Many SaaS companies use Committed Annual Recurring Revenue (CARR) as a primary metric, and for good reason. Your company might sign deals with implementation periods, and while it’s known that revenue is coming, it won’t actually appear in your ARR for a few months. Or your business might start its services on the first of every month, meaning there is a waiting period between customer signup and accrual of revenue. Perhaps you have a graduated schedule built into your contracts, causing them to rise automatically over time. Committed Annual Recurring Revenue (CARR) takes into account these future revenue increases and decreases, even when they are not yet visible in ARR.
Just as with your ARR figures, you need to consider committed revenue when calculating roll forward. Keep reading to learn more about this measurement and how it’s critical for subscription businesses!
⏩⏩ Committed Revenue Roll Forward
Recurring revenue roll forward communicates the effect of churn, downsells, upsells and new customers on ARR. This analysis allows you to see how your business’s revenue changes from one period to the next. However, there are limitations when you only calculate roll forward for revenue that you’ve already accrued. When committed revenue is not included in these figures, you’re missing an important dimension of your business’s growth. If you have good reason to expect that revenue is coming, it only makes sense to include it in your calculations.
Sometimes, businesses use Excel or other spreadsheet software to calculate roll forward. This is always challenging, but with committed revenue, this method is particularly error-prone. So, what’s different when it comes to committed revenue? Why is this type of roll forward so difficult to calculate through traditional means?
Roll forward measures the effect of four variables: new customer revenue, upsell revenue, downsell revenue and churned revenue. In the context of committed revenue, most of these terms have slightly different meanings than they do elsewhere. There are also considerations when it comes to Existing Recurring Revenue.
We’ll get into the details in a moment, but in short, the nuances of these terms’ new definitions require particularly gnarly formulas in Excel or Sheets. If you want to calculate these figures accurately, you will need help from another program (like Subscript!)
💸 New Customers
With other types of roll forward, a “new” customer is an individual who generated recurring revenue for the first time in a given month. In contrast, with committed revenue, a “new” customer has committed to revenue for the first time, but hasn’t generated that revenue yet.
✋ Here’s the caveat: when calculating committed revenue roll forward, you need to be sure not to include any customers who had revenue for the first time, but did not commit to the revenue during the month in question. Example: You onboard a new client in mid-September, but they don’t want to start their contract until October 1st. It is imperative that you do not include this customer in your committed revenue roll forward calculations for October. To do so would be double-counting, since the client was presumably counted as new in September’s roll forward.
The definition of “upsell” also changes when discussing committed revenue. Typically, an “upsell” occurs when a customer generates more revenue in a given month than they did the previous month. A committed upsell occurs when a customer is already contracted for a specific amount of revenue, but has committed to more. Occasionally, committed upsells include customers who haven’t even started their contracts yet!
Again, there is a pitfall to avoid when calculating committed upsells. Revenue increases must be counted for the month in which the commitment was made, not in the month when the new revenue starts.To illustrate this, imagine a customer who signed a contract for an upsell in the month of September. The new contract, along with the revenue increase, begins in October. A person calculating committed revenue roll forward might mistakenly include this revenue increase in the figures for the month of October, which would also result in a double-count. 🤦♂️
There are other upsell scenarios that may also result in errors. Maybe a customer signs on in the month of September, and their contract starts in October. When October comes around, the customer realizes they need more data storage, and they commit to upsell. However, they don’t need the storage until November. This upsell could be mistakenly entered into October’s roll forward, and be double-counted again in November.
Or, a customer might sign on in September with a contract beginning in January. Then, in October, they realize that they’re going to need more storage. They then commit to an upsell at the beginning of their contract in January. This scenario also opens up the opportunity for double counts.
⚠️ Warning! An extremely challenging problem arises when an upsell is in arrears. For instance, if a client commits to an upsell that begins in January, but the contract isn’t signed until February, the upsell could be wrongly admitted from January’s roll forward. These highly elaborate figurations are nearly impossible to complete in a spreadsheet.
Typically, customers are included in calculations of churn when their contracts end, but what about customers that “commit” to churn (in other words, they notify your company that they won’t be renewing their contracts)?
Imagine that a customer’s contract ends in September, and they notify your business that they will not renew. You then compute a recurring revenue roll forward for the month of October. Since the roll forward does not include committed churn, you include this customer in your calculations for October - even though you know that the revenue isn’t coming!
It’s vitally important to track these anticipated revenue decreases. If you only measure churn for customers that are already gone, you might miss essential signs that you’re not on track to meet your goals. You don’t want any surprises when it comes to revenue decreases!
The problem: it’s very difficult to track commitment to churn using spreadsheet software. Any method of doing so leaves the calculation heavily prone to error.
💰💸💵 Existing Recurring Revenue
In most situations, Existing Recurring Revenue includes all customers who have revenue in a given month, who also had revenue in the prior month. With committed revenue roll forward, existing recurring revenue is the amount of revenue from the current month minus committed upsells and downsells for the next month.
This one is especially tricky when it comes to committed revenue. Anticipated revenue from customers who sign on in advance still needs to be counted! Case in point: if a customer signs on in July, but services begin in January, the revenue that’s coming still needs to be included in a committed revenue roll forward for the intervening months. This applies even though the revenue is not yet recognized. It’s easy to miss this revenue, and calculating this in spreadsheet software is convoluted and frustrating.
❗Committed Revenue Roll Forwards Are Tricky, But They’re Vital!
On top of all that, when you’re using spreadsheet software, you also need to ask yourself how far in advance you’re going to calculate a commitment (by the way, you can check out other SaaS professionals’ thoughts on this here). Will you include it three months in advance? Six months? A year? Will you include all commitments no matter how far into the future?
Clearly, there are many considerations and plenty of opportunities to make mistakes. Any calculations need to be checked with numerous test cases, which is difficult and time-consuming when completed in a spreadsheet.
You need the most complete possible picture of your business’s growth, so you have to account for committed revenue - but with so many things to consider, you might feel overwhelmed. 😖😫 While these figurations are challenging, you don’t need to do it on your own - software like Subscript can do the heavy lifting for you! 🏋️♀️