🎙️ Hey there, SaaSpreneurs!🎙️

Ben Murray here, and I'm thrilled to welcome you to the latest edition of SaaS Metrics School! 📊

Have you ever found yourself puzzled over how to track Annual Recurring Revenue (ARR) and Total Contract Value (TCV) for those game-changing multi-year contracts? You're not alone! In our newest podcast episode, we tackle this very issue head-on.

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📓Key Concepts to Learn💡

Understanding Multi-year Contracts

Multi-year contracts are agreements between the SaaS (Software as a Service) provider and the customer that extend over multiple years. These contracts can vary in duration, typically ranging from two to five years, though longer durations are sometimes seen. The key aspect of these contracts is that the customer commits to using the software for several years, which has implications for how revenue is tracked and reported.

Importance of Tracking Components of Revenue

Accurate tracking of revenue components is crucial, especially when dealing with multi-year contracts. When a customer signs a multi-year contract for a subscription product, it's essential to break down and track the ARR for each year within that contract. This breakdown allows the company to calculate the TCV accurately.

For instance, if a customer signs a three-year contract:

1. ARR (Annual Recurring Revenue): This should be tracked per year. ARR is a metric that normalizes the value of a contract on an annual basis. It helps in understanding the regular recurring revenue the company can expect from that contract every year.

2. TCV (Total Contract Value): This metric aggregates the total value that the contract will bring in over its entire duration. It's calculated by summing up the ARR for each year of the contract. Caution! TCV definitions vary. Some companies include all revenue types in their TCV number.

Practical Tracking in CRM Systems

It’s important to configure your CRM (Customer Relationship Management) systems correctly to track multi-year contracts. Here are the key points:

1. Breaking Down Revenue by Year: Rather than recording a $50,000 deal as a lump sum, it's essential to specify that this amount is, say, $25,000 per year for two years. This granularity aids in accurate revenue forecasting.

2. Use in Revenue Forecasts and Sales Compensation: The first year of the contract often plays a critical role in revenue forecasts and is used in sales compensation calculations. In some sales compensation plans, there might be a bonus (or "kicker") for securing multi-year contracts, which makes tracking first year ARR and TCV critical.

3. Bookings Report: Companies usually report the first year's ARR in their bookings reports. This practice provides a clearer picture of future revenue performance and growth.

4. Pitfalls of Incorrect Tracking: Not specifying the duration of a contract in the CRM can lead to forecasting issues. For example, simply entering $50,000 without noting whether it covers two, three, or four years (or what revenue types) makes it unclear how we should interpret this number. This lack of clarity can impact everything from revenue forecasts to sales compensation and financial planning.

5. Tracking by Revenue Type: In addition to tracking ARR and TCV, it’s important to distinguish between different revenue types such as subscription fees, usage fees, and services revenue within the CRM. This distinction helps in a more nuanced analysis of revenue streams.

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If you found this episode helpful, make sure to tune in to future episodes of SaaS Metric School to broaden your knowledge of essential SaaS metrics and finance topics.

Got any burning questions or specific metrics you'd like us to cover?

Drop us a line, and we'll do our best to address them in upcoming episodes.

Until next time, keep hustling and measuring those metrics!

Best regards,

Ben Murray
Host of SaaS Metric School

P.S. Don't forget to subscribe to our podcast and share it with your SaaS business buddies. Together, let's conquer the world of SaaS metrics!

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