1. The Only Three Saas
Metrics That Matter
Tien Tzuo
Zuora, Founder & CEO
April 2012
1

2. Zuora Was Built on the Prediction
of a “Subscription Economy”
BUY NOW
1999 2012+
2

3. Today, Subscriptions are Everywhere
Technology Transportation Retail Music
A
Video Voice Legal? Healthcare
By 2015, 35% of Global 2000 companies will generate revenue
through subscription-based services and revenue models.
3
April 2011: Building a Strategy for the Subscription Economy

4. There’s a Fundamentally New Way to Price
BUY NOW
Editions
One-Time Fees
Price $29.99 Recurring Fees
Price * Unit Usage Fees
Free Trials
Bundles
Pay-as-you-Go
SKU Based Plan Based
4

5. There’s a Fundamentally New Way
to Conduct Commerce
BUY NOW
# Units 1 Order Type
One-Time On-Going
Transactions Subscriptions
5

6. There’s Even a Fundamentally New Way
to Think About Finance
BUY NOW
Σ $100
8
$100
n=1
One-Time Recurring
Metrics Metrics
6

7. The Subscription Business Model is Built on
Future Recurring Costs & Revenues
ARRn – Churn + ACV = ARRn+1
You spend some % Hopefully you do a You invest to grow
You start the You then end up at
of that ARR to good job, and that ARR by acquiring
period @ some a new ARR level as
service the base minimize the amount new ACV (including
recurring revenue you kick off the
(COGS, G&A) and of that ARR that goes both new customers
run rate next period
to reinvest in R&D away and upsells)
The metrics for Cloud computing are fairly
different from traditional enterprise software.
Top 10 Laws for Cloud Computing
7

8. But Today’s GL’s Don’t Speak This Language
Income Statement
For Period Ending December 31, 2011
Backwards Looking, Not
Forwards Looking
No Separation of
Recurring vs. 1-Time
No Concept of
Subscription Metrics
The Pre-Subscription
Income Statement
8

9. Today’s GL’s Look Backwards, Not Forwards
Income Statement
For Period Ending December 31, 2011
Last Year This Year
9

10. Today’s GL’s Confuse
One-Time and Recurring Items
: Subscriptions
Revenues
1x: Services
1x: Setup Fees
: TechOps
Expenses
1x: Marketing
1x: Sales
10

11. Today’s GL’s Give You Product, Not Subscription Metrics
# Units # Customers
Average Selling Price Customer Lifetime Value
Annual Gross Revenue Recurring Profit Margins
Gross Margins Growth Efficiency
Close Rates Renewal & 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.
11
SaaS Showcase: Keeping the Customer Happy, July 11, 2010

12. The Subscription Economy Income Statement
would start with ARR vs Revenue
You start with an ARR
level
Annual Recurring Revenue $100
You anticipate Churn
Churn (10)
Net ARR 90 This gives you an
expected income or
COGS (20) cash flow to play with
G&A (10) You spend to service
the base
R&D (20)
Recurring Profit 40 This gives you your
recurring profit margin
Q: But what about Sales & Marketing?
A: Sales & Marketing are one-time costs related to growing ARR
12

13. Your Choice: Spend on Growth or Take Profits
Annual Recurring Revenue $100
Churn (10)
Net ARR 90
COGS (20)
G&A (10)
R&D (20)
Recurring Profit 40
Optimizing for Optimizing for
Margins Growth
Growth (Sales & Marketing) (10) (40)
Net New ARR 10 40
Net Income $30 $0
Ending ARR $100 $130
13

14. Subscription Economy Companies Run Their
Businesses With 3 Key Metrics
Annual Recurring Revenue $100
Churn (10) Retention Rate
Net ARR 90
COGS (20)
G&A (10)
R&D (20)
Recurring Profit
Recurring Profit 40 Margin
Growth (40)
Growth
Efficiency Index
Net New ARR 40
Net Income $0
Ending ARR $130
14

15. When looking at a Subscription Economy
company, only these 3 metrics matter
Retention Recurring Growth
Rate Profit Margin Efficiency
How much of ARR less Churn How much does
your ARR you less Non-Growth it cost you to
keep every year. Spend acquire $1 of
ACV
The metrics for Cloud computing is fairly
different from traditional enterprise software.
Top 10 Laws for Cloud Computing
15

16. A company with 1.0 / 90% / 40% can grow
at 43% a year at breakeven
Assumptions Year 1 Year 2 Year 3 Year 4 Year 5
% of ARR spent on Growth 52.9% 52.9% 52.9% 52.9% 52.9%
% of ARR spent on non-Growth 60.0% 60.0% 60.0% 60.0% 60.0%
Growth Efficiency Index (cost to acquire $1) $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Renewal Rate (percent of ARR we renew) 90% 90% 90% 90% 90%
Bookings Year 1 Year 2 Year 3 Year 4 Year 5
ARR (starting) $ 100 $ 143 $ 204 $ 292 $ 417
ACV (new, upsell) $ 53 $ 76 $ 108 $ 154 $ 221
Churn $ (10) $ (14) $ (20) $ (29) $ (42)
ARR (exiting) $ 143 $ 204 $ 292 $ 417 $ 596
ARR Growth Rate 43% 43% 43% 43% 43%
Income
Subscription Revenue $ 113 $ 161 $ 230 $ 329 $ 471
Expenses
Growth $ 53 $ 76 $ 108 $ 154 $ 221
Non-Growth $ 60 $ 86 $ 123 $ 175 $ 250
Total Expenses $ 113 $ 161 $ 231 $ 329 $ 471
Core Business Income (Loss) $ (0) $ (0) $ (0) $ (0) $ (0)
PS Income (Loss) $ - $ - $ - $ - $ -
Net Income (Loss) $ (0) $ (0) $ (0) $ (0) $ (0)
16

17. Or it can have $0 growth, and have a net income of $30.
Assumptions Year 1 Year 2 Year 3 Year 4 Year 5
% of ARR spent on Growth 10.0% 10.0% 10.0% 10.0% 10.0%
% of ARR spent on non-Growth 60.0% 60.0% 60.0% 60.0% 60.0%
Growth Efficiency Index (cost to acquire $1) $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Renewal Rate (percent of ARR we renew) 90% 90% 90% 90% 90%
Bookings Year 1 Year 2 Year 3 Year 4 Year 5
ARR (starting) $ 100 $ 100 $ 100 $ 100 $ 100
ACV (new, upsell) $ 10 $ 10 $ 10 $ 10 $ 10
Churn $ (10) $ (10) $ (10) $ (10) $ (10)
ARR (exiting) $ 100 $ 100 $ 100 $ 100 $ 100
ARR Growth Rate 0% 0% 0% 0% 0%
Income
Subscription Revenue $ 100 $ 100 $ 100 $ 100 $ 100
Expenses
Growth $ 10 $ 10 $ 10 $ 10 $ 10
Non-Growth $ 60 $ 60 $ 60 $ 60 $ 60
Total Expenses $ 70 $ 70 $ 70 $ 70 $ 70
Core Business Income (Loss) $ 30 $ 30 $ 30 $ 30 $ 30
PS Income (Loss) $ - $ - $ - $ - $ -
Net Income (Loss) $ 30 $ 30 $ 30 $ 30 $ 30
17

18. Benchmarking the SaaS Leaders
18

19. 2001 2002 2003 2004
Ending ARR $37 M $70 M $129 M $231 M
Growth Efficiency 0.93:1 0.80:1 0.75:1 0.76:1
Renewals 83% 83% 83% 83%
Recurring Profit 3% 41% 58% 61%
Margin
19

20. 2004 2005 2006 2007
Ending ARR $22 M $43 M $71 M $105 M
Growth Efficiency 2.02:1 1.65:1 1.28:1 1.26:1
Renewals 86% 86% 86% 86%
Recurring Profit (27%) 6% 35% 47%
Margin
20

21. 2006 2005 2008 2009
Ending ARR $40 M $73 M $108 M $147 M
Growth Efficiency 1.41:1 1.90:1 2.15:1 1.62:1
Renewals 92% 92% 92% 92%
Recurring Profit (29%) (16%) 19% 43%
Margin
21

22. Best Practice
Model
Growth Efficiency 0.75:1 1.26:1 2.15:1 1:1
Renewals 83% 86% 92% 90%
Recurring Profit 58% 47% 19% 50%
Margin
22

23. How Do You Achieve the
Ideal Model
23

24. (1) Maximize your Recurring Profit Margins
1 Automate Quote-to-Cash-to-Renewals
Seamless, eliminate manual errors
Take Credit Card Payments
2 No touch, bring cash in the door immediately
3 Drive Multi-Year Commitments
Multi-Year Pricing Tiers, Term Discounts
“How do you cost effectively service the base”
24

25. (2) Focus on sustaining high Retention Rates
1 Make Renewals Really Easy
Auto-Renewals, Early Bird Renewal Incentives
2 Enable Your CSRs to Renew Customers
Churn defense, ARR preservation
3 Prevent Churn with New Price Plans
Monthly vs. Annual, Discounted, Lower Tiers
“How much ARR you keep every year”
25

26. (3) Optimize your business for Growth Efficiency
1 Tune Your Pricing Strategies
Freemium, Editions, Pay-as-you-Go, Tiers
2 Increase Total Customer Value
Upsells, Cross-Sells, Add-ons
3 Make Doing Business Simple
Self-Service, Promotions, Free Trials
“How much does it cost you to acquire a $ of ACV”
26

27. Thank You!
Tien Tzuo
ceo@zuora.com
27