Let’s take this example. John runs a SaaS business that offers a cloud-based helpdesk tool for his customers called ‘Help!’. Help! was started in the end of 2014, has more than 2000 customers and growing globally. The customers come in all shapes and sizes. Help! is offered in 3 different plans - Startup, Growth and Enterprise, priced at $200, $500 and $1000 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.

Customer Recurring Fee (per month) of Enterprise Plan Annual Contract Value
Customer A $1000 $24000

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.

Billings: Billing is when ‘Help!’ raises an invoice to customer A. So, if customer A has signed up for the annual plan and the contract agrees that customer A shall be billed in the beginning of the year, then Billing = $12000.

Revenues: When ‘Help!’ has rendered the service to the extent that there is reasonably certainty as to the collectibility of payments in relation to such service rendered, 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 of January 2017, the Revenue = $1000. And as on the end of June 2017, the revenue recognized would be $6000, and so on.

MRR: MRR or Monthly Recurring Revenue is a simple estimate of the predictable monthly revenue based on all the recurring subscriptions. So the normalized monthly recurring revenue for ‘Help!’ from Customer A would be MRR = $1000.

It is also important to remember that MRR is very different from Revenues. Suppose Customer A has upgraded from Growth to Enterprise plan i.e. from $500 to $1000, on the 15th of April. So, the MRR report for April would show that the MRR for Enterprise plan is $1000. But actually, it would have taken into consideration, the fact that the Customer A has moved from $500 to $1000.

From a revenue recognition perspective, which is dependent on the billing and the services rendered, the revenue that would end up showing for April would be calculated as below:

  • April 1st - April 30th ⇒ Customer A was billed for $500
  • Customer moves to a higher plan of $1000 on April 15th
  • So the revenue till April 15th = $250 because the service has been rendered only to the extent of $250 for 15 days.
  • A credit note will be issued for $250
  • April 15th - April 30th ⇒ Customer A has moved to $1000 plan
  • So the revenue from April 15th to April 30th = $500, because the service has been rendered to the extent of $500 for the remaining 15 days.

So the revenue recognized will be $750 whereas the MRR shown is $1000. And the net billing amount will be $1250 ($500 + $1000 - $250).

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