Finance departments will no doubt change the way they measure their business when shifting from the old world of chasing after each and every dollar to this new world of monetizing relationships. Get the low down on the 3 most important Subscription Metrics for your business.
10. Annual Recurring Reven
forward looking
ARR is the amount of revenue you expect to
repeat. This is different than revenue. Revenue
is backwards looking while ARR is forward
looking.
Annual Recurring Revenue
11. New Revenue
ACV is your new revenue brought in by
new customers or customers upgrading
or renewing their existing contract.
Ultimately, this drives your ARR. And
we like this.
Annual Contract Value
12. Churn
When Customers Leave You
Even if you have the hottest service offering
out there, you’ll still have customers leave
you. This is important to subtract from your
ARR.
Customer downsells…
Competitive loss…
Business failure…
Churn
13. The 3 Metrics…
that will keep you up at night.
Growth Efficiency Churn Rate Recurring Profit Margin
14. Annual Recurring Revenue
Churn
Net ARR
COGS
G&A
R&D
Recurring Profit
Growth
Net New ARR
Net Income
Ending ARR
$100
($10)
$90
($20)
($10)
($20)
$40
($40)
$40
$0
$130
Retention Rate
Recurring Profit Margin
Growth Efficiency Index
The 3 Metrics…
15. “How much new recurring revenue can we
get out of a given investment?”
What’s my strategy?
Spend at least enough money to replace
your customers churned. With what’s left,
you have to decide to book as profits or
invest in growth.
“How much of our recurring revenue should
we invest in growth?”
Growth Efficiency Index
16. Churn Rate
“What’s the minimum new business I need to
stay viable?”
Connecting GEI & Churn
If your GEI is 2:1 (spend $2 to generate $1
of ACV) and your churn rate is 30%, you’ll
be losing that 30% of your business well
before you recover the 2 years of ACV it
cost to acquire them.
17. Recurring Profit Margins
“What’s left to invest in growth after COGs
are taken care of?”
Your strategy…
The lower the recurring costs, the more
money you have to play with – book as
profit or invest back in growth.
18. Let’s apply this to the
real world with some
good old fashion
benchmarking.
23. Summary
1 The new economy focuses on relationships, not products
2
Efficient acquisition and retention of those relationships is
critical to success
3
Running a disciplined business model based on the three
metrics will generate long-term shareholder value
25. We build modern, flexible and easy to use enterprise software
that enables companies to manage all aspects of their
relationship with their subscribers.
25
26. Offices: Silicon Valley, Boston, Atlanta, London, Paris, Munich, Sydney, Beijing
95%
Customer Sat
Awards
500
Employees
Founded
2007
$132.5M
Funding
70+
Monthly Product
Releases
$100M+
Approaching
Run Rate
500+
Customers
80
Public Companies
ALWAYSON
Company of the Year
STEVIE (GOLD)
Customer Service Excellence
CODiE
Best Subscription
Management Solution
$1.7B
In Quarterly
Transaction Volume
27. TELECOM MEDIA & PUBLISHING TECHNOLOGY
CONSUMER
SERVICES
INTERNET OF THINGS
We power the Subscription Economy
28. tailored pricing
subscription journey
multi-channel
revenue recognition
subscription metrics
smart accounting
branded touch points
global payments
scale & automation
COMMERCE BILLING FINANCE
Z-BUSINESS
Relationship Business Management Solution
Mission Critical System of Record
SCALE RELIABILITY TRANSPARENCY SECURITY CONTROL COEXISTENCE
BUILT ON THE Z-BUSINESS PLATFORM
The Principles of the Subscription experience
These core 5/5 pillars = personal relationships
The role of the helper is best
Whatever happens, you need to solve your subscription problems quickly
With the shift from measuring your business by tracking products sold to managing relationships…
Requires an entirely new business model…
Annual Recurring Revenue, or ARR, is the amount of revenue you expect to repeat. It’s that simple. Note that, this does not include one time revenue, it only includes revenues that recur. And with that said, ARR is different than revenue. Revenue is a backwards looking number while ARR is a forward looking number -- emphasis on “Recurring” in ARR.
The Problem? Well, your traditional financial statements is that they only show revenue for a past period and have no concept of recurring, forward looking revenue. But for Subscription Economy companies, because of ARR, they can actually start each fiscal year knowing what their revenues are going to be for that year. In the formula above, we call this Starting ARRn.
Annual Contract Value (or ACV) is your new revenue brought in by new customers or customers upgrading or renewing their existing contract. You invest in sales and marketing to drive new revenue, because ultimately this increases your ARR. And we like that.
If you add up all of these metrics, you not only have a complete financial picture of your subscription business, but you also have your recurring revenue for next year or you’re Ending ARR.
What’s next in the Subscription Finance 101 series? Traditional ERP systems limit your relationships. Discover the gaps your existing system has when it comes to optimizing customer relationships
I’d assume that most of you understand churn, but in it’s simplest sense, churn is the number (often noted in revenue) of subscribers who will not renew.
Typically, downsells are also factored into your churn number. It’s a hard reality to swallow, but even if you’ve got the best service offering in the market, you’ll still have customers that leave you. So, in the formula you’ll need to subtract your churn from your ARR for the year.
At Zuora, we first look at growth. How much do we want to grow and what will cost the business? Basically, your growth efficiency index, or GEI. After we’ve achieved our GEI, we then move to churn followed by recurring profit margin.
And then this becomes a cycle...do we want to invest? Great! This means we can grow at an even faster rate by accepting a higher GEI.
Lets actually dive deeper in these three metrics, and why they’re so critical to leverage when determining the success of your business.
For the sake of making this clear and simple, let’s say you’re a b2b SaaS model and start off the year with a $100. Now, using these 3 metrics, lets trace what happens over the course of the year.
As I mentioned earlier, we start by asking ourselves “How much new recurring revenue can we get out of a given investment?” Lets say you spend $1 on sales and marketing. How many new recurring revenue dollars does that buy you? This is your Growth Efficiency index.
Another question you’ll ask -- “How much of our recurring revenue should we invest in growth?” If you’re smart, you know that at a minimum, you’re going to spend at least enough money to replace the customers churned. In this case, $10. Which leaves you with $30.
Do we take the $30 off the table and book as profits? A 30% annual profit margin isn’t bad. Then again, we won’t see any growth. Instead, let’s be bullish and invest all $30 in growth. With a Growth
Efficiency rate of 1:1 you’ll book $30 in net new recurring revenue over the course of the year, leaving us with $130 in Annual Recurring Revenue to the next year.
If you run this play year over year, you’re growing by 30% annually. But with an infusion in capital, you’ll have more than $30 to invest in fueling that growth, as long as you maintain an efficient Growth Efficiency ratio. When the time comes to finally start taking profits, you’re working off of a much bigger recurring revenue stream.
Recurring Profit Margins are simply the difference between your recurring revenues and your recurring costs. Leveraging this metric is critical. Why? The higher the recurring costs, the less money you have to play with -- aka, book as profits or invest in one-time growth expenses. Let’s put it to use, in our example. You’ve now got $90 to play with. But there’s some natural, recurring business costs that will eat away at that number pretty quickly.
You’re going to spend money to deliver your service so that you can earn the recurring revenue you’ll need to grow your business, aka COGS (Cost of Goods Sold). For a SaaS company, an example of a COGS would be the cost to maintain your data center. Let’s say you spend $20 here.
There’s also, General and Administrative (G&A) costs just to keep the lights on -- literally. Things like rent for your office space and paying your finance team. Let’s say you spend $10 here. And what about Research & Development (R&D). Not typically a recurring cost, but we’ve seen that most companies’ R&D organizations don’t fluctuate wildy over time, unlike departments like Marketing. Let’s budget $20 for your recurring R&D.
I’m sure you’re already ahead of me in the calculations, but these recurring costs have left you with $40, or a 40% recurring profit margin. And then the cycle begins again -- now you know how much you can invest back in growth or book in profits for the year.
Set the stage by clearly stating what Zuora sells
It’s a real company with significant size and traction. This cannot be easily replicated
Drill down on what commerce, billing and finance entails
This is modern software, our customers use us because we are flexible and scalable, but changes can also be made in real time