Growth metrics are tremendously important in the context of a SaaS business, not least because growth is good for the financial health of a company, but as they provide valuable insights into the overall performance of a SaaS business, especially to assess how well the business is expanding and evolving. By monitoring growth metrics, you can evaluate whether your company is achieving its strategic objectives and identify areas that need improvement.
In addition, growth metrics are critical to investors and stakeholder confidence who are keenly interested in the growth potential of a SaaS business. Growth metrics serve as critical indicators of a company’s ability to attract and retain customers, generate revenue, and expand its market share and these are of fundamental importance to securing funding or support.
Growth metrics also allow informed and data-driven decisions about the business, but also to marketing campaigns, and product differentiation efforts.
Among growth metrics, no other metric is more important than Bookings.
Bookings refer to the value of customer commitments or contracts for a specific period. Bookings represent the revenue that a SaaS company expects to recognize in the future from its customers. It typically includes the total value of signed contracts, including both new customer acquisitions and renewals or expansions from existing customers.
Bookings are an important metric for SaaS businesses as they provide visibility into the expected revenue and growth potential. It helps the company track its sales performance, forecast future revenue, and assess the health of its business. Bookings can be measured monthly, quarterly, or annually, depending on the company’s reporting practices.
It’s important to note that bookings may differ from recognized revenue due to accounting principles and revenue recognition policies. Revenue is recognized over the course of the contract based on accounting standards, while bookings capture the total value of the contract upfront or over the contract period, depending on the specific terms and conditions.
In a SaaS P&L, Bookings show as the very first item of the P&L, above the usual “top line” or revenue, and this is evidence of how critically important they are to the performance measurement of a SaaS business.
Let’s now look at each type of Bookings metrics.
There are typically different types of bookings that represent various stages of customer engagements and revenue recognition. Here are some common types of bookings:
Bookings contraction occurs when existing customers reduce the scope or value of their contracts, resulting in a decrease in their booking size. It represents a contraction or downsizing of the customer’s commitment to the SaaS company’s services.
Bookings contraction can happen due to various reasons:
Bookings contractions have obviously an adverse impact on a SaaS business, as they erode revenues, and indicates a possible customer dissatisfaction or a perceived lack of value in the SaaS company’s offerings. Managing bookings’ contraction requires proactive customer relationship management that involves understanding the reasons behind the contraction, addressing customer concerns, and exploring potential solutions to retain the customer, prevent additional churn, and ultimately mitigate revenue loss. While losing a customer is never fun, it is very common in a SaaS business, and it allows for product and service enhancement provided the customer pain points are understood, and the product can be modified. Faced with contraction it is essential for a SaaS business to demonstrate strong customer relationships, effective customer success programs, and continuous product innovation which can help mitigate the occurrence of further bookings contraction and maintain a satisfied and loyal customer base.
Net bookings business represent the total value of additional bookings, be it from new customers or existing customers who either upgrade or expand the scope and usage of their contracts / subscriptions, net of any cancellations, downgrades, or reductions in bookings from existing customers. It is the net result of new business gained and any reductions or losses within the customer base.
Net bookings are calculated by subtracting the value of cancellations, downgrades, or reductions in bookings from the value of new business acquired. The formula for net bookings is:
Net Bookings in ($) = Bookings Additions ($) – Bookings Contractions ($)
Net bookings provide a more accurate representation of the revenue growth and customer expansion within a SaaS business, as it factors in both new customer acquisitions and changes in existing customer commitments. If the net bookings rate is higher than 100%, then the business is expanding overall, but if it drops below 100% it is a red flag that the growth of the business is stalling or even going into the reverse.
The bookings’ ratio can be calculated either by comparing lost bookings with new bookings (commonly referred to as the Bookings Lost Ratio or the Bookings Churn Ratio) or the other way around, by comparing new bookings with lost bookings (commonly referred to as the Bookings Win Ratio). Regardless of the method of calculation, this ratio provides insights into the effectiveness of a company’s sales and customer retention efforts by comparing the value of new bookings with the value of lost bookings over a specific period.
Taking the Bookings Lost Ratio for illustration, it is calculated by dividing the value of lost bookings by the value of new bookings. The formula for calculating the ratio is as follows:
Bookings Lost Ratio = Value of Lost Bookings / Value of New Bookings
The value of lost bookings represents the total revenue or bookings that were expected or contracted but were lost due to customer churn, downgrades, or cancellations during the specified period. This can include customers who terminated their subscriptions or reduced their subscription levels.
The value of new bookings, on the other hand, represents the total revenue or bookings generated from new customer acquisitions, upsells, expansions, or upgrades during the same period. It includes revenue from new customers as well as additional revenue from existing customers who made additional purchases.
By comparing the value of lost bookings to the value of new bookings, the Bookings Lost Ratio provides insights into the net growth or contraction in bookings during the period and helps evaluate the overall health of the business. A ratio below 1 indicates that the company is losing more bookings than it is generating, suggesting a net contraction in the customer base. Conversely, a ratio above 1 indicates that the company is acquiring more bookings than it is losing, suggesting a net growth in the customer base.
Tracking the Bookings Ratio allows companies to identify trends, assess customer retention strategies, and make informed decisions to minimize churn and maximize revenue growth. It provides insights into the effectiveness of sales, marketing, and customer success efforts and helps guide strategies to optimize customer acquisition, retention, and revenue expansion.
Tracking bookings is crucial for several reasons, including:
Overall, tracking bookings in a SaaS business is essential for revenue management, performance evaluation, business planning, customer success, investor relations, and strategic decision-making. It provides valuable insights that help optimize sales, marketing, and product strategies to drive growth and ensure long-term success in a competitive SaaS market.
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