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The Only Three Saas Metrics That Matter

Tien TzuoZuora, Founder & CEO

April 2012

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Zuora Was Built on the Prediction of a “Subscription Economy”

1999 2012+

BUY NOW

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Today, Subscriptions are Everywhere

Technology Transportation Retail Music

Video Voice Legal?

A

Healthcare

By 2015, 35% of Global 2000 companies will generate revenue through subscription-based services and revenue models.

April 2011: Building a Strategy for the Subscription Economy

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Price $29.99Price * Unit

Editions

One-Time Fees

Recurring Fees

Usage Fees

Free Trials

Bundles

Pay-as-you-Go

There’s a Fundamentally New Way to Price

BUY NOW

SKU Based Plan Based

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1 Order Type# Units Change Order

Add-On Order

Initial Order

Cancellation

UpgradeRenewal

TransferSuspension

Free Trial

There’s a Fundamentally New Way to Conduct Commerce

BUY NOW

One-TimeTransactions

On-GoingSubscriptions

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$100 $100Σn=1

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There’s Even a Fundamentally New Way to Think About Finance

BUY NOW

One-TimeMetrics

RecurringMetrics

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ARRn – Churn + ACV = ARRn+1

The Subscription Business Model is Built on Future Recurring Costs & Revenues

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

The metrics for Cloud computing are fairly different from traditional enterprise software. Top 10 Laws for Cloud Computing

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But Today’s GL’s Don’t Speak This Language

Backwards Looking, Not Forwards Looking

No Concept ofSubscription Metrics

The Pre-SubscriptionIncome Statement

Income StatementFor Period Ending December 31, 2011

No Separation of Recurring vs. 1-Time

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Today’s GL’s Look Backwards, Not Forwards

Income StatementFor Period Ending December 31, 2011

Last Year This Year

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Today’s GL’s Confuse One-Time and Recurring Items

: Subscriptions

1x: Services

1x: Setup Fees

: TechOps

1x: Marketing

1x: Sales

Rev

enue

sE

xpen

ses

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Today’s GL’s Give You Product, Not Subscription Metrics

# UnitsAverage Selling Price

Annual Gross RevenueGross Margins

Close Rates

# CustomersCustomer Lifetime ValueRecurring Profit MarginsGrowth EfficiencyRenewal & Churn Rates

The best in class software model operators will measure their business not by revenue or bookings, not by current profitability, but rather by recurring profit.

SaaS Showcase: Keeping the Customer Happy, July 11, 2010

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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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Annual Recurring Revenue $100

Churn (10)

Net ARR 90

COGS (20)

G&A (10)

R&D (20)

Recurring Profit 40

Your Choice: Spend on Growth or Take Profits

Growth (Sales & Marketing) (10) (40)

Net New ARR 10 40

Net Income $30 $0

Ending ARR $100 $130

Optimizing for Margins

Optimizing for Growth

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Subscription Economy Companies Run Their Businesses With 3 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

Net Income $0

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 income 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

3

(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

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Thank You!

Tien Tzuoceo@zuora.com