September 12, 2023
Before SaaS emerged as a dominant business model, companies had a simple process for measuring revenue: sell a good, book the sale in the CRM, and record the revenue. With no concept of an ongoing contract or a service period, expansion and renewals didn’t exist. You simply collected and recorded revenue with every sale like it was a new sale.
In SaaS, the paradigm changes. Most products have a contract with several licenses included and a service period. As a result, the leading metric for SaaS companies evolved from simple revenue to annualized recurring revenue, or ARR.
While SaaS companies adopted ARR as their top metric, sales and customer success at those SaaS companies teams didn’t. Legacy CRMs stood in the way with an out-of-the-box 'Amount' field that encouraged measuring total contract value (TCV) for all opportunity types when in reality:
Read on to learn how to use your CRM to measure any opportunity based on how it grows ARR.
ARR, and its associated growth, are critical signals of whether a SaaS company has product market fit, sales momentum, and growth potential. SaaS companies and their investors use ARR as their leading revenue metric as it better measures the business's health vs. revenue alone, which includes one-time, non-repeatable items such as implementation services.
As a RevOps or sales leader, you’re probably getting questions such as, “which field do I look at for renewal opportunity size?” or hearing, “oh, that’s an expansion opp, so you can’t trust the whole amount”.
If you’re getting these questions, your team is looking at the same numbers differently - bookings and pipeline are not universally understood. Why does it matter? Overstate bookings and you may over hire and need to downsize or you may overpay sales rep commissions. Understate it and you may miss an opportunity to invest in additional growth.
ARR growth is the best forward-looking view of your company's next year ARR, the leading SaaS company goal.
By measuring all of your Opportunities to a single ARR growth metric, you can cut through the noise, thus focusing go-to-market efforts on how to grow ARR rather than how to measure it. Your bookings and forecasting will be trusted as you can roll up all your teams’ to a single number each quarter!
A ‘Booking Amount’ field is the best place to track ARR on your CRM opportunities or deals. This enables easily adding up bookings across all opportunity types and using forecasting tools such as Salesforce collaborative forecasting or Clari consistently across all your teams.
CRMs were not designed for SaaS companies to measure their sales performance. CRMs encourage measuring opportunities to total contract value (TCV) by adding up the value of all products on the opportunity.
While TCV is an acceptable metric for 1 year new sales deals, it does lead to some over and understatement vs. ARR:
For multi-year new sales deals, however, TCV dramatically overstates ARR growth. The deal may have been $50k ARR each year, but you’d count $150k if it’s a 3 year deal!
For expansions and renewals, TCV similarly overstates ARR growth as contracted revenue is double counted. If you expand a customer from $50k ARR to $60k ARR along with a 1 year renewal, you’ve grown ARR by $10k, but counted $60k.
*As deals can have ramps that extend into the second or even third year of a contract, it is best practice to draw a line at 12th month ARR (twelfth month MRR*12) due to increased uncertainty as time passes. E.g. a customer who signed today may go out of business in 2 years or may not reach their ramped growth projections.
Let’s walk through an example of a customer sold a 1 year ramped deal and then subsequently renewed with an upsell and a flat renewal.
*ramped deal with $3,000 monthly for months 1-3; $5,000 per month for months 4-12
While Incremental ARR serves as the most important measure for sales, serving many use cases, we recommend tracking additional opportunity size data for account executive commission, renewals, and other RevOps use cases.
It is typical to:
We recommend tracking TCV and ACV as additional fields on all opportunities to enable these types of use cases.
To properly allocate Renewal Manager resources to key accounts, Revenue Operations teams must keep a keen eye on how much ARR is up for renewal in any given quarter.
We recommend tracking ARR up for renewal on Renewal Opportunities to enable this use case. This allows for easy reporting of how much ARR is up for renewal in any quarter.
Consistently measuring all your sales and customer success team’s opportunities to a single metric isn’t easy if you don’t have the tools to collect the data and automate reporting. A robust quoting tool such as MonetizeNow can enable consistent measurement automatically so that you can focus not on how to measure but how to grow your ARR.
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SaaS businesses with a license-based pricing model, operationalized as selling licenses upfront for the contract term, add friction to expansion. What’s the solution? Combine license-based with usage-based pricing.