Measuring your company: bookings vs revenue
Many companies measure their progress by some indicator of sales. In the end, product, market, and execution have to come together and how much money customers are willing to pay you is a pretty good indicator of how you are doing. But how to measure that?
In SaaS/recurring revenue models there are lots of detailed metrics. But what is that one summary metric – not for the wonkish analyst trying to analyze every detail of each month’s result but for Joe or Jane employee in engineering or marketing to see how the company is doing?
In early stage companies you almost always hear about “bookings”. Bookings are a measure of raw sales, how many orders we got. Which sounds simple and correct. But it is not always so simple. If a customer orders 10 widgets, one a year for the next 10 years that is very different from an order for 10 widgets right now. Now lets think about that order for 10 widgets, one per year for the next 10 years. Are they paid up front or on delivery? If the first widget doesn’t work are they still committed to the other 9? If they are not committed to all 10 is it really an order for 10 widgets or an order for 1 widget with an option on the other 9?
Unfortunately there is no universal standard for what is and is not a booking. I might have a strict policy that only counts firm commits that are paid up front. My competitor might have a lenient policy that counts orders that are paid later and are at risk of being cancelled, so it is very hard to compare bookings numbers across companies.
Revenue is different. There are very detailed standards for when you can recognize revenue. Revenue requires not just that you have an order, but that you have delivered the item and you expect to actually get paid for it. If I have an order for 10 ultra-widgets but haven’t yet figured out how to build an ultra-widget that is zero revenue until I actually ship the customer some ultra-widgets. Conversely, if I ship some widgets that were ordered a long time ago I recognize revenue today. So revenue is not purely a measure of sales, it can be increased or decreased by how the product is delivered to customers.
Which is better? As usual, it depends. Large companies typically report revenue. Reporting revenue is required for public companies and it is what outside parties look at because it is comparable across companies. Smaller companies typically report bookings because it is simpler to calculate and a purer measure of sales especially when other areas of the company that impact revenue recognition are not yet mature. Sometimes small companies don’t know the difference and say “revenue” when they have not followed any of the rules for recognizing revenue properly and they are reporting something that looks more like bookings.
Bookings numbers are typically higher than revenue numbers – it is hard to have revenue that is not bookings, but easy to have bookings that are not revenue. Sometimes the difference is enormous. If I get an order for 50 Dreamliners that might be a multi-billion dollar booking but until I deliver some planes that is no revenue. If a subscription service gets an order for a 3 year subscription to their product with one month remaining in the quarter they recognize 1/36 of that revenue in the quarter. It is not unusual to have revenue be half of bookings or less at a fast growing company.