cfo summit san carlos, ca july 2015
TRANSCRIPT
CFO Summit
TUESDAYJuly 14th, 2015
#CFOsummi
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Summit Intro“Share data,
unblemished and
unbiased, in an effort to
provide transparency and
define best practices, but
also create a network for
ongoing collaboration
that lives on long past
this afternoon.” @tylerslo
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So, what’s happening?
of companies believe their
customers
are switching to new consumption
models.
4 / 5
83%73%
84%
@tylerslo
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Businesses are Responding
US 13%28%
AU 24%43%
UK 25%23%
Over half of companies are in the
process of changing or have changed the way they price and deliver their goods and services.
51%
@tylerslo
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“Innovation is the hottest word in business…
…but most of the discussion
centers around products and
services. The more profound
challenge for most companies
now is imagining a new business
model, a new answer to the
fundamental question, how do
we make money?”
- Fortune Magazine
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Owningthe new model.
“…vast majority (81%) felt they worked at
companies that viewed their finance
operation as a ‘strategic business partner,’
involving the CFO in top-level decision
making as never before…”
- Fortune Magazine
@tylerslo
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10%0% 5% 15% 20% 25% 30% 35% 40%
38%26%
Traditional tasks
19%20%
Directly assisting the board/audit committee
18%24%
Business strategy and other commercial work
15%16%
Market and shareholder information
10%14%
Enhancing the efficiency of the finance function
Current
3 years time
How CFOs are allocating their tasks…
…today and tomorrow.
Survey@tylerslo
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“There’s been an evolution in America in terms of
the CFO. The CFO is increasingly being called
upon to weigh in on much more strategic
decisions involving the company, including
everything from transactions to providing
assessments of emerging markets and analyses
that go far beyond looking at the books and
determining whether there will be enough cash to
support investment.”
- Fortune Magazine
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“CFOs’ responsibilities go well beyond finance into
balancing compliance and risk management with
business-performance goals. They have an
important role to play in reading and
understanding evolving business drivers and
helping their companies seize opportunities. CFOs
now spend more time on strategy and operating
issues and less on budgeting and accounting.”
- Business Week
@tylerslo
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obsolete. Your business model is
everything you think you know
Assume this:
doesn’t work anymore. about staying competitive
@tylerslo
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The new model is much more complex. @tylerslo
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The old model
Build a widget. Sell the widget. Recognize your
revenue.
simple.
@tylerslo
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The new model
Build a widget. Recognize your
revenue.
complex.
Sell the widget. Acquire
customers &
monetize
relationships.
free
trial
paid
subscripti
ons
add on
upgraderenewal
@tylerslo
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The new model
Build a widget. Recognize your
revenue.
Sell the widget. Acquire
customers &
monetize
relationships.
free
trial
paid
subscripti
ons
add on
upgraderenewal
complex.
@tylerslo
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Executing against the business model requires an understanding of a whole new set of metrics. @tylerslo
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The Metrics
@tylerslo
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The Metrics
Growth Efficiency IndexCost to acquire customers
in comparison to new ACV
@tylerslo
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The Metrics
Retention RateLost ARR from customers churning or downselling
@tylerslo
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The Metrics
Recurring ProfitCost to service your customer base and
organization
@tylerslo
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The Metrics
One-time ChargesAny non-recurring
revenue and costs (e.g. hardware / services)
@tylerslo
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But there’s a problem…
@tylerslo
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THIS DOESN’TMEAN WE HAVE A HALL PASS. THERE STILL NEEDS TO BE AN OWNER.
“The benchmark for these metrics don’t exist in the public domain. They are not GAAP.”
@tylerslo
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It’s a completely new way of thinking…
@tylerslo
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ARR GOVERNS ALLA R R n – Churn + A C V = A R R n +
1
@tylerslo
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A R R n – Churn + A C V (+/- FX impact) = A R R n + 1
Even the simplest of formulas will evolve…
@tylerslo
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The model…
COGS, G&A,R&D
50%Recurring
Profit Margin
Sales, Marketing
, Customer Success
BREAK EVEN
0%
100%
50%
ARR Non-GrowthExpense
GrowthExpens
e
BREAK EVEN INVEST IN FIELD & GROW FASTER
Sales, Marketing
, Customer Success
OR
@tylerslo
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Growth is best measured by GEI.
$100M Growth Exp.
1.5 GEI
=$65M ARR
Growth
Therefore, if GEI is 1.5 and $100M is spent on growth:
Growth ExpenseARR Growth
=Growth
Efficiency Index (GEI)
Growth Expense
GEI=ARR
Growth
@tylerslo
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• incurred to maximize ACV
• traditionally sales & marketing efforts
• sometimes customer success
• incurred to support the organization• traditionally COGs, R&D, admin
functions
GROWTH SPEND NON-GROWTH
SPEND
@tylerslo
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The model interpreted…
COGS, G&A,R&D
50%Recurring
Profit Margin
Sales, Marketing
, Customer Success
BREAK EVEN
0%
100%
50%
ARR Non-GrowthExpense
GrowthExpens
e
BREAK EVEN INVEST IN FIELD & GROW FASTER
Sales, Marketing
, Customer Success
OR
With a GEI of 1.0 and churn at 15%, you’ll have 35% growth while maintaining break even. But only if deals are collected upfront and you’re cash flow positive.
But, if your GEI is 2.0 you’re growth will slow to 10% to break event.
““
@tylerslo
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The Marketloves these business models.
@tylerslo
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IPOs in 2014. or 55 of the IPOs were in Tech. of Tech were either Software
or Internet/New Media.
263
20% 73%
@tylerslo
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@tylerslo
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Lower development, support and maintenance
costs
Predictability allows longer-term thinking
No quarter-end pricing games
Oh yeah, investors give you a higher
valuation
Downside: longer ramp to scale from lack
of up front license fee
At scale, subscription models are
superior in every aspect
“Ultimate Software will never make money.”
- Competitor CEO in 2002 … just as ULTI stock price was on the cusp of a 12 year, 14-fold
advance
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In 2008, a globally over levered
world collapses. US GDP falls
0.9%, the S&P 500 drops >50%
peak to trough.
Perpetual license companies
saw roughly 5-15% y-o-y
declines in quarterly
revenues.
On average, subscription
firms’ revenue growth
decelerated to ~18% from
30%+.
Since the 2009 bottom,
subscription software revenues
and stock prices are up nearly
400% and 575%.
Perpetual and mixed models’
revenue growth and stock
price: 70% and 280%
The Great Recession: Subscription
wins
@tylerslo
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INTROSubscription goes
mainstream…• 30-50 subscription software
IPO’s over the next two years seems
reasonable.
• Hottest areas:
• Vertical SaaS
• Security/Systems Software
• Analytics
• Next Generation Marketing
• Caution:
• High valuations allow features
to think they’re companies.
0
10
20
30
40
50
60
2005 2010 Today
Number of Public Saas Companies
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• Bookings / New ARR
• Gross Customer Churn
• Mix of S&M spend that is growth
oriented
• New ARR = forward year increase in subscription revenue + gross dollars churned in current year
• Assume all S&M spend is driving new ARR• S&M Efficiency = $ S&M Spend / $ New
ARR• Range of Public SaaS Companies: $0.67 -
$2.30
DATA WE DON’T GET HOW WE THINK ABOUT IT
SLIDE HEADERS&M Efficiency: a challenge for public investors
Conclusion: the trend line is up
2012 2013 2014 2015E 2016EAverage S&M / $ARR $0.99 $1.02 $1.18 $1.27 $1.40Based on Canaccord Genuity analysis of the 30 largest SaaS companies; leverages SEC filings, Capital IQ estimates, and Canaccord Genuity estimates
@tylerslo
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S&M Efficiency
Best in Class 2015EVeeva $0.67Descartes $0.76Q2 Holdings $0.80Ultimate Software $0.94Constant Contact $0.95Analysis based on SEC filings, Capital IQ estimates, and Canaccord Genuity estimates
Best in class
@tylerslo
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The level to which operating margins revert to if you were to cull all growth spend.
2014A 2015E 2016ESubscription Services Revenue $5,014 $6,055 $7,295
Growth 31% 21% 20%Subscription Gross Margin 83.4% 83.7% 84.5%
Subscription Gross Proft $4,182 $5,068 $6,164
R&D Expense (672) (819) (997)G&A Expense (577) (672) (780)
Recurring Gross Profit $2,933 $3,577 $4,388Recurring Profit Margin 58.5% 59.1% 60.1%
* Based on Canaccord Genuity projections
Salesforce.com: Top of the Pack and Improving
C2015E Sub Rev
Recurring Profit Margin
1 CRM 6,055 3,577 59.1%2 N 599 347 57.9%3 PAYC 201 113 56.2%4 CSOD 306 165 54.1%5 NOW 830 428 51.5%6 VEEV 308 158 51.2%7 LOCK 560 279 49.8%8 SPSC 142 69 48.3%9 MKTO 182 87 48.1%
10 OPWR 133 64 48.0%11 CVT 173 83 47.7%12 ULTI 515 242 47.0%13 CTCT 374 169 45.3%14 HUBS 155 70 45.2%15 SQI 102 45 43.8%
Recurring Proft Margin
Analysis based on SEC filings, Capital IQ consensus, and Canaccord Genuity estimates
Recurring Profit Margin
@tylerslo
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INTRORetention: most powerful lever to
LTVToday, Salesforce.com’s gross churn is about
10%...
What if it improved to 7%?Salesforce.com
Annual Gross Churn Rate: 10% Implied Customer Life (years): 10.02012A 2013A 2014A 2015E 2016E
Subscription Services Revenue $2,869 $3,825 $5,014 $6,055 $7,295Growth 35% 33% 31% 21% 20%
Subscription Gross Margin 85.5% 84.2% 83.4% 83.7% 84.5%Subscription Gross Proft $2,453 $3,220 $4,182 $5,068 $6,164
R&D Expense (353) (516) (672) (819) (997)G&A Expense (364) (505) (577) (672) (780)
Recurring Gross Profit $1,736 $2,199 $2,933 $3,577 $4,388Recurring Profit Margin 60.5% 57.5% 58.5% 59.1% 60.1%
New ARR Approximation $1,243 $1,572 $1,543 $1,846 $2,189S&M Expense (1,404) (1,872) (2,406) (2,858) (3,475)
Cost / $ARR (CAC) $1.13 $1.19 $1.56 $1.55 $1.59
LTV / $ARR $6.05 $5.75 $5.85 $5.91 $6.01LTV / CAC 5.4x 4.8x 3.8x 3.8x 3.8x
Salesforce.comAnnual Gross Churn Rate: 7% Implied Customer Life (years): 14.3
2012A 2013A 2014A 2015E 2016ESubscription Services Revenue $2,869 $3,825 $5,014 $6,205 $7,481
Growth 35% 33% 31% 24% 21%Subscription Gross Margin 85.5% 84.2% 83.4% 83.7% 84.5%
Subscription Gross Proft $2,453 $3,220 $4,182 $5,194 $6,322
R&D Expense (353) (516) (672) (819) (997)G&A Expense (364) (505) (577) (672) (780)
Recurring Gross Profit $1,736 $2,199 $2,933 $3,703 $4,545Recurring Profit Margin 60.5% 57.5% 58.5% 59.7% 60.8%
New ARR Approximation $1,157 $1,457 $1,543 $1,710 $2,021S&M Expense (1,404) (1,872) (2,406) (2,858) (3,475)
Cost / $ARR (CAC) $1.21 $1.29 $1.56 $1.67 $1.72
LTV / $ARR $8.64 $8.21 $8.36 $8.53 $8.68LTV / CAC 7.1x 6.4x 5.4x 5.1x 5.0x
Note: we estimate that a 3% improvement in retention could drive a ~16% increase in C2015 operating profit – an incremental $150M at subscription GMs
Analysis based on SEC filings, Capital IQ consensus, and Canaccord Genuity estimates
@tylerslo
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It’s no wonder that investors value net dollar retention.
• Most public companies don’t provide gross customer retention
• Instead, they give net dollar retention, which is inclusive of upsell
TickerDollar-Based
Retention1 VEEV 138%2 BOX 126%3 NOW 125%4 HDP 125%5 QTWO 122%6 ZEN 120%7 NEWR 120%8 ULTI 110%9 PAYC 110%
10 MKTO 109%
VEEV
BOX NOWHDP
QTWOZEN NEWR
ULTI PAYCMKTO
WK CSLT
AMBR DWRE
OPWR
ECOM
FIVN
RNGCVTMRIN
SQI BNFT
CSOD SPSC HUBS
ILCRM
LOCK
CARB
LOGM
CTCT
70%
80%
90%
100%
110%
120%
130%
140%
1.0x 3.0x 5.0x 7.0x 9.0x 11.0x
Dol
lar B
ased
Ret
entio
n
EV/C2015E Revenues
DBR is based on most recently available publicly stated information
Valuation based on Capital IQ consensus and Canaccord Genuity estimates
@tylerslo
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• In March 2014, investors transitioned
from GAAP to GARP– That means from “Growth at any Price”
to “Growth at a Reasonable Price”
• A quick trick we like to use: Revenue Growth + FCF Margin– Gold, Silver, Bronze: 50%, 40%, 30%– Change in G+M is an important
indicator as well Many trending down as growth rates
decelerate faster than margins ramp
An Easy Screen:
growth + margin
@tylerslo
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The Top 20: growth plus marginWhat Are You Worth?
Benchmark your business metrics against the
least squares regression of public comps
C2015E Growth +
MarginImplied EV/Revs
Needs Work 0% 2.8x10% 3.8x20% 4.8x
About Average Today 30% 5.8x40% 6.7x50% 7.7x
Best-in-Class 60% 8.7x
Regression Analysis on Public SaaS Firms
Revenue Growth + FCF Margin Top Performers
C2015E C2016E
Rank CompanyRevenue Growth
FCF Margin
Growth + Margin
Revenue Growth
FCF Margin
Growth + Margin
Y-O-Y Change
1 ServiceNow 46% 16% 62% 36% 17% 53% -9%2 Textura* 44% 16% 59% 40% 19% 59% -1%3 Demandware 51% -1% 50% 34% 3% 37% -13%4 Paycom 39% 10% 50% 29% 10% 39% -11%5 WageWorks* 26% 22% 48% 14% 24% 38% -10%6 Veeva Systems 27% 21% 47% 24% 24% 48% 1%7 Elli Mae* 45% 2% 47% 23% 9% 32% -15%8 Workday 46% 1% 47% 39% 6% 45% -2%9 LogMeIn* 19% 23% 43% 16% 23% 40% -3%
10 Zendesk 55% -13% 42% 37% -1% 36% -6%11 Netsuite 32% 7% 39% 29% 9% 38% -1%12 Salesforce.com 21% 16% 37% 21% 17% 38% 1%13 Descartes 11% 26% 37% 12% 26% 38% 1%14 Cornerstone OnD* 30% 5% 36% 26% 7% 33% -2%15 SPS Commerce 24% 9% 33% 19% 11% 30% -3%16 Paylocity* 33% -1% 31% 26% 4% 30% -2%17 Cvent* 29% 3% 31% 23% 12% 35% 4%18 Marketo 41% -10% 30% 33% -3% 30% 0%19 Ultimate Software 22% 8% 30% 21% 9% 30% 0%20 HubSpot 47% -17% 30% 27% -7% 20% -10%
* Indicates company is not under formal Canaccord Genuity research coverage
Canaccord Genuity Research Disclosures: http://disclosures.canaccordgenuity.com/EN/Pages/default.aspx
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A Sector Emerges• Hyper-growth phase
• Crowding-in drives up
valuation
• Investors more willing to
tolerate losses; misses
overly-punished
SLIDE HEADERThe future of subscription
valuations…TODAY: 3-5 Years Later• A shakeout: distribution
flattens
• The “haves” and “have-nots”
• Investors now expect growth
and margin expansion
TOMORROW: Steady
State• Growth slows, target margins
• Investor attention shifts toward
cash flow growth/value; 1.5-
2.0x PE/G
• EV/Revs in the 6-8x forward
range
0
1
2
3
4
5
0.0x-2.0x 2.1x-4.0x 4.1x-6.0x 6.1x-8.0x 8.1x-10.0x 10.0x+EV/Revenues on C2015E
Valuation Distribution for Next Generation Tools
Includes names like: DATA, NOW, SPLK, FEYE, PANW, NEWR, HDP
0
2
4
6
8
10
12
14
0.0x-2.0x 2.1x-4.0x 4.1x-6.0x 6.1x-8.0x 8.1x-10.0x 10.0x+EV/Revenues on C2015E
Valuation Distribution for Cloud Software
Includes names like: CRM, WDAY, N, ULTI, VEEV, DWRE, CSOD
EV/FCFFCF
MarginSecular Growth PE/G EV/Revs
ADBE* 21x 28% 15% 1.3x 8.0xAZPN 18x 47% 12% 1.4x 8.0xINTU* 31x 20% 15% 1.9x 6.2xANSS* 23x 34% 14% 1.5x 7.9xMEAN 23x 32% 14% 1.5x 7.5x
Steady State: 2015E Valuations
* Indicates company is not under formal Canaccord Genuity research coverage
Note: analysis based on Capital IQ consensus and Canaccord Genuity estimates
@tylerslo
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But how do you get the metrics…
@tylerslo
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…and how do you operationalize across your company? @tylerslo
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The survey.
@tylerslo
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150+survey respondents
100+survey questions
@tylerslo
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10,000+points of data
The respondents.
@tylerslo
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10%
60%
50%
40%
30%
20%
70%
80%
90%
100%
0%
34%
40%
90%
62%
> $50M in TTM Rev
> 200employees
Software
Recurring
only@tylerslo
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The framework.
@tylerslo
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P A D R E
P P M
@tylerslo
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Pipeline
• How do you drive pipe
• How much do you need
• Quality vs. Quantity
• How long does it last
@tylerslo
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Pipeline: What does your funnel look like?
Of those, 76% clarified
that as ORGANIC (website, free trials)
INBOUND is the largest individual
source of pipe (46% listed as primary source)
40%Investing in your website pays off – more than 40% of website visits were unique for majority of respondents 46%
76%
@tylerslo
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web visits
IB leads
new S1 pipeline
S2 accepted
bookings
ratios
total to unique
web to IB leads
IB lead to IB opp
S1 to S2
win ratio
%
%
%
%
%
%
%
Pipeline: What does your funnel look like?
@tylerslo
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16%
16%
18%
23%
27%
81-100%
41-60%
0-20%21-40%
61-80%
Pipeline: What comes from inbound?
@tylerslo
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Pipe Score w/ Targets IB leads MQLs #New opps
$ New opps
IB lead to S1 conv
rate IB Leads MQLs# New opps
$ New opps
IB lead to S1 conv rate
Inbound Organic
Inbound Paid
Events / Other
Outbound
AE
TOTAL
QTD Actuals Plan
Pipeline: Expose, communicate, align
@tylerslo
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Thought Leadership drives pipeline
@tylerslo
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New Pipe Creation Workable Pipe (Current QTR) Workable Pipe (Next QTR)
Pipe Score w/ Targets
New Opps (S1)
New Opps (S1)
Accept Opps (S2)
Accept Opps (S2)
Acceptance Rate Quota
Workable Opps (S1-
8)Workable Coverage Quota
Workable Opps (S1-
8)Workable Coverage
Northwest
Northwest
Northwest
NorthwestNoAm
Enterprise
EMEA
APAC
ROW total
West
EastCommercial
Total
ZBR / Other
TotalPrevious Week
Total
Previous QTR Total
WoW Delta
Pipeline: Transition to acquire
@tylerslo
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Pipeline: Coverage
1.0x-2.0x
2.1x-3.0x
3.1x-4.0x
4.1x-5.0x>5.0x
12% 47% 24% 10% 7%
@tylerslo
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Acquire
• How do you model
• How do you compensate
• How do you drive efficiency in your sales org
• Accelerate, digest or pull back
77%of respondents sell
primarily through a direct sales
approach52%use a self
service model
65%offer their
prospects a free trial period 20%
However, only 47% said less than 20% convert from
free trial to customer
Acquire: Selling Approach
@tylerslo
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Acquire: How do you organizeSales team segmentation stack rank:
Industry Verticals31%
Customer Rev26%
#Employees21%
@tylerslo
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Acquire: Bookings growth
29% < 20%
29% 20 – 60%
17% 60 – 100%
25% > 100%@tylerslo
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AcquireWhat percentage of your total sales opportunities close?
1-2% 3-5% 6-10%
>10%
5%
37%
21%
36%
@tylerslo
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Acquire: How to model ramp?
30 days 60 days 90 days > 4 mos21%
24%41%
14%
@tylerslo
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Acquire: How to model sales cycle
10 days
4%
30 days
16%
60 days
32%
120 days29%
19%@tylerslo
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Acquire: How to model quota attainment
> 40 %
12% 10%
40 – 60%
39%
60 – 80%
31%
80 – 100%
7%
> 100%
@tylerslo
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Acquire: What’s your over-assign
100Min quota on the
street
35% >$90MEXPECT
36% $80-90MEXPECT
25% $70-80MEXPECT
2% $50-70MEXPECT
2% < $50M
EXPECT
@tylerslo
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ACQUIRE: What is OTE to quota?
16% < 150k
26% < 200k
35% < 250k
13% < 300k
10% > 300k
$1M
@tylerslo
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Acquire: What’s your quota based on?
19%
18%
47%
15%
MRRTCVACVOther
@tylerslo
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Acquire: What are your commission rates?
9% 5%
35% 6- 10%37% 11 - 15% 12% 20%
CHEAPSKATES
THE NORM
THE NORM
BREAKING THE BANK
@tylerslo
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ACQUIRE: Expose, communicate, align
Current Qtr (Current Week)
Current Week
CapacityCorporate
Street
Closed#Deals
$ACV
RVP / AVPCommit Best
CaseTechnical Buy Off
# Deals $ACVIn Contracts
# Deals $ACV
@tylerslo
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Deploy
• Profit or break even
• What KPIs should you hold • the implementation team
accountable to
• Alignment between Sales Professional Services
• When does subscription start@tylerslo
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Deploy
Have an implementation
component to their solution
Charge less than 10% of initial
year ACV for the implementation
75% commence the subscription on contract signing
Of customers go live within 30 days of contract signing
@tylerslo
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Run
• Churn is the Achilles heel of any subscription business
• Who owns renewals
• Support verses customer success
• SLAs and uptime commitments
• How does a company learn from service tickets @tylerslo
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Run: Are your customers committed?
15%Monthly
4%Semi-Annual 73
%1-2 years
> 2 years 7%
Contract Terms
Run: Who owns renewals?
Customer Success;
55%Sales; 33%
Other; 12%
@tylerslo
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Expand
• Who owns the upsell
• Sales efficiency depends on farming the existing base
• New usage, new divisions, new products…can all be leveraged as upsell strategy
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ExpandUpsells are important – over
40% 20%
>60%
14%
of respondents generate more
than
of their bookings from upsells
of companies are changing pricing
At least annually
Only every 3 years
Sales reps are the key – companies generating higher upsells assign reps to manage
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at
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42%
51%
7%
Who Manages Upsells?
Customer Success Team
Sales Reps
Other
35%
65%
Do you pay for results?
no
yes
Expand
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Conclusion
“As CFOs we have an
opportunity and challenge.
Own the business model
and drive strategic
decisions within our
organizations.”
@tylerslo
at
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Conclusion
“To be successful, we need
information and
collaboration. That is why
we are here today.”
@tylerslo
at
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Thank you.
CFO Summit
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