the business model for the subscription economy (accelerate east)

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The Business Model For the Subscrip/on Economy Tyler Sloat CFO

@TylerSloat


In The Subscrip:on Economy, Focus Is On Rela:onships

Product Relationships

BUY NOW SUBSCRIBE


…Requiring a Completely Different Approach to Building Businesses.

Sell Units

Product Economy Subscription Economy

Mone,zing Customer Rela,onships Why? Customer in the middle.

Forced to Pick a Customer Segment

Price Per Unit

One-‐Time Orders

Simple Financial Metrics

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.

Sell to Consumers & Businesses Why? Support B2C, B2B and B2Any.

Complex, Interrelated Bookings, Billings, & Revenue Why? All metrics are connected.


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.


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.


Problem 1 Tradi:onal Income Statements are Backwards

Income Statement For Period Ending December 31, 2012

Tradi,onal income statements measure income based on how much money you made this past period.


Problem 2 Tradi:onal Income Statements are One-‐Time Focused

Income Statement For Period Ending December 31, 2012

Tradi,onal income statements do not differen,ate one-‐,me from recurring revenue or expenses.


Problem 3 Wall Stret Uses GAAP to Get the ARR & the Three Metrics… Imperfect Data Leads to Es:mates

Revenue is the only relevant growth informa,on in GAAP… but it is just a piece of the picture.


At Zuora, Annual Recurring Revenue (ARR) is the Cornerstone of our Business Model

ARRn – Churn + ACV = ARRn+1

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


That Business Model is Centered on ARR and has Three Main components

Recurring Expense

GROWTH

One Time Events


When ARR Governs the Business Model, Increasing ARR is Top Priority

Growth

How Fast Can We Grow?

What Should We

Spend?

How Should We Measure?


While we invest in Growth, Disciplined Investment in all Recurring Func,ons is Paramount…

Recurring Expense

What to include?

What is the right

margin?

But we need to

innovate


Even if We Solve for Growth and Recurring, Without Predictability of any One Time the Model is at Risk!

One Time Expenses

Can we predict?

Model impact?

Who to own?


A new Income Statement &

Three Metrics that represent the health of a business


The Subscrip:on Economy Income Statement

giving you your

recurring profit margin

you spend to service the base

First, you begin w/ ARR…

you then an,cipate churn…

giving you an

expected recurring income

Annual Recurring Revenue $100

Churn (10)

Net ARR 90

COGS (20)

G&A (10)

R&D (20)

Recurring Profit 40


So, then your Three Metrics That MaPer are…

Annual Recurring Revenue $100

Churn (10)

Net ARR 90

COGS (20)

G&A (10)

R&D (20)

Recurring Profit 40

Recurring Profit Margin 40%

Growth Expense (40)

Net New ARR 40

Ending ARR $130

Reten,on Rate

Recurring Profit Margin

Growth Efficiency Index


The Three Metrics That MaPer Tell Us Everything

The metrics for Cloud computing is fairly different from traditional enterprise software.

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

Retention Rate


Growth Efficiency


Expanding the Three Metrics

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

Annual Recurring Revenue

Professional Services Cash

Retention Rate


Growth Efficiency


Your Calcula,ons…

Entering ARR + New ACV - Churn = EXITING ARR

ARR

Growth Efficiency

Sales & Marketing Expense / New ACV


(Entering ARR – COGS – G&A – R&D) / Entering ARR


How Are You Calcula,ng Your GEI?

Web Visits

Inbound & Outbound Events

Sales Mgmt

Sales Ops

AEs BD

SDRs

Marke,ng Sales

+

ACV

Acct Mgmt ?


Reten,on

Churn

Go Live

Increase Usage

Close Deal

Churn

Increase Usage

Churn



Last Year Next YearARR $90 $135

Tech Ops 13% 12$ 11% 15$ Acct Mgmt/Support 7% 6$ 7% 9$

Total COGS 20% 18$ 18% 24$ Eng/Qa 22% 20$ 18% 24$ Product 8% 7$ 7% 9$

Total R&D 30% 27$ 25% 34$ Finance/Ops 14% 13$ 12% 16$

HR 6% 5$ 5% 7$ Total G&A 20% 18$ 17% 23$

Recurring Expense 70% 60%Recurring Profit Margin 30% 40%


Now, Opera,onalize It

CFO Webinar FY11 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 FY13Starting ARR 35,200 48,058 69,080 76,662 84,967 94,062 69,080 Bookings 15,864 25,977 9,139 10,052 11,058 12,163 42,412 PS Churn (350) (1,661) (520) (598) (688) (791) (2,598) Live Churn/Ramp (2,656) (3,294) (1,036) (1,150) (1,274) (1,411) (4,872)

Net ARR Growth 12,858 21,023 7,582 8,304 9,095 9,961 34,943 Ending ARR 48,058 69,080 76,662 84,967 94,062 104,023 104,023 ARR Growth Rate 37% 44% 51%S&M Spend 17,450 27,276 9,139 10,052 11,058 12,163 42,412 Non-‐S&M Spend 21,085 31,447 9,499 10,541 11,683 12,933 44,656

Pre S&M margin 40% 35% 45% 45% 45% 45% 35%GEI 1.10 1.05 1.00 1.00 1.00 1.00 1.00PS Churn (off prior bookings) 13% 10% 10% 10% 10% 10% 10%Live Churn (Annualized) 8% 7% 6% 6% 6% 6% 7%

Cash In 41,348 57,528 18,218 20,204 22,379 24,761 85,561 Cash Out (38,535) (58,723) (18,637) (20,593) (22,741) (25,097) (87,068) Net Cash 2,813 (1,195) (419) (390) (362) (336) (1,507) Ending Cash 25,313 24,118 23,699 23,309 22,947 22,610 22,610


Detailed Modeling

Expecta,on should be that these might shig based on maturity of region, type of sale and maturity of market.

L2 Growth Formula NA

Emerging ROW

Emerging NA

Commercial ROW

Commercial NA

Enterprise ROW

Enterprise APAC

Enterprise Total / Average

#Aes on Jan 31, 2013 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 $200k $275k $275k $400k $400k $400k $301k

# Deals / Qtr 4.0 4.0

2.8 2.8 2.0 2.0 2.0 2.8

ASP $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

Total Annual Sales Cost $4,247k $3,038k $5,246k $4,409k $7,496k $4,498k $2,549k $31,483k

Mktg % of Sales 75% 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) 1.3 1.2 1.0 1.0 0.9 0.9 1.0 1.0


Report and Measure

Product

People • Recruiting • Onboarding • Training • Help Desk

Money • Finance • Operations • Legal

• PM / PMM • R&D • Docs

Pipeline Acquire Deploy Run Expand • Field Enablement • BD • Emerging • Enterprise • Int’l • Sales Eng.

• Self Service • Squads • Partners • Methodology

• Tech Ops • Support • Renewals • Account Management

• Adoption • Training

• Upsell • Expansion

• Web • Social • AR / PR • Events • Product Launches

• Demand Gen

PADRE / PPM


Report and Measure

Bookings

Billings

Cash

Revenue

Deferred Revenue

Backlog

Accounts Receivable REPORT:

What Happened

FORECAST:

What to Expect


The CFO Perspec:ve Meet The Panelists

Bazaarvoice Marisa Massie, Controller

Chartbeat Antonia Abraham, CFO

@marisamassie

Zuora Tyler Sloat, CFO

@tsloat


END

the business model for the subscription economy (accelerate east)

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