Your SaaS business is faring well, and your investors are happy. Your sales team is signing new clients every month, and you have $500 thousand in monthly billings. You’re thinking that you’ll soon become a unicorn (a company with a valuation of more than one billion dollars), but the party might come to an abrupt halt if your revenue churn is high. It’s not enough to just measure your billings; you need to measure your Monthly Recurring Revenue, or MRR for short. Let’s cover the meaning of Billings vs. MRR and how it impacts a SaaS company’s valuation.
What does Billings Mean to a SaaS Business?
Billings Definition: Billings is the total amount of money a SaaS business has received in a given period.
It’s important to note that billings are not the same as MRR or ARR:
Billings are not recurring revenue. They’re simply what you’ve billed in total during a certain timeframe (usually monthly), regardless of whether you’re actually receiving any cash from those clients immediately. It’s why we say they’re “estimated” rather than actual numbers; because clients could be paying you slowly, or on different payment terms, or even have outstanding invoices due to them.
Why is Monthly Recurring Revenue (MRR) important for SaaS businesses?
MRR is the most important metric for a SaaS business to track. It’s the best indication of your company’s health, growth, and profitability. In fact, MRR is so important that it’s often used as a key performance indicator (KPI) in SaaS businesses.
To help you understand why MRR is such an important metric, let’s take a look at some key metrics used by investors when evaluating SaaS companies:
- Revenue: Revenue refers to how much money the company makes on average over time; this can be calculated based on transactions or contracts. If you’re selling subscriptions on Amazon Web Services (AWS), then revenue would be calculated by multiplying your monthly recurring price (MRP) by 12 months per year multiplied by the number of customers who have signed up during each month since they started buying from you.
- Gross Margin Ratio: Gross margin ratio measures gross profit as a percentage of revenue generated from sales activities performed overtime the period measured; this indicates how efficient operations are at turning revenue into profits for shareholders without taking into account expenses related with running day-to-day business operations like salaries paid out etc.
What do Bookings mean to a SaaS business?
So, what do bookings mean to a SaaS business? Bookings are the total amount of money you expect to generate from a customer over the lifetime of the contract. They’re an estimate or forecast—not a promise, guarantee, or commitment.
This means bookings can change over time as your company’s sales team closes deals that include more features or pricing options than were previously included in an initial quote. If these changes are significant enough to alter how much revenue each booking represents, it might be time for you to readjust your forecasts and projections.
Key differences between Billings and MRR
The key difference between billings definition and MRR is that the former only consider the money that has already been received, while the latter takes into account future income as well. As a result, you can think of billings as being more akin to “cash in hand” while MRR represents your business’s potential for growth over time.
Another way of looking at this relationship is by comparing them to two sides of a balance sheet: cash on the left and total assets on the right (where total assets are made up primarily by accounts receivable). In this case, cash on hand would be like monthly recurring revenue since it’s about how much money you have immediately available for use in your business.
Is it good to Have High Growth in Billings but Stagnant MRR?
In many cases, you will see this trend in companies that have a recurring revenue model with a high renewal rate.
For example, let’s say you sell software and provide services related to it. You charge $20/month to use the software and offer training classes on how to use it. Customers are happy with your product and keep renewing their subscriptions every year for five years before sending you any support tickets or calling into sales (which is great!). This means that after each year, there’s always one final monthly payment from each customer before they stop paying altogether. That last month is called “Billings,” so if your customers continue paying for five years straight, all of your revenue would be considered Billings. As long as people continue renewing their purchases at an average rate higher than 70%, you’re doing well!
How much is Too Much of Revenue Churn?
Revenue churn is, simply put, the percentage of customers who cancel their subscriptions. It’s a good measure of customer satisfaction and loyalty.
The formula for determining revenue churn is:
Revenue Churn = [# of cancellations] / [Total # of Customers] * 100
If you have 1,000 customers and 50 of them cancel in a month, your revenue churn would be 5%. However, if you have 2,000 customers and 100 (50%) cancellations in one month, your revenue churn would be 20%! That might sound bad, but it could also mean that you’re doing something very right to generate this kind of growth rate.
You need to Measure Your SaaS Revenue in Terms of MRR, Not Billings
Billings are not a good measure of SaaS revenue because they don’t accurately reflect how much recurring revenue you’re generating. When you’re dealing with monthly subscription fees and other variable billing cycles, it makes more sense to track recurring revenue as opposed to non-recurring payments like one-time or annual licenses.
Plus, your customers may have different payment plans for their subscriptions—like paying for their service monthly or quarterly—but if you only look at the total amount of money collected from each customer per month (billings), then it’s possible that those customers whose plans are on a longer cycle would be underrepresented in terms of their overall contribution to your business’ bottom line compared to shorter cycle memberships.
SaaS businesses need to monitor their MRR on a monthly basis. If you are a SaaS business, you need to be aware of the difference between MRR and Billings. However, if you do not already have your financials tracked in terms of MRR and Billings, it is probably not worth changing over now just because other companies have done so.