% 10% 10% 10% 10% Live Churn (Annualized) 8% 7% 6% 6% 6% Cash In Cash Out Net Cash Ending Cash 23 41,348 (38,535) 2,813 25,313 57,528 (58,723) (1,195) 24,118 18,218 (18,637) (419) 23,699 20,204 (20,593) (390) 23,309 22,379 (22,741) (362) 22,947 Zuora confidential, shared under non-disclosure and subject to disclaimer notice Q4 FY13 94,062 12,163 (791) (1,411) 9,961 104,023 FY13 69,080 42,412 (2,598) (4,872) 34,943 104,023 12,163 12,933 51% 42,412 44,656 45% 1.00 10% 6% 35% 1.00 10% 7% 24,761 (25,097) (336) 22,610 85,561 (87,068) (1,507) 22,610
- 24. Detailed Modeling L2 Growth Formula #Aes on Jan 31, 2013 NA ROW NA ROW NA ROW APAC Total / Emerging Emerging Commercial Commercial Enterprise Enterprise Enterprise Average 10 8 12 10 12 8 4 64 Annual Quota $800k $800k $1,100k $1,100k $1,600k $1,600k $1,600k $1,203k Qtrly Quota $200k 4.0 $200k 4.0 $275k $275k $400k $400k $400k $301k 2.8 2.8 2.0 2.0 2.0 2.8 $50.0k $50.0k $100k $100k $200k $200k $200k $123.4k Annual Base Salary $63k $63k $85k $85k $125k $125k $125k $94k Annual OTE $125k $125k $170k $170k $250k $250k $250k $187k AE: SE 5 5 3 3 2 2 2 AE: ZBR 1 1 2 2 2 2 2 AE: Mgr 7 7 6 6 6 6 6 $5,246k $4,409k $7,496k $4,498k $2,549k $31,483k # Deals / Qtr ASP Total Annual Sales Cost Mktg % of Sales $4,247k $3,038k 75% 75% 75% 75% 75% 75% 75% Total Annual Mktg Costs $3,185 $2,278k $3,935k $3,307k $5,622k $3,373k $1,912k $55,094k Total Growth Costs (Feb 1) $7,432k $5,316 $9,181k $7,716k $13,118k $7,871k $4,460k $55,094k Total Corp Capacity $5,760k $4,608 $9,504 $7,920k $12,824k $9,216k $4,608k $55,440k Implied GEI (Feb 1) 24 75% 1.3 1.2 1.0 1.0 0.9 0.9 1.0 1.0 Expecta,on should be that these might shig based on maturity oZuoraegion, type of sale and maturity of market. f r confidential, shared under non-disclosure and subject to disclaimer notice
- 25. Report and Measure PADRE / PPM Pipeline Acquire • Web • Social • AR / PR • Events • Product Launches • Demand Gen Deploy • Field Enablement • BD • Emerging • Enterprise • Int’l • Sales Eng. • Self Service • Squads • Partners • Methodology Run Expand • Tech Ops • Support • Renewals • Account Management • Adoption • Training Product • PM / PMM • R&D • Docs People • Recruiting • Onboarding • Training • Help Desk Money • Finance • Operations • Legal 25 Zuora confidential, shared under non-disclosure and subject to disclaimer notice • Upsell • Expansion
- 26. Report and Measure Bookings Billings REPORT: What Happened Accounts Receivable Cash Revenue Deferred Revenue Backlog 26 Zuora confidential, shared under non-disclosure and subject to disclaimer notice FORECAST: What to Expect
- 27. The CFO Perspec:ve Meet The Panelists Chartbeat Antonia Abraham, CFO Bazaarvoice Marisa Massie, Controller @marisamassie Zuora Tyler Sloat, CFO 27 @tsloat Zuora confidential, shared under non-disclosure and subject to disclaimer notice
- 28. END 28 Zuora confidential, shared under non-disclosure and subject to disclaimer notice