Measuring Success: A Deep Dive into SaaS Revenue Metrics - Part 1

This series was inspired by Sara Archer’s “SaaS Metrics Fundamentals” class on Pavilion.

In the central forum of ancient Rome stands a Roman monument known as the Milliarium Aureum, or golden milestone, which was erected by Emperor Caesar Augustus. It served as the starting point for measuring all distances in the Roman Empire and was regarded as the site from which all principal roads diverged.

As all roads led to the Milliarium Aureum, all roads in SaaS lead to revenue. Revenue seems to be the ultimate destination and measurement of success for any business. (Although, some could disagree.)

There are several key revenue metrics that serve as essential markers on the road to success for SaaS businesses. In this series, we will explore these revenue metrics in detail and provide a clear understanding of what they mean and how you can use them to evaluate the performance of a SaaS business.

The Contract and the Booking

For simplicity, we’ll assume that we recently built our niche SaaS business: an inventory management system for small and mid-sized boat retailers. We picked up the phone and we won our first client, Swell Boats, Inc. We closed-won that opportunity in our CRM, and we sent out a contract to Swell Boats. The terms of this agreement, dated January 15, dictate that Swell Boats pay €12,000 per year to our business for 3 years. We will charge Swell a one-time €5,000 for set up and training. We are now waiting for Swell Boats to sign this contract. At this point, the only thing that we got is a commitment to spend money. A letter of intent. An agreement. Something waiting to be signed. We recorded a booking. The paid version of the software and its benefits is not yet provided to the customer. How businesses record bookings may differ, but “first-year bookings” is typical across SaaS businesses. In this example, our overall bookings are: $$\text{€}36,000 + \text{€}5,000 = \underline{\underline{\text{€}41,000}}$$

Our first-year bookings are: $$\text{€}12,000 + \text{€}5,000 = \underline{\underline{\text{€}17,000}}$$

The single source of truth for bookings is your system of records, such as Salesforce.

Billings

Let’s assume that Swell is happy with the contract we sent out. They signed it the same day. This allows us to send over an invoice and bill the customer. Depending on the financial processes, the bookings and billings might happen at the same time or at different timeframes. Bookings are a forecasting metric that signifies a commitment from the customer. Billings is an accounting metric and it signifies the money you are owed. If you have customers from a variety of payment terms, the difference between bookings and billings might be significant. Moreover, the ownership within the organization might differ: In-house sales or analytics teams might own the bookings while Finance teams often owns billings. In our case, since the client will pay yearly, we will only bill for the Year 1 portion for now. The first-year billings are:

$$\text{€}12,000 + \text{€}5,000 = \underline{\underline{\text{€}17,000}}$$

The single source of truth for billings is your ERP software such as Netsuite.

Next part of this series will focus on ACV, TCV, and ARR.