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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
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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
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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
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?
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
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
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• Upsell
• Expansion
26. Report
and
Measure
Bookings
Billings
REPORT:
What
Happened
Accounts
Receivable
Cash
Revenue
Deferred
Revenue
Backlog
26
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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