Bookings do 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 indicates 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.
Simplified meanings… 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 a reasonable guarantee of receiving payments for the service, then that revenue can be recognized.
For instance, if the customer had signed up in January 2017 and ‘Help!’ has billed the customer at the beginning of January, then as at the end of January 2017, the Revenue = $1000. And as at the end of June 2017, the revenue recognized would be $6000, and so on.
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 to 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 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.
Bookings can be classified under three types - New Bookings, Renewal Bookings, and Upgraded Bookings.
New 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.
Expansion/Upgraded Bookings Upgrades and expansion from up-selling usually fall 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 annualized value of $24000.
Renewal Bookings 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 the 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 that are usually ignored in terms of nuance and Santi Subotovsky points out those minor details in his post.
Annual Contract Value (ACV) Bookings In the case of multi-year contracts, bookings that have at least one year’s committed revenue is considered as 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.
Non-Recurring Bookings While the recurring bookings are 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 are 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 the 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
Bookings help at various stages of growth. Many early-stage businesses that don’t entirely follow accounting best practices, treat bookings as the source of truth, in terms of revenues that can potentially be generated for their business. It also helps in understanding the market demand and the product-market fit for the solution they are building.
For sales and marketing teams, bookings help in deciphering revenue flow. The teams can improve on their customer acquisition strategy by drawing insights from which prospects signed up for what plans, converting prospects into paid users, which salesperson was responsible for winning the customer, etc. Based on these inputs, you can tighten the process of customer acquisition, retention, and a possible upgrade.
Bookings are an indicator of sales growth - so the sales team’s primary metric is bookings.
While the sales team also looks at metrics such as MRR and churn, to understand if they are targeting the right kind and quality of customers, Bookings is one of the better metrics to evaluate sales success, as it estimates the revenues that are won by sales, including non-recurring bookings. This is particularly necessary as MRR does not count in revenues from non-recurring charges.
For instance, in the case of new bookings, attributes such as downgrades, or contract cancellations, etc. should be taken into consideration for evaluating compensation. Similarly, for renewal bookings, it is worth considering upgrades or downgrades during renewals to evaluate compensation. The idea is to bridge the gap in expectations raised during a sale versus expectations during continuous service delivery.
That leads us to convert the bookings into recognizing the revenue. That is, if the bookings are high and the revenues recognized are low, there is a clear gap in the sales process and product delivery.
Apart from sales, Bookings is an important metric for CFO’s and finance teams as well, to help in planning cash outflows and inflows. In effect, it helps finance teams to report bookings as committed money, without recording them as revenues, and thus falsely calculating MRR/ARR.
It is also a must for Product teams to refer to Bookings in order to deliver the product experience that customers have committed to pay for.
Fred Wilson in his blog says, “When a customer commits to spend money, that is a booking”. With this in mind, we had earlier mentioned that bookings include recurring, non-recurring subscription charges along with one-time charges for professional services such as implementation, set-up, etc.
Customer A signed up with Help! in Jan 2017, for a 24-months contract at $2000 per month, paid half-yearly.
Customer A also committed to a one-time implementation fee of $3000.
Customer B signed up with Help! around the same time, for a 12-months contract at $1000 per month, paid in advance.
Customer B committed to pay one-time concierge support at $2000.
Customer C committed to a 6 monthly contract at $1000 per month paid quarterly.
Customer D upgrades to a monthly plan of $100 on a month-on-month basis
The Bookings, in this case, will be $48000. We need to be careful about the multi-year subscription contract and take into consideration only the ACV booking. The subsequent year will be considered as a renewal booking, even if it was committed in advance.
You will see that we have calculated and recorded bookings for different scenarios including bookings for multi-year subscription contracts, annualized bookings, bookings within the year, recording bookings for mid-term upgrades, and one-time charges.
However, David Skok in his incredibly exhaustive post points out, “Since the bookings number might have a mix of different durations (e.g. month-to-month; 6 months; 12 months) this number is not very helpful for understanding the business.”
He goes on to add that, you should look at the following components, to make more sensible decisions
What happens with new customers: New MRR/ACV from new customer contracts
What happens in your existing customers: Renewals Churned MRR/ACV Expansion bookings
The sum of all of the above: Net New MRR/ACV
Simply, Bookings don’t directly impact financial reports and income statements. Encouraging sales to enable prospects to pay upfront is another great way to improve bookings and increase cash flow. Needless to say, that should also mean delivering an experience that justifies the payment.