Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It

by Tien Tzuo

INTRODUCING THE SUBSCRIPTION ECONOMY INCOME STATEMENT Every smart subscription business I know focuses on something called ARR, or annual recurring revenue. What is ARR? Simply put, it is the amount of revenue that you expect your subscribers to pay you every year. It is the revenue that recurs, as opposed to the revenue that gets booked only once. Every quarter, subscription businesses look at how much their ARR has grown, using the following formula: Based on this formula, Tyler and I constructed a Subscription Economy income statement, one that better reflects how we thought about the business. This is what we presented to the board sixty days later. Since then we’ve shared this model with countless other companies, as well as a number of financial analysts who cover subscription businesses. Given the formula above, a Subscription Economy income statement should look more like this (revenue in millions): ARR $100 Churn (10) Net AA 90 Recurring Costs Cost of Good Sold (20) General & Administration (10) Research & Development (20) Recurring Profit 40 Sales & marketing (30) Net Operating Income 10 New ARR (or ACV) 30 Ending ARR $120 Let’s break this down. ARR—Notice again that instead of starting and ending with income, now we’re starting and ending with ARR, or annual recurring revenue. Again, that’s because this income statement looks forward, not backward. Whereas a traditional statement says “you made this much revenue in the past quarter,” this statement...