Bookings vs ARR: Understanding Two Key KPIs

Precise calculation of key metrics is essential for accurate estimation of a business’s financial health. As long as businesses proactively monitor their KPIs, they gain a realistic outlook on their performance. Two such KPIs that play an important part in the prediction of a business’s finances are bookings and ARR.

It is easy to confuse these two terms, and use them interchangeably. This results in incorrect business performance estimations. In this article, let us explore the definitions of bookings and ARR, and the key aspects that set these two SaaS metrics apart.

What Are Bookings?

A booking denotes the total value of a customer contract. Bookings correspond with the number of signed contracts made between customers and the business within a specified time period. Bookings can refer to the contract value of one-time purchases, recurring subscriptions. Whenever a customer agrees to pay a SaaS company in exchange for its services, this agreement is known as a booking.

Let us clarify the concept with an example. Suppose there is a customer who has signed a 1-year contract with a company. The total amount indicated in the contract is $12,000. The customer is supposed to pay this amount in equal instalments on a monthly basis. This makes their monthly charges $1000. Since bookings mean the total contract amounts, the booking value in this scenario would be $12,000.

What Are Recurring Bookings?

The above mentioned example explained the concept of one-time booking. Or the booking related to a single purchase. There is another type of booking which is popular in the SaaS industry. It is known as recurring booking. The concept of recurring booking is tied to the subscription model.

Suppose a company is offering monthly subscription for its steaming services. This means that if a customer comes into a contract with the company, they pay for its service on a recurring basis. Their subscription gets renewed with the beginning of each month. Whenever the subscription will get renewed, the booking will get renewed as well.

Usually the case with subscription-based businesses such as Netflix is that their subscription renewals run on automation. This means that customers do not have to sign a contract every time their subscription gets renewed. The initial contract between the customer and the company suffices for the recurring payments involved in the subscription.

These recurring payments reflect the total booking value of this contract over a set period. The total amount of revenue generated over this set period should correspond to the total booking value. To get a clearer insight into the concept of recurring booking, let us take an example:

A customer subscribes to a company, and agrees to pay $10 per month for the service. Suppose the company wants to calculate the booking value of this subscription for 6 months. The booking value in this case would be $10 x 6 =$60.00. If the customer continues to pay seamlessly for these 6 months, the company’s revenue would also be $60. However, if the customer cancels their plan mid-way, upgrades or downgrades it, then the revenue amount would also deviate from the ideal i.e. the booking value.

What is ARR?

ARR or annual recurring revenue refers to the projection of a company’s revenue over a year. For SaaS subscription based companies, the calculation of ARR starts as soon as their revenue starts being realized, or is about to get realized in the near future.

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Realized revenue denotes the revenue which a company has earned. When a customer subscribes to a company, and pays upfront, that payment does not get recognized as the company’s revenue immediately. Rather, it only starts converting into realized revenue when the company begins on its own end of the deal i.e. service provision. As the service provision for a monthly subscription completes, the customer payment fully translates into the company’s earned revenue.

Now ARR is the forecast of this recurring revenue to be generated over the entire year. To understand the calculation of ARR, let us take another scenario. Suppose a company realized its monthly revenue recently, and it was $20. The company would then multiply this revenue by the total number of months (12) and get $240 as its ARR measurement. However, it is mostly not as simple as that. Because, the earned revenue is prone to change each month. There might be new subscribers joining next month, or there might be some subscribers cancelling.

The changes in the number of subscribers alone changes the company’s earned revenue. Since the calculation of the ARR depends upon the closest realized, or soon to be realized revenue, its value is also prone to change throughout the year.

You have now learned what bookings and ARR mean, and what their concepts entail. These KPIs are often confused with each other, and their terms are used interchangeably. Doing so is not only incorrect, but is also likely to give you a false evaluation of your financial situation. Therefore, it is important to clarify the distinction between these two KPIs from the get-go.

Bookings vs ARR: A Breakdown

The main differences in bookings vs ARR lie in their definitions, timing of calculation, and scope. Bookings signify the total value of contracts over a set period. In comparison, ARR predicts the total revenue a business will realize over the year. Here is the list of the key differences between the two concepts:

By definition

• In the definition of bookings, we discussed that it reflects the total value of the number of customer contracts a company gets. This value is ideal, and it might or might not convert into actual revenue.

• ARR on the other hand is a forecast of the actual revenue over the year. Its figure is prone to change, as the earned revenue changes each month.

By timing

• A contract’s booking value is calculated as soon as it is signed.

• ARR, on the hand, gets updated on a regular basis. It is measured when a company’s revenue is in the process of being realized, or has been recently earned.

By scope

• Booking value is calculated based solely on one-time customer contracts, or recurring contracts. 

• ARR is estimated on the basis of recurring revenue.

By predictability

• Bookings are less predictable when it comes to future revenue, as they give a more ideal revenue figure to be caught up with. 

• ARR is better in revenue forecasting, as it relies upon earned revenue. It gives businesses a more accurate, and closer-to-reality estimate of their revenue to be earned in a year.

By impact

• A high booking value means that a business’s sales are going strong. Since a higher number of customer contracts means higher customer acquisition, and a greater revenue goal to be accomplished.

• A higher ARR, on the other hand, commends the business’s customer retention efforts. That is because a high ARR figure reflects stable revenue streams that the business has maintained by maintaining a stable customer base.

By changes in subscription

• The total booking value changes when a business acquires more customers, or loses them. The value increases and decreases in such cases respectively. Similarly, the bookings also change value when subscription upgrades or downgrades occur. 

• ARR changes with subscription changes as well. Its value increases with new subscriptions, and decreases with cancellations. In case of upgrades and downgrades, ARR modifies accordingly. The key difference between the changes occurring in the booking value and the ARR value is of timing. ARR changes more frequently as compared to bookings, because it gives a more real-time revenue prediction.

By revenue recognition

• Bookings indicate the potential revenue that could be earned from a customer over a period of time.

• ARR indicates the estimate of an entire year’s ‘earned’ revenue, as it takes already realized revenue under consideration.

Significance of Measuring Bookings and ARR

For businesses who desire a clearer picture of their performance, it is crucial to understand the differences in SaaS bookings vs ARR. Once you get a better grasp of these two key KPIs, it is time to track them regularly, and assess your SaaS business’s overall financial situation. These are some valuable pros that these KPIs equip you with:

• Assessment of Financial Health

Bookings translate into the number of customers acquired over time. They reflect the effectiveness of a business’s sales strategy. Under ideal circumstances, the total bookings value should equate the total revenue generated, given that no subscription changes take place. Therefore, bookings set a revenue target to be achieved by the company.

ARR also assesses financial health, but in a more realistic way. Since it denotes the actual earned revenue, it reflects a company’s success or failure to achieve the set revenue goals. ARR signifies the company’s performance as well, as it gives you a revenue figure as close to reality as possible. 

• More Accurate Revenue Prediction

Keeping yourself updated on your booking and ARR metrics is valuable, as it allows you better revenue forecasting. Bookings show businesses the revenue they should ideally generate from each customer. ARR shows businesses how close or how far they are from their revenue goals. Hence, using these metrics, companies can measure their own performance by comparing their revenue goals, the and actual earned revenue. 

• Improved Decision Making

When companies compare their bookings and ARR values, they can better identify their strengths, as well as their shortcomings. This gives companies a chance to work on their areas of improvement, and develop strategies to allocate resources more efficiently. Moreover, they can also identify the trends in their consumer behavior. These trends can be identified by the sales fluctuations, and the customer retention rates, both of which are reflected in the bookings and ARR figures.

By identifying trends, businesses may find good opportunities to capitalize on. They may also find out factors causing their revenue to leak. This information enables them to fix any loopholes timely and effectively.

• Enhanced Transparency

Bookings are a straightforward way for businesses to show their sales performance over time. However, ARR provides a more transparent view into the business’s financial performance. That is because it is the most accurate estimate of their recognized revenue. The ARR data can help investors gauge a company’s performance better. The ARR of the previous year can be compared to that of the next year, and so on to measure improvement.

• Better Customer Retention

Businesses keeping an eye on their bookings and revenue can assess whether their customer retention is good or not. If the total booking value of your contracts actually converts into your recurring revenue, this means that your customers are staying committed. Conversely, if you have a high bookings rate, but a low or stagnant ARR, it means you lose customers quickly after you acquire them. In such a case, investigate the root causes behind this decline, and combat any potential obstacles.

It is essential to check how often your bookings translate into actual revenue, so that you can come up with ways to manage your customers better. You can offer customers various incentives, such as discounts and coupons, special seasonal offers, loyalty gifts etc. to make them feel valued.

Why You Need a Powerful Software for Effective Financial Management

Proactively tracking KPIs, and making sure that they are regularly updated is not possible manually. Especially if you are running a large enterprise. Manual data management is error-prone and might lead to a largely incorrect assessment of your business performance.

A subscription management software like SubscriptionFlow is the right solution to streamline your accounting practices. Here’s 3 reasons why you need a robust management system to accurately track key KPIs:

1. Centralized Data: The system keeps all your data unified into one place which makes it increasingly accessible to analyze. SubscriptionFlow’s intuitive dashboard lets you access all your important KPIs conveniently. You can customize your dashboard according to your own needs, and track the KPIs of your own choice.

2. Tracking Automation: SubscriptionFlow automatically updates your key metrics like bookings and ARR in real time. It ensures that your figures are precise for accurate financial statements.

3. Scalability: The right subscription management software has the capability to scale with your business. Leverage SubscriptionFlow to deal with massive numbers accurately. Leave no room for risky errors. Utilize this data to get reliable revenue forecasts.

Book a demo with SubscriptionFlow today, and get impressive insights into your business health and performance.