How do you project revenues in a SaaS or subscription business?
To generate revenue projections or a revenue forecast, you must incorporate three revenue projections from at least different revenue sources:
- SaaS revenues from existing contracts
- SaaS revenue projections from renewal contracts
- SaaS revenue projections from new contracts (new sales/contracts)
SaaS Revenue from Existing Contracts
Each existing contract will have a revenue schedule, which typically runs only through the end of the present term (there are plenty of exceptions). This schedule includes fees for subscription services and other items the accountants determine must be recognized over time. In addition to the scheduled revenues, you need to include any variable, transaction, or usage fees. Typically, these are calculated, recognized, and often billed in arrears.
SaaS Revenue from Renewal Contracts
To project revenues, you must project renewals. For all contracts expiring within your projection period, you must create projections. For the projections, you must create a revenue schedule. Projections are typically created using a simple renewal rate or churn number. A more sophisticated approach is to use different renewal rates for different segments. The most accurate approach, if your business supports it, is to project individual contracts. Obviously, this is only possible if you have either a limited number of contracts and sufficient customer interaction to gauge customer health, or you have an algorithmic-based approach based on actual usage information pulled from your application.
SaaS Revenue from New Contracts
These are revenues from new sales, again with subscriptions, variable fees, recognition schedules, etc.
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