With all the recent S-1 IPO filings by SaaS companies it’s great to the see the growth and market awareness expanding for the business model. One area that isn’t talked about frequently is how a growing SaaS company can actually be in bad shape due to declining bookings. That’s right, the business can have its top-line revenue increasing year-over-year while the business is actually eroding.
Here’s how to analyze a growing SaaS company that might have declining bookings:
- Look at each year’s new customers as individual cohorts (e.g. the 2007 cohort, the 2008 cohort, the 2009 cohort, etc)
- Analyze the renewal rates and up-sell/ARPU growth of each cohort
- Look at incremental bookings growth of each year’s cohort (bookings are monies to be received based on customer contracts)
- Understand if once the individual cohort renewal rates are teased out from the overall renewal rate there are trends not seen before (e.g. legacy customers might be sticking around but customers signed in the last couple years are leaving at a significantly greater rate indicating a serious problem not seen by looking at the generic renewal rate)
- The end result, in a bad case, is that the business shows revenue growth due to the layering of new revenue each year, but the underlying business is eroding faster due to customer churn, so declining revenue is on the horizon
The SaaS business model is great due to recurring revenue, strong gross margins, and predictable cash flow. It’s important to understand the lifecycle of more specific customer cohorts and distinguish positive or negative trends that could result in growing SaaS companies with declining bookings.
What else? What other aspects of SaaS companies do you look at to see if there are declining bookings?