How to Optimize Your Market Value Potential
Transcript of How to Optimize Your Market Value Potential
Market Value Potential
Optimizing Your
Tyler Sloat, CFO
@tylersloat
Agenda
1 How’s Wall Street is Valuing Subscription Companies
2 What Are Your Levers
3 How to Optimize Those Levers
How’s Wall Street valuing subscr ip t ion businesses?
The Market
loves subscriptions.
the value of subscriptions.
realizing They’re getting better at R
even
ue M
ultip
le
(nex
t yea
r’s r
even
ue)
high-growth subscription businesses.
premium on They’re placing a
why the disparity?
But
Y o u r f i r s t l e v e r
f o r o p t i m i z i n g y o u r M a r k e t p o t e n t i a l :
Efficient Growth
Growth is good.
Efficient
growth is better.
0%
100%
50%
ARR Non-Growth Expense
Growth Expense
COGS, G&A, R&D
50% Recurring
Profit Margin
Sales, Marketing, Customer Success
BREAK EVEN & 35%
GROWTH
INVEST IN FIELD & GROW
FASTER
OR
Sales, Marketing, Customer Success
The Subscription Model
Non-Growth Spend
Growth Spend incurred to maximize ACV
traditionally sales & marketing efforts
sometimes customer success
incurred to support the organization
traditionally COS, R&D, admin functions
vs.
measured by GEI. Growth is best
$100M Growth Exp. _________________ 1.5 GEI
= $65M ARR Growth
Therefore, if GEI is 1.5 and $100M is spent on growth:
Growth Expense _________________ ARR Growth
= Growth
Efficiency Index (GEI)
Growth Expense _________________ GEI
= ARR Growth
higher valuation multiples.
drives Better efficiency
GEI on ARR companies w/ similar (30-40%) revenue growth
EV /
20
15E
Rev
enue
Y o u r s e c o n d l e v e r
f o r o p t i m i z i n g y o u r M a r k e t p o t e n t i a l :
Net Retention Rate
Starting ARR + Upsell – Churn / Starting ARR
N e t R e t e n t i o n R a t e :
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A R R n+1 / A R R n
Min $5k ACV
“We calculate our retention rate as of a period end by starting with the annual contract value (ACV) from customers with contract value of $5,000 or more as of 12 months prior to such period end (Prior Period ACV) and a subscription term of at least 12 months. We then calculate the ACV from these same customers as of the current period end (Current Period ACV). Finally, we divide the aggregate Current Period ACV for the trailing 12-month period by the aggregate Prior Period ACV for the trailing 12-month period to arrive at our retention rate.“
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M R R n+1 / M R R n
“We calculate our dollar-based net expansion rate by dividing our retaining revenue net of contract and churn by our base revenue. We define our base revenue as the aggregate monthly recurring revenue of the paid customer accounts on our customer service platform as of the date one year prior to the date of calculation. We define our retained revenue net of contraction and churn as the aggregate monthly recurring revenue of the same customer base included in our measure of base revenue at the end of the annual period being measured.”
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M R R n+1 / M R R n
each month compounded to arrive at annual expansion rate
“Our dollar-based net expansion rate compares our recurring subscription revenue from customers from one period to the next. We measure our net expansion rate on a monthly basis because many of our customers change their subscriptions more frequently than quarterly or annually. To calculate our annually dollar-based net expansion rate, we first establish the base period monthly recurring revenue from all our customers at the end of a month. This represents the revenue we would contractually expect to receive from those customers over the following month, without any increase or reduction in any of their subscriptions. We then (i) calculate the actual monthly recurring revenue from those same customers at the end of that following month; then (ii) divide that following month’s recurring revenue by the base month’s recurring revenue at arrive at our monthly net expansion rate; then (iii) calculate a quarterly net expansion rate by compounding the net expansion rates of the three months in the quarter; and then (iv) calculate our annualized net expansion rate by compounding our quarterly net expansion rate over an annual period.”
i s b e c o m i n g t h e c o n s e n s u s .
Net Retention Rate
retention rate means
higher What a
Net Annual Retention Rate
EV /
20
15E
Rev
enue
How do you opt imize these levers?
Optimizing for Efficient Growth
Al ign your growth organizat ion
Marketing is measured on pipeline generation
Sales are compensated on generating net new ACV
Customer Success focuses on driving adoption & customer
around maximiz ing ARR
stickiness that results in upsells
Optimizing for Efficient Growth
Systems & Processes
Discipline in contract structure to enable upsells
Product Management developing features for add-ons
Optimizing for Efficient Growth
Bui ld ing ef f ic iency in to
Executing a land & expand strategy
Organic upsell via pricing & packaging
Low sales turn over
your sales model
Increased quotas
Optimizing for Net Retention
Al ign ing your Customer Success
Regular communication around product feature enhancements
Identify upsells opportunities based off usage trends
Have key customers help drive the roadmap
around product adopt ion
Optimizing for Net Retention
Understanding & engaging
Identify & track churn risks
Engaging to drive conversions from free to paid customers
Build a payment structure that facilitates flexible payment options
your users
Optimizing for Net Retention
A serv ices organizat ion that
Rapid deployments
Align implementation partners to your definition of success
Commit to consistent engagement throughout the deployment cycle
cons is tent ly del ivers
successfu l deployments
In Summary
Wall Street gets it
Growth is determined by ARR
Net Retention as an efficiency indicator
We build modern, flexible and easy to use enterprise software that enables companies to manage all aspects of their
relationship with their subscribers.
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the end. Tyler Sloat, CFO
@tylersloat