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Building Subscription Financial Models: Your Step-by-Step GuideDAVE KEYManaging DirectorCloud Strategies
MARK GERVASESr. Product Marketing Manager—Software VerticalIntacct
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Introductions
MARK GERVASESr. Product Marketing Manager—
Software VerticalIntacct
DAVE KEYManaging Director
Cloud Strategies
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Housekeeping
Type questions into the chat box or the Q&A box to submit it to our panelists
We’ll try to get to all the questions during the course of the webinar. If we do not get to your question, we’ll make sure to follow up afterwards.
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Please take a few minutes to fill out the survey at the end of the event
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Today’s Agenda
Financial modeling objectives
Key elements of the model
– Revenue
– COGS
– Operational costs
– Income and cash flows
Using and updating the model
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Business Model
Financial Model
KPIs
Business Planning Components
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Financial Modeling Objectives
Expose expense ramp relative to income
Shows sensitivity to business drivers
Show where, when, and how of income
Give measurable business goals
Quantifies the “Big Picture” business economics
Projects cash requirements
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Models Vary by Business Type
B2B
B2C
Trial to Paid
Freemium
Ad Supported
Enterprise Sales
“Low Touch” Sales
ChannelSales
Affiliate Sales
Complex Implementation
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Financial Model Traits
Simple, appropriate level of details
Readily modifiable
Supports non-linearity of inputs
Supports manipulation of inputs for sensitivity analysis
Updated with actual financial results
“Everything should be made as simple as possible, but no simpler.”—A. Einstein, 1933
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Revenue Modeling
“Prediction is hard, especially about the future”*
*attributed to: Yogi Berra, Albert Einstein, Will Rogers, Mark Twain, Groucho Marx, Vint Cerf…
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Revenue Projections
Top-down Analysis
Total Addressable Market
Competition
Market Share
Market Growth
Revenue
Revenue Opportunity
Bottoms-up Analysis
Revenue
Retention
Funnel Conversion
Lead Generation
Channels
Revenue Plan
Sales/Marketing Resources
Pricing
Products
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Top-down Revenue Analysis
Quantify the opportunity
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Top-down Revenue Analysis
Product-market fit
Disruptive effect
Expand the market or take competitor share?
The “tops-down” analysis shows the best case scenario if the market opportunity is
maximized by the company
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Bottoms-up Revenue Modeling
How you will capture the market opportunity
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Bottoms-up Revenue Plan
Shows revenue generation details
Growth governed by KPI results
Establishes milestones central to the plan
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Revenue Progression
Growth Drivers
New products
New geographies
New channels
Growth Sources
New customers
Increased customer use
New offerings
Growth Influencers
Referenceablecustomers
Brand awareness
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Bottoms-up Revenue Components
Basic revenue components
Bookings
Total Annual Contract Value
Total Contract Value
Subscription revenues
Professional services
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Growth Model Caveats
Early growth lumpy and difficult to predict
Constrained by sales and marketing resources
Geometrics increases don’t last
Compare growth projections against comparable companies
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Comparable SaaS Company Growth
Growth is during the early stages with modest revenue
Your plan better justify higher than average growth
Use comparable subscription companies as a benchmark
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COGS
Crucial determinant of profitability
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Cost of Subscription Operations
CompanyCOS as % of Subscription Revenue
Salesforce 17%
Demandware 19%
Components
– Hosting fees
– IT administration and SaaS operational costs
– License fees
– Customer support
Percentage should decrease with scale
Target 15% to 20% of SaaS Revenue
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Cost of Professional Services
Business analysis
Configuration and setup
Training
Target is 40% to 50% gross profitDifferent markets support different margins
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Operational Expenses
The costs of running the business
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Early Operational Expenses
Sales and marketing
– The most complex component
R&D
– Sized to meet product milestones
General and administrative expenses
– Minimize early expenses not directly associated with creating or selling the product
Only include material expenses Excluding sales, use fixed costs plus
per employee expenses
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Later Stage Operational Expenses
39%
18%15%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Sales &Marketing
R&D G&A
Public SaaS Companies Median Operating Ratios*
* Software Equity Group, August 2014
24%
15%
11%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Sales &Marketing
R&D G&A
Public Software Companies Median Operating Ratios*
Delayed subscription revenues result in higher expense/income ratios
Projections superior to benchmarks require justification
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For high growth subscription companies S&M costs typically ~40% to ~50% of revenue
S&M % of revenue is higher for growing subscription companies
Target customer acquisition costs are < annual customer gross profit
Sales and Marketing Costs
Company Revenue Annual Growth S&M % of Revenue
Salesforce $4,017M 29% 53%
Workday $469M 68% 42%
Demandware $104M 56% 50%
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R&D Operational Expenses
R&D expenses tied to product milestones
Product delays can result in failure
R&D expense forecasts move to a percent of revenue in later years
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General and Administrative
Keep early expenses low beyond the CEO/GM
Outsource wherever possible
Minimize capital expenses
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Bottom Line Numbers
EBITDANet IncomeCash Flow
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Crucial Financials
Cash burn rate
Cash balances
Time to cash flow break-even
Follow revenue recognition standards
Track profit versus growth
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Cash Flow
For a new venture, cash flow and change in cash flow is the primary financial metric
Time to cash flow break-even is key metric of subscription success
The greater the growth the greater negative impact on cash flow
The “life blood of the business
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Financial Summary
Q4
20
14
Q1
20
15
Q2
20
15
Q3
20
15
Q4
20
15
Q1
20
16
Q2
20
16
Q3
20
16
Q4
20
16
Q1
20
17
Q2
20
17
Q3
20
17
Q4
20
17
Q1
20
18
Q2
20
18
Q3
20
18
Q4
20
18
SaaS Customers
Expenses
EBITDA
Quarterly Revenue
Gross Profit
Net Cash flow
Total Cash Burn
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Crucial Subscription Metrics
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Essential KPIs for Subscription Models
Should trend towards target benchmark
Lead generation (#)
Funnel conversion (%)
Active customers (#)
Monthly reoccurring revenue (MRR) ($)
Annual contract value (ACV) ($)
Growth efficiency (cost of one more dollar of ACV)
Churn (%)
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Updating the Model
Things Change…
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Keeping Models Current
Financial Model
Financial Results
KPIs Results
Looking Forward
Looking Back
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Adjust with Experience from Results
Variance from KPIs
– Update with actuals KPI results
– Take action on problems
Use analytics to gain additional insights
– Segments performing best/worst
– Elements impacting results most significantly
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Watch for Trends
Directions of essential KPIs
– Sales productivity
– Churn
– Costs
– Cash levels
Changes in market adoption
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Develop the business plan
Size the market opportunity
Forecast the revenue based on resources
Develop the expenses to support the revenue
Adjust the model based on resources available and relevant benchmarks
Track financial performance and KPIs to the model
Revised the model with actual performance
IN SUMMARY
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Financial Modeling
Transitions to SaaS
Product Strategies
SaaS Training
Sales and Marketing Strategies
KPI Analysis and
Optimization
SaaS Advisors
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Questions?
www.intacct.com | [email protected] | 877-437-7765
INTACCT CORPORATION:
www.cloudstrategies.biz | [email protected] | 949-887-4401
CLOUD STRATEGIES:
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Interested in Learning More?
Try Intacct with a free 30-day trialhttp://www.intacct.com/trial
Attend an upcoming webinarhttp://www.intacct.com/webinars
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Contact us [email protected] | 877-437-7765
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Thank you!
www.intacct.com | [email protected] | 877-437-7765
INTACCT CORPORATION:
www.cloudstrategies.biz | [email protected] | 949-887-4401
CLOUD STRATEGIES:
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