the only 3 saas metrics that matter
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The Only Three Saas Metrics That Matter
Tyler SloatZuora, CFO
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ARRn – Churn + ACV = ARRn+1
The Basic Business Model of the Subscription Economy
You start the period @ some
recurring revenue run rate
You then end up at a new ARR level as
you kick off the next period
You spend some % of that ARR to
service the base (COGS, G&A) and to reinvest in R&D
You invest to grow that ARR by acquiring new ACV (including
both new customers and upsells)
Hopefully you do a good job, and
minimize the amount of that ARR that goes
away
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Problem: TraditionalFinancial SystemsHave Not Kept Up
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Problem #1: Traditional Income Statements are Backward Looking
Income StatementFor Period Ending December 31, 2011
Traditional income statements measure revenue based on how much money you made this past period
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Problem #2: Traditional Income Statements are One-Time Focused
Income StatementFor Period Ending December 31, 2011
Traditional income statements do not differentiate one-time from recurring revenue or expenses
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The Subscription Economy Income Statement would start with ARR vs Revenue
Annual Recurring Revenue $100
Churn (10)
Net ARR 90
COGS (20)
G&A (10)
R&D (20)
Recurring Profit 40
Q: But what about Sales & Marketing?A: Sales & Marketing are one-time costs related to growing ARR
You start with an ARR level
You anticipate Churn
This gives you an expected income or
cash flow to play with
You spend to service the base
This gives you your recurring profit margin
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Investing for Margin vs Investing for 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
Optimizing for Margins
Optimizing for Growth
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The Three Key Metrics
Annual Recurring Revenue $100
Churn (10)
Net ARR 90
COGS (20)
G&A (10)
R&D (20)
Recurring Profit 40
Growth (40)
Net New ARR 40
Ending ARR $130
Retention Rate
GrowthEfficiency Index
Recurring ProfitMargin
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When looking at a Subscription Economy company, only these 3 metrics matter
ARR less Churn less Non-Growth
Spend
Recurring Profit Margin
How much of your ARR you
keep every year.
How much does it cost you to acquire $1 of
ACV
RetentionRate
Growth Efficiency
The metrics for Cloud computing is fairly different from traditional enterprise software. Top 10 Laws for Cloud Computing
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A company with 1.0 / 90% / 40% can grow at 43% a year at breakeven
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Or it can have $0 growth, and have a net loss of $30.
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Benchmarking the SaaS Leaders
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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%
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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%
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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%
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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
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How Do You Achieve the Ideal Model
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1
2
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(1) Maximize your Recurring Profit Margins
“How do you cost effectively service the base”
Take Credit Card Payments No touch, bring cash in the door immediately
Automate Quote-to-Cash-to-Renewals Seamless, eliminate manual errors
Drive Multi-Year Commitments Multi-Year Pricing Tiers, Term Discounts
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1
2
3
(2) Focus on sustaining high Retention Rates
“How much ARR you keep every year”
Make Renewals Really Easy Auto-Renewals, Early Bird Renewal Incentives
Enable Your CSRs to Renew CustomersChurn defense, ARR preservation
Prevent Churn with New Price Plans Monthly vs. Annual, Discounted, Lower Tiers
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Tune Your Pricing Strategies Freemium, Editions, Pay-as-you-Go, Tiers 1
2
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(3) Optimize your business for Growth Efficiency
“How much does it cost you to acquire a $ of ACV”
Increase Total Customer Value Upsells, Cross-Sells, Add-ons
Make Doing Business Simple Self-Service, Promotions, Free Trials
