Chapter Chapter 1 1 UnfortUnfortunateluny,a thetely , wthehole w holeconc eptcon cofept ma oftc mahintgc histnagrt sst toart bres toa kbre doawk n down for subfors criptionsubscription busin besussi mnesods elmso. dWeles’re. W goie’ren ggoi ton dgo to so dmoethi somnethig differeng different nt and candompare compare these these costs co tos tARRs to. ARRWhy. WARR?hy ARR? Becau Bseecau ARRse repreARR represents sents revenuerevenue acquire acquired in dprevio in previous perious periods, whids,c hwhi isc nho iws nrecowu rrirecngu.rri Sungre. , Sure, you neeyoud nee to kdeep to kseepervi csierving yocinugr yocuustor cmusertosm, sero COGs, so SCOG andS Gan&Ad Gsho&Au sld hould matcmath toc ARRh to. ARR. How Howabou at bRo&uDt ?R W&Dell? , Wtheell ,tr theaditio tradnaitiol vienawl viesayws satheys pro theduc protsduc yotu’s ryoe u’re sellingselling today today are alrea are dalreay dodnye do, andne ,yo andu’re yo inu’veres itingnves itingn res iena rercshe toar cchre toat ce reate innovationsinnovations that drivethat drive future fu satulesre .sa Bulest her. Buet ’hers thee’ sthi theng thi: theng cus: thetomer customers of s of SaaS SaacomSpa conmiespa diniesdn ’dit sdignn’t upsig nfor up a sforta tiac s servitatic cservie thacet ntheverat n getevers bgetettes br.etter. u knowethi somnethig abnogu abt SaaSout SaaScom pcoanmiespan, theyies, ’theyre ob’rese ssobesde sswitedh with If youIf know yo som keepingkeeping their theircusto cmustoersm hersapp hy,a ppto yk,eep to ktheeepm the bumying bu yingthe s theervic seervic, aned , and they invest inthey invest in R&D a Rg&Dain astg athinastt gothaatl. goal. At SalesforcAt Salesforce, wee , swtartee sdtarte namd ingnam releing asrelees aswithes withthe stheeas osns,eas ofons,r for exampleexample the Winter the Winter 2013 2 R013eleas Relee, toas ceo, ntovey co nthevey c onthes tcanonts rtaantet w raete ex wpee cet xpect to adtod enhan add enhancemecnemets ton thets to pro theduc protsduc. Thtast.’ sTh wahyt’s Iw lihyke toI li kthie tonk thi of nRk& ofD aRs &D as being beimnatg cmheatdc tohe ARRd to. ARR. SalesSales and m anadrk metianrkgeti is nwghere is w ithere gets it igetsntere instereting.s Itif nyog.u Irf yoARRur repre ARR represents sents todaytod’s reveay’sn reveue thatnue yothatu e yoxpectu ex pectto re cuto rre, thecurn, theyounr yospeundr spe onnd sa onles saanled s and markmaretingketing is going is going towa tordwa growird growing ARRng, ARRto ac, qtou airicnqgu irifuntureg fu reveturenu revee thnuaet that marketi exnpeg nsexepes nses is notis yet not in yet ARR in. ARRIn other. In other word ws, ordtods,a ytod’s saayle’ss saandles maandrk eting are matched toare matched to future reve future revenue. nue. In traInd itiontradaitionl accaountil accounting linnggo li, nyogou,r yosaleurs saalends maandr kmaetinrkgeti nnogw nacowts acts moremore like a li ckapitale a capital expe ndexpeiturnde,itur or cae, pore xca forpe sxhort for s. hortIn the. In ol thed manu old manufactufar ctu-r - ing winorldg w, orldyou ,investe you invested in ad b inig a fa bcigtory fac totory bu toild bu a bildunc a bhunc of whi dofget wisd, getand s, and you syoupread spread the co thest ofco thst aoft fthacatoryt fac otoryut over out overtime tiams yoe aus myoadu em aadnde saolndd sold those thowisde getwis dovergets overtime . timThate. ’s caThatlled’s ca dlledepre dcepreiatiocnia. tion. SimilarlySimilarly in the in s uthebsc sriptioubscription econn oecomyn, oyomuy ,i nyoveus itn iven ssatles in sanalesd ma andrk maetinrg keting to acqtou ireacq cuuiresto cumsers,tom aners,d yoanud reyocognizeu recognize revenu revee fromnue fromthose tho cusseto cusmertos mers over overtheir theirlifeti mlifetie, wmhie,c hw hioftench often can bcae nthre be ethre, fivee,, fiv10e ,ye 1a0r s,ye orar s,mor or emor. e. HoweveHowever, accor, unaccotingun ruletings ruletodas yto doda yn otdo letnot yo letu spreayou spread, or d,depre or depreciate, ciate, les m anardk metiarngketi consgts co oversts overtime ti—m thoe —u ghtho suomegh s omecom pcanomiespan amiesortiz ame ortize sales saand commiscommission costssion costs over theover c othentr cacontetrdac tertem.d ter Them. b Theig differe big difference isn thcea its yo thu at you generallygenerally expect expect ARR to ARRconti to cnuontie bnueyoe bndeyo the indn the iitial ncitionatrl cacont trtermact .term. 2020 2020
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