- Peter Drucker famously said
what gets measured gets managed.
So, if you're growing your SaaS business,
what you're probably measuring very meticulously
are your revenues and your revenue growth.
When I was working in toutapp, my SaaS business
and I was working at Marketo, the company
that bought my SaaS business, which was also SaaS business,
revenues and how we measured revenues
and how we thought about revenues versus booking
and MRR versus ARR, Oh man, it was it was kind of crazy.
And so, it's very often I see SaaS founders getting
a little confused about how to measure
revenues the right way.
And that's super important if you're
actually driving growth.
That's like the one metric you want to nail
and get right and be accurate about.
So, in this episode, I'm going to walk you
through the three principles that you absolutely need
to know when it comes to measuring revenues the right way.
Intro
(upbeat music)
What's everybody, welcome to Unstoppable, I'm TK.
On this channel, I help SaaS founders like you
navigate the path to the next stage growth,
navigate the path of product market fit and beyond.
So if you are new to the channel, welcome,
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like this with the TK Energy.
Also, if you're already part of the community, welcome back.
Really excited to have you here.
So, on this episode, I'm going to go through some things
about measuring revenue and all these metrics
we talked about and in SaaS businesses,
I'm wanna walk you through how to think
about them the right way,
because I don't know about you,
but when I first started out in SaaS,
which was, I don't know, 10 years ago, 15 years ago,
it was kind of confusing.
And back then it was also a very nascent space,
everyone was still trying to figure out
how to do it the right way.
But now, I think there's some broadly accounted things
that we agree on, on how to measure revenue
and what to focus on between MRR, ARR, ACV, TCV.
So, I'm gonna walk you through my three principles.
If you're excited to get started, smash that like button
and let's dig right into it.
So, the first thing You got to get your head around,
especially when you're like, just focus on revenues
and thinking about scaling is you got to start thinking
differently between bookings versus revenues,
bookings versus revenues.
I made this mistake where I was talking about bookings,
but I meant revenues and we should have been focused
on revenues and not bookings, because cash flow
is different between those.
So, this is where I take a deep breath,
let's dig into it, bookings versus revenues.
Bookings are essentially
how much the customer has committed to pay you.
Revenue, on the other hand, is how much the customer
is paying you for this period of service,
this next period of service.
So, for example, let's just say you bring on a customer
that has committed to a three year deal,
they said, Look, we'll sign with you for three years
or the best system of record for my particular industry.
Three years I'm all in is going to be a giant transformation
is super strategic and only 300K.
So, did you book 300K, is that your ARR,
is that your MRR, is that your TCV?
Like there's some nuances here.
And if you really want to nail this,
especially as you measure your business,
as you think about cash flow, as you think
about fundraising, and how to communicate
your business growth and revenue growth
and your bookings growth, you got to nail all this.
So, the first thing you want to understand is, you booked
that three year deal, but you need to only recognize
the revenue for this current period.
And just because you booked that three year deal,
doesn't mean that 300K is going to be in your bank account.
They could be paying on for only for this year,
and then they'll pay next year,
and then they'll pay the following year,
even though they're contractually obligated for three years.
If they are actually paying on a yearly basis
or monthly basis, they'll also impact
how you think about your cash flows.
This is why, investors really wanna understand
not so much bookings all the time, but they really wanna
understand revenue, and what your revenue run rate is
versus your bookings rate.
Because it tends to Office gate a lot of things
especially on the health of the business,
the cash flowing into the business and all that.
So, basically, lesson number one, there's difference
between bookings and revenues.
Revenues are more important
because that's the most impactful thing to your bottom line
and your cash flow versus bookings.
Bookings are great too, three year deals are fantastic,
but you want to think about revenues
because it's more present.
The second thing you wanna understand,
is whether you think about Monthly Recurring Revenue,
or Annual Recurring Revenue.
This one I learned a little bit on the hard way
coz I always thought ARR, or Annual Recurring Revenue,
even when I talk to SaaS founders, they're applying
to my Go-to-Market-Program in the little forum
where you apply to join,
I was asked what's your ARR not your MRR.
There's a reason for this,
toutapp originally started as a self service business
and people signed up, they activated,
the swipe their credit card,
and then we made a certain amount of money every month.
And that was kind of like, chapter one of the business.
But chapter two, through chapter 10 of the business,
we actually turned on an inside sales team.
We actually de emphasize the self service visits
and focus a lot more on bigger deals
and going after the enterprise and the upper mid market.
And so, we always did one year deals or three year deals.
And so, we always thought in terms of ARR,
even when Marketo, there was no way you could sign up
for a trial, you have to pay for the year,
you have to do a one year contract minimum.
In some cases, we made exceptions both toutapp
and our Marketo that, okay, you can do
at least a one year deal, but you can pay quarterly
but you're still contractually obligated
for the full year and will come after
if you don't pay every quarter,
we can break up the payments for smaller companies,
but it was always Annual Recurring Revenue.
Now not every besides business thinks about an annual deal.
There are lots of SaaS businesses, even people in my program
that actually think more in terms of monthly revenue.
Because they're only paying every month
and they charge a credit card every month,
and any given month, the customer can decide
they're going to leave.
So, the first thing to ask yourself is, do you wanna
think for yourself an MRR cadence or ARR cadence?
I'm biased here, I actually think that every SaaS business
should try to go for yearly deals.
But that's not true for every market, right?
In certain markets, just the most you can do
is on a monthly basis, on an MRR basis.
So, the first thing you want to figure out is,
is your business thinking in terms of charging customers
on a monthly basis, or can you actually move up
to doing it on a yearly basis and then a multi year basis?
Obviously, the more of an important and urgent problem
that you're solving, the more likely the customers
are gonna be to prepay for the year sign up
for the year or even do multi year deals.
So, you want to push for that.
I actually think you should try to be on the ARR level
and charge for the year all the time.
But, that may not be the case that may not be feasible
or you may not have grown into it yet.
So, first choose whether you're on
the MRR cadence or the ARR cadence.
Now, how do you measure MRR, or ARR for that matter?
It's essentially any new business,
plus upgrades, plus cross sells,
minus downgrades, minus cancellations.
That's essentially your MRR,
and simply put that MRR times 12 is your ARR.
If you're always charging on an annual basis,
then you start with your ARR calculation,
and you can divide it by 12 for your MRR calculation.
There's this extra thing that you get into
and I'm not going to go into it in this video,
but this is something to talk about
with their finance person, it's around Revenue Recognition.
Revenue recognition is like the underbelly of SaaS,
finance and SaaS revenues and how do you measure it?
Rev Rec, there's like this ugly spreadsheet that's hidden
in every SaaS business, and it's usually by the controller
or the accountant or the part time CFO or the CFO,
where they're trying to do Rev Rec the right way,
and there's almost certainly bugs in there.
Revenue Recognition comes into if someone pays you
for a three year deal upfront, they pay the 300K,
but they're on a monthly basis,
like they're using the service every month,
when you recognize that 300K,
and what do you do with that cash,
and how do you manage that cash?
That's revenue recognition.
I won't go into that, for the purposes of this video,
just know the difference between MRR and ARR,
and whether you should be on an ARR level or an MRR level.
If you are truly on a monthly cadence, then stick with MRR.
If you are charging doing one year deals,
and that's your baseline, you don't do business
unless they sign up for a one year deal,
which is where you want to get to with the SaaS business
in my opinion, then you want to do ARR.
Now, can you go into ARR right away in the early stages?
No, we didn't, we started with MRR and then we grew in ARR,
and then we were doing three year deals.
So, that's that's how you can think about that.
But know that number one bookings versus revenues.
And then when you get into revenues,
think about MRR versus ARR.
And also talk to your friendly finance person
about Revenue Recognition and make sure
that they're doing that properly,
otherwise, they'll screw you over.
The other thing I'll mention,
I have one more on this and I'll get to that.
But before I get to that, let me pause here for a second.
There's this one time at tout,
this was like super early days, we were just in that chasm,
we were moving from doing the the self service business
to the inside sales business and we were starting to book
these one year deals and they were like,
they start with 20K deals, and 30K deals, and 50K deals
and they were coming in, coming in coming in, coming in.
And we hadn't even raised our series A yet
we were we had only raised about a million like 970K
in seed money, we were getting to a million ARR,
we were almost like, we were basically cashflow positive,
and we were thinking our next run, but then all of a sudden,
like I log in, to our bank account.
And by the way, we've been killing it,
we had our best sales month.
And I logged into our bank account and we were like,
We weren't gonna make payroll, forget like,
we weren't gonna be able to make payroll.
We had like seven employees at the time,
reaching a million ARR, but we also wouldn't be able to pay
our like Engine Yard bill, we were using Engine Yard.
And I'm like, I don't understand, like what's going on?
We booked all this business,
but we don't have the money in here,
like what the hell is going on?
And that was my rude awakening to this entire mess
of bookings versus revenues.
In that just because we booked a deal
doesn't mean the cash is in the bank account.
There's also this thing around DSO,
which is just essentially how much
your customers owe you but haven't paid yet.
Like, we booked the deals, we put them in the platform.
They're like sounds good, checks in the mail.
But it turns out even for large corporations
unless you have a series of processes, hey,
you owe us money, you need to pay it, it's due in 30 days,
need invoice you, and they had to ship you the check,
because you can't put $50,000 on a credit card.
We essentially, were at a point where we booked,
like we booked a whole bunch of deals, but essentially,
our Rev Rec was zero and even more so,
Rev Rec was okay, but our cash collected was negative.
And therefore we were like, out of money.
And like I had literally had to call up
one of our investors, I'm like, listen,
we're out of money, but we're not really out of money.
But we're out of money and we need you to wire us 25K
so that we can pay our bills, but I promise you,
like, there's a whole bunch of money coming our way.
And that's when I really learned like,
you got to think differently between bookings and revenue
and you got to think differently between MRR and ARR.
You also think differently about Rev Rec
and cash collections.
These are all important pieces that, like I wanna
build great product, I wanna to market it,
I wanna to get more people, wanna to serve them.
Yes, but you also have to think about this finance piece.
So I wanted to do this episode, so was crazy story,
we're like out of money but not out of money.
And like our investors just laughed coz he's like,
I get this all the time, like you get your stuff together.
Like I know, I know, we're hiring a part time CFO.
And when we got our series A we actually brought
on the firm to be our part time CFO.
So, this is why this is so important.
If you're seeing why this is so important,
you gotta embrace this stuff.
You don't know the difference between bookings
and revenues, MRR versus ARR,
can I just get a yes in the comments below
and also smash that like button, for the YouTube algorithm.
Also, if you're thinking about growing your SaaS business,
I'm a five point star strategy guide,
I'll tell you more about it,
but let's wrap up on the third principle.
The third principle is knowing
the difference between ACV and TCV.
So, we talked about bookings and revenues.
We talked about MRR versus ARR.
The last piece you just need to know
in this slide PhD for SaaS financial terms
that are related to revenue, ACV verses TCV.
ACV is your Annual Contract Value,
TCV is your Total Contract Value.
This is the league you want to get to.
If you're building a substantial SaaS business,
you want to get out of this, like swipe
a credit card every month,
like that's good to get started in.
But in the larger, larger scales, you want to get
into annual deals, you want to get into multi year deals,
that's when it gets super interesting, it gets super fun.
And so let's just say Acme Inc,
signed a three year deal, with a TCV of 300K.
If it's a TCV, TCV is Total Contract Value.
Total Contract Value of three years 300K,
that means your ACV, your Annual Contract Value is 100K.
It also means that, if this is your first customer,
your ARR annual recurring revenue is now 100K.
But it also means, that your MRR is now 8.3K, roughly.
I think I did the math right, yeah, that sounds right.
And so, that's how all of these connect together,
but also remember, there are nuances
here if you've been paying attention,
like just because you booked the 300K deal doesn't mean
you have 300K in the bank,
just because, your payment terms matter
your collection matters, and all of these tie together
to actually paint the true revenue picture
of your SaaS business.
There's also this thing of like,
just because someone signed a three year deal
doesn't mean they're always going to honor it.
If it's a tiny company, they might give you the wink
and a nod and say that they're doing a three year deal
but they've got a business, some money in the bank.
This is why all these nuances matter.
So, to recap, know the difference
between bookings and revenues.
Pick whether you're on the MRR cadence or the ARR cadence,
and also, do multi year deals, those are the best
but just know ACV versus TCV.
Those are the three principles I wanted to walk you through
and the story I wanted to share about SaaS revenue metrics,
what gets measured gets managed, so be sure to measure
your SaaS revenues properly, as you drive to growth.
If you got value from this video,
please be sure to smash that like button
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That's pretty much it.
I really appreciate watching this video.
And remember, everyone needs a strategy
for their life and their business,
but when you are with us, yours, its gonna be unstoppable.
I'm TK and I'll see you in the next episode.
(upbeat music)
I think I did the math right, yeah, that sounds right.