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Early-Stage SaaS Businesses Must Focus on Bookings

Business Finance Solutions Financial Techniques SaaS Business Startup

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-Natalia Meissner

I am a future-focused and strategically minded finance professional with 20+ years of experience in industrial and technology verticals. With an MBA, CPA, and PMI background, I blend intellect with a strategic, financially savvy, and sustainability-focused mindset. Known for my energetic execution, analytical thinking, and transformative approach, I deliver results. I prioritize collaboration, invest in people, and leverage financial technology for data insights and automation. I excel in diverse, multicultural contexts, promoting collaboration. I grow business value, focusing on the top and bottom line, cash flow, and resource efficiency. My solutions help when internal resources are stretched thin or an outside perspective is essential. My network of C-Level executives is ready to step in and deliver lasting impact, ensuring your business’s continued success.

Nothing Matters More To Early-Stage SaaS Business Than Growth In Bookings

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.

What Are 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.

Different Types Of Bookings

There are typically different types of bookings that represent various stages of customer engagements and revenue recognition. Here are some common types of bookings:

New Bookings: This refers to new customers or contracts acquired during a specific period. It represents the total value of new sales contracts or subscriptions closed during that period.
Renewal Bookings: These are bookings from existing customers who renew their subscription or contract for another term. It reflects the value of recurring revenue from ongoing customer relationships.
Upsell/Cross-sell Bookings: This category includes additional sales made to existing customers, such as upgrades to higher-tier plans or the sale of complementary products or features. It represents incremental revenue generated from expanding the relationship with an existing customer.
Expansion Bookings: This type of booking captures revenue resulting from expanding the usage or scope of the software within an existing customer’s organization. For example, if a customer adds more users or extends the software to additional departments or locations, it would be considered an expansion booking.
Churn Bookings: Churn refers to the loss of customers or cancelled contracts and subscriptions. Churn bookings represent the value of lost recurring revenue due to customer attrition. Tracking churn bookings helps measure customer retention and identify areas for improvement in customer success or product offering.
Downgrade Bookings: Booking downgrades occur when existing customers choose to reduce the level of their subscription or downgrade to a lower-tier plan, resulting in a decrease in their booking value. It means that customers are opting for a lesser scope of services, features, or resources compared to their previous subscription.
Net New Bookings: This metric provides a comprehensive view of the growth of a SaaS business. It considers new bookings, renewal bookings, upsell/cross-sell bookings, and expansion bookings while factoring in churn bookings. Net new bookings indicate the net increase or decrease in recurring revenue from a given period.

Zooming On Contraction 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:

Downgrading Subscription: Customers may choose to downgrade their subscription or switch to a lower-tier plan that offers fewer features or resources. This could be driven by cost-cutting measures, changing business requirements, or a need to align their usage with the actual needs of their organization.
Contract Renegotiation: Customers may request contract renegotiations to reduce the scope of their agreements, such as decreasing the number of licences or users, or adjusting service levels. This can happen when customers feel they are not fully utilizing the contracted services or when their needs change over time.
Changing Circumstances: Changes in a customer’s business circumstances, such as downsizing, restructuring, or budgetary constraints, can lead to bookings contraction. In these situations, customers may need to reduce their subscription size to align with their current resources or operational requirements.
Mergers or Acquisitions: In the case of mergers or acquisitions involving the customer’s organization, there might be a need to consolidate software subscriptions or standardize on a different platform. This can result in a contraction of bookings as the customer transitions away from the SaaS company’s services.

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

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.

Bookings Ratio

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.

The Importance Of Bookings Metrics And Why They Should Be Tracked

Tracking bookings is crucial for several reasons, including:

Revenue Visibility: Bookings provide visibility into the future revenue that will be recognized as services are delivered over the contracted period. It allows the company to project and forecast its revenue streams, helping with financial planning, resource allocation, and investment decisions.
Performance Measurement: Bookings serve as a key performance indicator (KPI) for a SaaS business. By tracking and analysing bookings data, companies can assess their sales and growth performance. It helps evaluate the effectiveness of marketing and sales strategies, identify trends, and make data-driven decisions to drive business growth.
Business Planning and Strategy: Bookings data enables SaaS companies to develop informed business plans and strategies. By understanding the demand and customer preferences, they can align their product roadmap, pricing, and go-to-market strategies to capitalize on market opportunities and stay ahead of competitors.
Customer Acquisition and Retention: Bookings data provides insights into customer acquisition and retention rates. It helps identify the sources of new customers, evaluate customer churn, and understand the factors that influence customer decisions. This information is valuable for optimizing customer acquisition efforts, improving customer success programs, and enhancing customer satisfaction.
Investor Confidence and Funding: Investors closely monitor bookings as a key metric to evaluate the growth and financial health of a SaaS company. Strong bookings figures can instil investor confidence, attract funding, and potentially increase the company’s valuation. Accurate and reliable bookings’ data enhances transparency and credibility in financial reporting.
Sales and Revenue Forecasting: Bookings serve as a foundation for sales forecasting. By tracking bookings trends, companies can estimate future revenue, predict demand patterns, and set achievable sales targets. This information is valuable for sales teams to plan their activities, allocate resources, and drive revenue growth.
Pricing and Packaging Optimization: Analysing bookings data helps SaaS businesses assess the performance of different pricing plans and packaging options. It provides insights into customers’ preferences, pricing sensitivity, and the popularity of specific features or offerings. This knowledge helps in optimizing pricing strategies and adjusting product plans to maximize revenue and customer satisfaction.
Performance Benchmarking: Bookings data allows SaaS companies to benchmark their performance against industry peers. By comparing bookings metrics such as new bookings, expansion bookings, and churn rates, companies can assess their market position, identify areas for improvement, and drive operational excellence.

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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