Published on Saturday, October 5, 2019
It hasn’t been that long since the SaaS (Software as a Service) market took off. However, it has proven to be a very popular and profitable industry to be in. Despite this, it seems that there has been a struggle to nail down the financial planning aspect of it, particularly when it comes to a great way to forecast revenue.
For businesses that run on traditional revenue models, forecasting revenue growth can be a relatively uncomplicated process. If you make a sale for $100, that simply means you generate $100 worth of revenue for the sale. When it comes to SaaS businesses though, things get a bit more tricky. There are many more revenue factors to consider, for instance, new sales, upgrades of existing clients, and recurring revenue.
In this article, we outline how to forecast revenue growth for SaaS companies. Read on to find out more.
Explaining B2B SaaS Revenue Forecasting
Essentially, a B2B SaaS revenue forecast is a prediction of all the revenue that a B2B SaaS company will bring in over a certain, predetermined time period. Most commonly, companies decide to forecast across a quarter or a year. However, technically, it can be done for any period of time that an organization prefers.
In the process of forecasting revenue, organizations (or financial analysts) consider a broad range of factors. For instance, the activity in the overall market is taken into account. Other aspects that may be included in the forecast are historical trends or past performance, and the existing pipeline of sales.
There are several benefits to revenue forecasting. First and foremost, a good forecast allows you to plan your business operations better, as you’ll know how much cash you’ll have to work with. It’s a great resource to use for budget allocation and other such activities.
For instance, it can give you an indication of whether you’ll be able to hire new staff soon, whether you can spend some extra cash on marketing, or if you should save the money for operational costs instead.
In addition, a positive forecast can be used to draw in investors.
Forecasting Revenue Growth For B2B SaaS Businesses
So, now we know that forecasting is practically an imperative task to complete in any SaaS business. We should also note though, that you should aim for your forecasts to be as accurate as possible.
If the forecast is inaccurate you’ll likely be making business decisions based on incorrect assumptions, and thus will be setting yourself and your organization up for a hard time in the future. For a forecast to be as accurate as possible, you have to base it on solid data.
So how do you forecast the revenue growth of your SaaS business? There are three main steps you need to carry out.
Step 1: Consider Your New Sales
Without new sales, many businesses wouldn’t last. That may seem quite obvious, but it’s worth mentioning since these sales form a large chunk of potential revenue. By making many new sales, your revenue can increase exponentially.
Analyze Your History
Looking at the general sales patterns that your organization has experienced in the past is a great place to start. Your historical recurring revenue can be a good indicator of what’s to be expected in the future. Here, however, you should be sure to note whether your organization has gone through any major changes in the past here. These changes might affect changes in your recurring revenue.
For instance, have you grown your sales team significantly? This could mean that you made many more sales and thus can expect a larger recurring revenue this time around. From here you can predict your upcoming performance based on your history and the “upgrades” made in your organization.
Take A Look At Your Pipeline
We should all know how important a sales pipeline is in the process of estimating future revenue. Look at the trends in your pipeline, and how past customers performed at different stages in the sales pipeline. Then, use this information to project how the customers in your current pipeline will behave.
Think About Sales And Marketing Activities
Do your marketing and sales teams consistently meet their targets? Do they exceed the goals set out by management regularly? Or, are they underperforming and not meeting targets as often as they should be?
All this, plus how close the teams are to meeting their existing targets, can help you to determine a picture of your upcoming revenue.
Step 2: Turn To Your Existing Buyers
We can never underestimate how effective a loyal customer base can be for revenue growth.
Customers Who Renew
You should have a relatively good idea of how many of your customers will be renewing their existing subscriptions in the coming months. Here, you can use various metrics to determine the rate of renewals. For instance:
- Customer Satisfaction Score – This gives you an idea of whether your current subscribers are enjoying your service. If the score is good, they will likely renew their subscriptions.
- Net Promoter Score – Using this index, you can determine how likely your customers are to recommend you to others. This also tells you that they will most likely renew.
By considering your renewals, you can calculate a portion of your upcoming revenue.
Customers Who Upgrade
Renewals aren’t the only way you generate revenue from existing subscriptions. You also grow your revenue by having your clients upgrade their plans. Therefore, we cannot forget this when forecasting revenue growth.
If an existing customer has moved up a plan tier, added an extra product into their subscription, added more users to their plan, and so on, then your revenue generated from that customer will increase. As such, you must consider how many customers have already upgraded in the past year, how many more you expect to upgrade. From here, you can calculate another portion of your predicted revenue.
Step 3: Remember To Think About Churn
Remember that your growth should also consider your churn. Churn relates to customers who cancel subscriptions or who decrease their payments through downgrading their subscriptions.
Churn rate is a sales metric that tells you about the speed of your sales growth. A high churn rate is an indicator of slow growth.
Churn Rate Calculation:
Churn Rate = total number of customers churned in a period / the total number of customers you had at the beginning of that period
Putting It All Together
By considering your new sales, your existing customers, and your churn rate, you can have a pretty good prediction of the revenue growth of your SaaS business. And, with help from revVana, you can make the process so much easier.
revVana is a platform that can take your data and automate revenue forecasting. It considers everything from your pipeline to your recognized revenue, so you know that the forecasts are accurate and reliable. With a strong platform like this behind you, you can easily identify gaps in your processes, to ultimately better your revenue growth even more.
A forecast of revenue growth is particularly tricky to generate for SaaS businesses. Nevertheless, it remains an important aspect of financial planning and thus is not a task that you should ever skip. By following the three steps in this guide, you should be well on your way to creating a forecast. And, revVana is just a click away if you help or want to improve your forecasts. Contact us Today!