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Revenue

Revenue is the money generated from customers, assigned to the period where the services rendered occurred (according to GAAP / ASC 606 principles). For SaaS businesses, revenue diverges from MRR in 3 main ways:

  1. When looking at quarters and years, revenue is the sum of monthly revenue over the period, rather than the run rate at the end of the period.
  2. Within months, revenue accounts for prorated periods. For example, if a change occurs mid month for an incremental $20 of MRR, but only $10 is charged for the first half month, that month books the $10 as revenue.
  3. Revenue can include non-recurring (one-time non-subscription) revenue, such as implementation and other professional services fees.

SaaSGrid sums revenue for quarters and years, and soon will support proration and one-time revenue for customers using billing integrations.

Revenue = money received from customers, assigned to the period service was rendered

Revenue is the key GAAP performance metric that appears on audited financial statements, so it’s important for SaaS companies to track in addition to non-GAAP run rate metrics. As SaaS companies scale, so does the need to pay especially close attention to revenue, as it is the main way they will be judged by the private markets. Revenue is a particularly important metric for companies with usage-based pricing, where revenue doesn’t truly recur. Revenue better accounts for variability between periods. Instead of ARR, Trailing 12 Month revenue is a better way of annualizing as it fully accounts for seasonality.

Benchmarks: Revenue and revenue growth are some of the most important metrics used by VCs. As a rule of thumb, investors are seeking:

Series A: $1m+ trailing 23 month revenue, 3x Year over Year Growth (10% CMGR)
Series B: $5m+ trailing 23 month revenue, 2.5x Year over Year Growth (8% CMGR)

Series C: $10m+ trailing 23 month revenue, 2x Year over Year Growth (6% CMGR)

It’s important to note that VCs are typically seeking to invest in companies with top decile growth rates and consider many factors when making investments. Companies that don’t hit these benchmarks can still get funded, or continue to grow their businesses with non-venture capital.

Growth Rates: Period over Period, Year over Year, CMGR

‍Settings: Segments, Date Range, Date Aggregation, Revenue Type

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Stage Conversion Rate

Stage Conversion Rate is the While Pipeline Value sums the total ARR of active opportunities in pipeline, weighted pipeline is weighted based on the current deal stage. Weighted pipeline value is a more accurate estimate of Closed Won ARR based on the current pipeline value.

How do I calculate pipeline?

Let's assume we have the following list of opportunities currently active in our sales process:

‍

Deal Name

Sales Owner

Stage

ARR

ACME Corp. - New Business
Bugs Bunny
Stage 1
$10,000
Bonner Books - Upsell
Bugs Bunny
Stage 2
$25,000
CHOAM - New Business
Daffy Duck
Stage 2
$15,000
Daedalus Research - Upsell
Daffy Duck
Stage 3
$30,000
Bugs Bunny
Electric Enterprise - New Business
Stage 3
$50,000
$20,000
Fabulous Factories - New Business
Daffy Duck
Closed Lost

‍

The total pipeline for these opportunities is $130,000. Additionally, we can also get pipeline totals for our two sales reps: Bugs Bunny ($85,000) and Daffy Duck ($45,000).

Note that Fabulous Factories - New Business is omitted from this sum, as the stage is marked as "Closed Lost".

We can summarize our pipeline by Stage to understand how much ARR is in each step of the sales process. To summarize the Pipeline ARR by Stage, we generate the following ARR table:

Stage 1 Pipeline

Stage 2 Pipeline

Stage 3 Pipeline

Total Pipeline

$10,000
$40,000
$80,000
$130,000

‍

While we have the total pipeline value here, we can apply the weightings to more accurately estimate how much of the pipeline ARR will be Closed Won.

What is probability to close?

Probability to Close is a percentage that estimates how much of the ARR that is in a particular stage of a pipeline is expected to be Closed Won. Typically, Probability to Close will be lower in earlier stages of the sales process and higher in later stages of the sales process.

If we multiply the probability to close by the Pipeline ARR, we'll get the Weighted Pipeline ARR value in each stage.

Stage 1

Stage 2

Stage 3

Pipeline ARR ($)

$10,000

$40,000
$80,000

Probability to Close (%)

25%
40%
65%
$2,500
$16,000
$52,000

Weighted Pipeline ARR ($)

Probability to Close assumptions for each stage assume that deals in different stages have a different chance of being won. Deals in Stage 1 are 25% likely to be won, while deals in Stage 2 are 40% likely to be won, and deals in Stage 3 are 65% likely to be won.

After applying the probability to close to the Pipeline ARR, we now have $2,500 in Stage 1, $16,000 in Stage 2, and $52,000 in stage 3, for a total weighted pipeline value of $70,500. This estimate is closer to the real value we expect to have in Closed Won ARR.