This story was originally published at Forbes.com by Tom Taulli.
Even though the enterprise cloud business has been around for nearly two decades, the opportunities are still enormous. According to a report from Gartner, the market is expected to grow at an annualized rate of 18% to $383.5 billion by 2020.
Despite all this, success is far from guaranteed for many startups. Hey, even top-notch companies have had challenges with the cloud, such as IBM.
So what are some strategies for winning? Well, to get insight on this, I recently talked to Tyler Sloat, who is the CFO of Zuora. The company is one of the pioneers of the cloud industry, which has developed a platform to help companies transition to subscription services. And yes, Zuora has seen quite a bit of traction. There are over 1,000 customers and the annual revenues are over $100 million.
OK then, let’s consider what Tyler has to say about building a successful cloud company:
Get a Reality Check: Based on research from McKinsey & Co., only 30% of software companies reached $100 million in revenues and less than 1% got to $1 billion (the survey included 3,200 publicly-traded firms from 1980 to 2013).
The fact is that the software industry is fraught with risks, such as fierce competition, dynamic changes in core technologies and prolonged sales cycles.
Focus On The Right Metrics: Tyler believes that a software company needs to think about revenues in different parts. First, there is ARR (Annual Recurring Revenues), which is what the sales will be for the year assuming no churn or growth in the customer base. Essentially, this metric is about “keeping the lights on.”
For Tyler, he compares the ARR to the recurring expenses (this includes the annualized Cost of Goods Sold, General & Administration expenses, and R&D), which is the recurring profit margin. “This metric is the cornerstone of the model,” he said. “You want to grow ARR faster than the recurring expense. This allows you to spend more to grow. Then, you will keep track of the growth efficiency index, which shows how much you can increase the ARR for every dollar invested.”
PADRE: This is an internal reporting framework at Zuora (the acronym stands for Pipeline, Acquire, Deploy, Run and Expand). This provides a view into the complete customer journey, from the initial inquiry to the ongoing success.
“At the start of the week,” said Tyler, “all the departments go through the PADRE, which lasts about an hour. We want to make sure that all departments are in sync. In other words, this guards against things going off the rails.”
And yes, each stage has its own set of metrics. For example, at the Pipeline level, you need to understand the nature of your sales approach (is it low-touch or high-touch?) and then measure the progress, such as traffic, leads and opportunities. In the case of Zuora, it has two main metrics for the pipeline: the Pipeline Creation Multiple (this is about setting the goal, such as a 5X sales quota for two quarters out) and the Pipeline Coverage Ratio (this is the ratio of the active pipeline on day 1 of the period divided by the sales goal for the period).
With PADRE, you can create a virtuous cycle. That is, the Pipeline spurs customer acquisition that then increases the deployments and so on. “It’s all about feeding ARR growth,” said Tyler. “And PADRE makes sure we are on track.”