SaaS companies love to talk about bookings. Total bookings are an important metric but just as important is the source of those bookings. Generally there are three sources: i) sales to new customers; ii) renewal of existing contracts; and iii) upsells to existing customers. At a minimum a business should break out all three and understand the drivers of each. The break out is important for the following reasons:
-Renewals are great, but if they represent the bulk of bookings, then you’re not growing fast enough. Strive to make sure that new bookings + renewal bookings are at least matching renewals every month. This will ensure that you’re at least doubling in size year over year. Generally a good SaaS businesses has a renewal/retention rate of 90%+.
-Upsells are an under-rated type of booking, and it’s important to make sure AE’s are compensated for this type of sale as much as a new sale, or ensure your customer success reps are paid for properly exploring and nurturing upsells with existing customers. Upsells are fantastic as it means you’ve got better product market fit than thought and customers are becoming more entrenched with your product, but they tend to have a natural ceiling: existing customers can only purchase so much product whereas new customers are unlimited. As we noted in a past blog post, make sure your net renewal rate (renewals+upsells) is at least 105%. Note that for publicly traded SaaS companies we monitor, the median is 105% and average is 110%. The data can be found at the link below.
-New bookings are of course the holy grail of bookings. Make sure your good sales reps maintain a ratio of new+upsell bookings/total comp of at least 3.0x, and your best reps are 4.0x+
-When looking at financials, we focus intensely on the cash flow statement of which bookings are a major part. We also do a quick check of cash flow health, often looking at total bookings/cash operating expenses for each month and quarter. This gives us a sense of the “bookings delta” required to get to cash breakeven without the distorting effects of working capital adjustments. In this case, looking at total bookings, and not siloing new bookings, upsells, or renewals is appropriate.
Total bookings are an important measure for any SaaS business, but understanding the source of those bookings and making sure the underlying metrics are healthy is just as critical.