What is bookings in a SaaS business?
How do you record bookings for multi-year subscriptions?
How do you calculate Backlog?
Broadly speaking, bookings refers to the total value of accepted term contracts, contracted work or services, and changes to such contracts as of either the order date or the effective date of the transaction.
While the method of invoicing or billing is largely irrelevant, Bookings can also include revenue generating invoices or bills created outside the context of a contract, such as incidental product or services purchase that has no corresponding formal contract.
Bookings typically include all items with a revenue implication, such as new contracts, renewals, upgrades, downgrades, add-ons, early terminations and refunds.
Bookings are typically segmented into classifications, such as New Bookings or Renewal Bookings, and performance in these bookings classes is frequently used in various sales and other compensation plans.
Like all other SaaS metrics, there is no standard definition for bookings. You will have to define bookings.
While at first glance, it appears like a simple metric to calculate, significant complexities arise when you attempt to define rules for various classes of bookings metrics needed for compensation plans.
Situations where bookings calculations become complicated:
Recording Bookings for Multi-Year Subscription Contracts
A firm (no out clause) 3-year contract billed at $10,000 per year is a contractual $30,000 commitment and therefore could be booked as $30,000. However, a common practice driven by sales compensation plans is to only include the first year value of $10,000. Years two and three may be booked as $10,000 renewals even though technically they are within the contracted committed first term of three years.
Recording Bookings for mid-term Upgrades/Downgrades and Contract Extensions
For many subscription businesses, a strategic component of the overall business growth model is to upgrade or up-sell existing customers. This can be accomplished by selling an additional product subscription or more “capacity” within the existing subscription. Frequently, you will see these changes accompanied by an overall extension of the previous subscription end date. Rules for the calculation of bookings should be defined and documented in conjunction with sales compensation plans to avoid overpaying sales people and to avoid sales behavior that is inconsistent with company objectives.