Bessemer SaaS Law #1

Bessemer SaaS Law #1. Your key monthly business metrics are: CMRR (Committed
Monthly Recurring Revenue), Churn, and Cash flow - “Bookings” is for suckers.

Experienced software executives have been taught for years that there is a single critical metric by which the health of a growth software business can be judged: “Bookings”. However, in the SaaS world, “Bookings” is ambiguous at best and often very misleading. A simple example would be if Customer A signs a one-year deal at $10,000 per month, and Customer B signs a three-year deal at $5,000 per month. The traditional metric of Bookings would value Customer A at $120,000 and suggest Customer B is more valuable at $180,000. This is misleading because in a recurring revenue model, Customer A is much more valuable to the business (assuming typical churn rates) as they will likely generate $360,000 of revenue for the business with renewals over that same three year period.

To achieve better business visibility, most SaaS companies focus on Monthly Recurring Revenue (MRR) – which is the combined value of all of the current recurring subscription revenue - instead of Bookings. We recommend companies actually take this a step further and keep a forward view of Committed Monthly Recurring Revenue (CMRR). The CMRR differs from the MRR from two standpoints: firstly, it includes both “in production” recurring revenues of customer and also those with signed contracts going into production. Secondly it is reduced by “churn” which is the MRR expected to be lost from customers that have announced they will stop the service. This metric is the single most important metric for a SaaS business to monitor as the change in CMRR provides the clearest visibility into the health of any SaaS business. For a more detailed explanation of CMRR and how it’s calculated, you can signup to receive David Cowan’s whitepaper Measuring Growth Businesses with Recurring Revenues at www.bvp.com/saas or send an email to saasvc@bvp.com.

If you calculate CMRR correctly, that single metric also gives you good forward visibility into, revenue, cash collections and Churn. SaaS executives need to track churn in detail from a “logos lost” (lost customers) perspective as well as the amount of lost CMRR. It’s very difficult and expensive to grow subscription businesses if you have moderate customer churn, and prohibitive if your churn is high. Whereas the largest legacy enterprise software companies literally made hundreds of millions of dollars over the last decade with “shelf-ware” projects that never got fully implemented, project failure is not an option for SaaS businesses or the customer will simply turn you off, regardless of your contract terms. The top performing SaaS companies typically achieve annual customer renewal rates above 90% - with most of the churn due to death (bankruptcies) or marriage (acquisitions) - and over 100% renewals on a dollar value basis due to up-sells into this installed base.

Cashflow is the other key metric. To be fair, visibility into the current cash position and the change in the cash position has always been important for software executives, but is even more critical for SaaS businesses because the working capital requirements are higher and the payment terms are often stretched out over the term of the contract. Given the high cost of capital for private SaaS companies, wise executives will often offer slight MRR discounts to customers in exchange for quarterly or annual pre-payment terms, and provide incentives for their sales force accordingly.

Many of our top performing SaaS CEOs will orient their entire executive team objectives and bonus plans around these three metrics exclusively, because almost every other key success factor for the business is embodied in CMRR growth, Churn, or Cashflow.

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