Subscription EconoSubscription Economics: m ics: How HoRecwu Rrring ecurring ReveRneveue Cnhaue nCgeshan Everythinges Everything g will bwe ill no ibe mnpo iact onmpact on that ye thaart ye’s revenar’s revenue, but it ue, bwut it ill imwpill iacmt your ARRpact your ARR. . ChurnChur sucnk s,su bcutks, evebutn eve if yon u’if veyo u’gotve thegot be thest beofferist offering inn theg in ma therk maet, rket, you’llyo stillu’ll hsatillve hcauvesto cmuserstom wersho wlehoave le yoaveu: yotheyu: theyswitch sw bitchusines business mosd mo-d - els, yourels, yourcom petitorcompetitor poac pohesac thehesm the withm wa ithsham a sheleamss eledisscsount disc,ount they, theygo go undeur.n Sdoe, r.in S othe, in topthe litopne youline’ llyou nee’lld nee to dsu tobtr sacubt tryouract yourexpecte expected chudr n churn from froyom ur ARR for theyour ARR for the year toye agetr to a getnet a ARRnet. ARR. Now letNo’ws lettake’s ata look ke a alook t those at those costsc. osts. Recurring CostsRecurring Costs In a SIanaS a ScoaaSmpa conmy,pa thereny, there are re aarelly re juasllyt three just three sourc soesu ofrc escost ofs cost: peopls: people, e, data dceatnate cer, nantedr, saanleds sandales maandrk maetinrkgeti. Inn gthe. In s ubthescription subscription incom ineco stmatee stat-e - ment themenst thee cosse cots are stsa lloare caatellodca into four ted into four key bkueyck betsuc: kets: 1. Costs of revenue,1. Costs of revenue, otherwise known as costs of good sold otherwise known as costs of good sold (COGS), which is how much you need to spend to actually (COGS), which is how much you need to spend to actually provide the service. In a SaaS company, this typically includes provide the service. In a SaaS company, this typically includes the data center, the hardware, the data center folks, customer the data center, the hardware, the data center folks, customer support folks, and so on. In an IoT company, these expenses support folks, and so on. In an IoT company, these expenses include the costs of your hardware and connectivity. In a include the costs of your hardware and connectivity. In a subscription box company, they include the costs of the subscription box company, they include the costs of the products you ship.products you ship. 2. Research and development (R&D).2. Research and development (R&D). This includes all the This includes all the developers and product managers.developers and product managers. 3. General and administrative (G&A).3. General and administrative (G&A). This includes primarily the This includes primarily the finance and HR folks.finance and HR folks. 4. Sales and marketing.4. Sales and marketing. This includes the sales and marketing This includes the sales and marketing departments and supporting personnel, and any money spent departments and supporting personnel, and any money spent on marketing programs. Notice how in the subscription income on marketing programs. Notice how in the subscription income statement, sales and marketing costs comes after recurring statement, sales and marketing costs comes after recurring profit margin. I’ll explain why later.profit margin. I’ll explain why later. traditionaitiol innacolm ineco stmatee mstaentstem tentsake thesetake these cost bucosctk etbusc anketd s and Now Nmoowst m ost trad map mtheapm the to mreven to revenue tou gete to a get ma rgia man. rgiRevenn. Revenue muineus m cinoussts c ofos revets ofn reveue, nue, for exforam eplxame, ispl youre, is yourgross gross margin ma. rginAnd. aAtn thed a the theart he ofa trrtad ofition tradaitionl finaanl finciaal ncial accouacntingcounting is the is c theonc eptcon cofept ma oftchi mantchig. Whenng. When $1 is $1sho isw shon aws nreve as nurevee nue on theon i nthecom ineco stmatemee statement, it nshot, itws sho allws of athesell of these fixed ficostsxed costs that wtheantt w inetno t into making thmaking that oneat one dolla dr.ollar. 1919 1919