What is Bookings in the world of SaaS?
Bookings does not have a standard definition in Generally Accepted Accounting Principles (GAAP). So this varies across companies. However, bookings are a forward-looking metric, that typically, indicate the value of a contract signed with a prospective customer for a given period of time.
Revenues, on the other hand, is a GAAP defined term. Revenues are inflows of assets or settlements of liabilities (or both) from activities of the entity's central operations.
Let’s take this example - a cloud-based helpdesk SaaS solution called ‘Help!’ with customers that come in all shapes and sizes. Help! is offered in 4 different plans - Startup, Growth, Pro and Enterprise, priced at $200, $500, $1000 and $2000 respectively.
Help! signed up an enterprise customer ‘A’ recently, under the Enterprise plan on 1st January 2016, with a contract in effect for 2 years.
Bookings: The contract between ‘Help!’ and Customer A, that commits a service from the provider’s end, as well as a payment from the customer’s end during the 24 months of engagement is Booking. So, Booking = $24000. It is the total value of all the contracts signed.
Revenues: When ‘Help!’ has rendered the service to the extent that there is reasonable guarantee of receiving payments for the service, then that revenue can be recognized.
For instance, if the customer had signed up on January 2017 and ‘Help!’ has billed the customer in the beginning of January, then as on the end of January 2017, the Revenue = $1000. And as on the end of June 2017, the revenue recognized would be $6000, and so on.Breaking down Bookings and its types
Bookings are a visual representation of the money committed to flow into the business. It is a great indicator of a product’s demand and a market’s response to the product, as a result of which they are willing to commit for the product or the service. While it is recorded as an annual number, bookings can extend to more than a year, or less.
In case of bookings, it is possible to collect the payments either at the beginning of the contract, in which case, it becomes a liability and is called a deferred revenue, as the company is obligated to offer the services. Alternatively, the revenue can be recognized over the term of the relationship, when the revenues can be recognized.Types of Bookings:
Bookings can be classified under three types - New Bookings, Renewal Bookings and Upgraded Bookings.
This portion of bookings includes new customers who have just signed up for the product or service. For instance, Customer A has been a customer of Help! Since 2014. However, if Customer A has introduced a new product and signs a new agreement with Help!, this will qualify under new bookings.
Upgrades and expansion from up-selling usually falls under New Bookings. So, if Customer A wants to upgrade from Growth Plan at $500 to Enterprise Plan at $2000, a new contract needs to be signed with Help!, where Customer A commits an annualised value of $24000.
This portion of bookings includes existing customers whose contracts are up for renewal. The Renewal Bookings can be calculated either at the time of the effective renewal date, or when renewal request is received on another date as opposed to the end of the contract.
Apart from these, there are more distinct types of bookings which are usually ignored in terms of nuance and Santi Subotovsky points out those minor details in his post.
Annual Contract Value (ACV) Bookings
In case of multi-year contracts, bookings that have at least one year’s committed revenue is considered as the ACV bookings. For instance, if Customer A signs a contract with Help! for a three years contract under the Enterprise Plan of $2000, then the ACV Bookings will be $24000.
Total Contract Value (TCV) Bookings
Just like ACV Bookings, this involves multi-year contracts. However, TCV Bookings is calculated taking into consideration the complete duration of the contract. So, if Customer A signs a contract with Help! for a three years contract under the Enterprise Plan of $2000, then the TCV Bookings will be $72000.
While the recurring bookings is a standard practice that includes a defined set of offerings every month, quarter or year on a recurring basis, some of the charges include non-recurring aspects such as set-up fees, training fees, discounts etc., that don’t get included under recurring bookings.
Typically, these is not included under SaaS Bookings by some businesses and investors. However, since bookings in essence denotes the value that you are able to predict upfront, all components which are ideally expected to pay, should be baked into bookings. These include non-recurring bookings.
What do you include in Bookings: - New Contract - Renewals - Planned Upgrades - Planned Downgrades - Non-recurring bookings such as set-up or implementation fees, one-time charges, discounts
Components of Bookings in a SaaS Financial Sheet: Average Deal Size - Average size of deal for full duration Average Contract Length - Average duration of contract signed by the new customers Average Months Paid Upfront - Average number of months paid upfront by new customers Average MRR for new customers = Average Revenue Per Account (ARPA) - Average MRR across the new customers ARPA (Across the installed base) - Average MRR per customer across the existing customer