The SaaS model is built on the concept of recurring revenue. SaaS companies will hone and develop their product, aiming to make it the best available tool on the market, and business customers will license access to the software on a ‘pay as you go’ basis. It’s a win-win scenario – customers gain access to regularly updated industry-leading software at an affordable price point, and SaaS companies secure a revenue over time often worth more than a one-off purchase.
For years, the holy grail for SaaS companies in terms of revenue has been securing enterprise customers. Enterprise customers offer a steady stream of revenue with great potential for upselling and cross-selling new features and products. Consider that the average SaaS company generates 16% of its Annual Contract Value (ACV) from upselling to existing customers, and the value in securing large enterprise organizations becomes readily apparent.
Given the SaaS model, it’s understandable that SaaS companies want to focus their attention on Annual Recurring Revenue (ARR) as a key performance indicator. ARR will communicate, at a glance, what a SaaS company has earned in terms of profit in a given year, demonstrating growth or decline over time. What ARR doesn’t factor in, however, is the overall or future value of any contracts that are currently in place. This makes it relatively short-sighted as a performance metric.
That’s why, when evaluating the stability and overall financial fitness of a SaaS company, it’s important to consider Remaining Contracted Cash Value or RCCV. If ARR is like a weather vane, showing which way the wind is blowing at a given time, RCCV is more like a weather forecast, allowing investors and other stakeholders to get an idea of what lies ahead.
RCCV refers to the value of the remaining contract that a customer has with a SaaS company. Simply put, it’s the guaranteed revenue that a company can expect to receive from a customer under their current contract. Here’s an example:
A customer signs a 3-year deal with an annual contract value (ACV) of $250,000, with an implementation fee of $50,000. That’s a total contract value of $800,000. If the implementation is categorized as a separate service, that leaves a contracted cash value (CCV) of $750,000. Assuming the initial year is paid upfront, which is common when dealing with enterprise companies, the RCCV after the first invoice will be $500,000. Once the second invoice is paid, the RCCV will fall to $250,000, and so on.
Looking solely at ARR gives some impressive figures, but it can lull investors into a false sense of security if a company enjoys a particularly fruitful year. RCCV, on the other hand, only focuses on the value that remains in a given contract, keeping the focus on what comes next rather than what has already transpired.
Here are four key benefits of using RCCV as an indicator of stability for SaaS companies:
The Ability to Make Revenue Predictions
RCCV provides a crucial advantage by delivering predictable revenue streams. With contracted customers, SaaS companies have a clear understanding of the revenue they will generate throughout the duration of the contract. This predictability enables better financial planning, accurate forecasting, and informed decision-making. For SaaS companies eyeing scalability, RCCV empowers them to chart a stable growth trajectory. This also aligns with the concept of Remaining Performance Obligation (RPO), as highlighted by successful SaaS leaders like Salesforce and Snowflake, who leverage a similar metric to showcase future contracted revenue. Snowflake, for instance, defines RPO as “the amount of contracted future revenue that has not yet been recognized, including deferred revenue and non-cancellable contracted amounts that will be invoiced and recognized as revenue in future periods.”
Lower Customer Churn Rates
RCCV also plays a pivotal role in churn reduction. When customers commit to long-term contracts, they are obligated to fulfill their contractual obligations for the agreed-upon period. For example, a 3-year contract ensures a minimum of 3 years of customer retention, shielding SaaS companies from the risk of sudden cancellations or customer defections to competitors. This security allows SaaS companies to invest in nurturing existing customers, safe in the knowledge that a guaranteed revenue stream is in place. By securing multi-year contracts, SaaS companies can demonstrate a long-term commitment to customers and create a bridge between value and investors.
Increasing the Incentive to Upsell and Cross-Sell
Contracted customers present an abundance of upselling and cross-selling opportunities. As SaaS companies establish relationships and gain insights into customer needs throughout the contract term, they can identify avenues for introducing new products and services that align with those needs. With a well-structured timeline, such as a 3-year contract, customer success teams can focus on upselling and cross-selling in the initial years and dedicate the final year to renewal efforts. This strategic approach not only maximizes upselling potential but also enhances the productivity of cross-selling initiatives. By providing a committed runway, SaaS companies amplify the value of partnerships, enabling their eager collaborators to reap the benefits of cross-selling. The outcome is increased customer lifetime value (LTV) and additional revenue generation for the SaaS company.
Gaining Investor Confidence
Investors favor companies with dependable revenue sources, and contracted customers provide precisely that. In an industry where mere expectations and hope – as reflected in metrics like Net Dollar Retention (NDR) and Gross Retention (GR) – are insufficient, reliance on RCCV becomes imperative. The lesson learned from past banking collapses underscores the importance of building a business on concrete foundations rather than wishful thinking. SaaS companies armed with RCCV are more likely to captivate investors, increasing their chances of securing additional funding for growth and expansion.
The SaaS model thrives on recurring revenue, and enterprise customers are a coveted asset for SaaS companies. While Annual Recurring Revenue (ARR) is a widely used metric, it falls short of capturing the overall value and future potential of existing contracts. That’s why RCCV is such a vital – yet often overlooked – metric of sustainability and success. By focusing on RCCV, SaaS companies can make more informed decisions, foster long-term customer relationships, and secure the funding needed for sustained growth and expansion.
About the Author
Vishal Tayal is the Chief Financial Officer at ExpertusONE, a leading enterprise cloud-based Learning Management Software platform headquartered in San Jose, CA. With extensive experience as a corporate finance executive, Vishal excels in harmonizing investor forecasts with operational plans, adeptly managing budgets, enhancing operational efficiency, and successfully executing complex financial transactions.