When done correctly, revenue forecasting in B2B SaaS can help to influence future valuations, dictate SaaS spending, increase conversion rates, and overcome economic uncertainty.
Nevertheless, predicting revenue in B2B SaaS subscription businesses can be challenging.
But why?
Because forecasting subscription revenue requires accounting for several key metrics.
Fret not—because in this article, you’ll learn what these metrics are, how to calculate them, and the best approach to forecasting SaaS subscription revenue for B2B businesses.
Let’s get started.
Why Is Revenue Forecasting Important in B2B SaaS Subscription Businesses?
The global SaaS marketing is currently growing at a CAGR of 6.6% and is projected to grow to $328.03 billion by 2027:
Image via Research & Markets
The rapid growth of this industry has been propelled by the shift to remote working as many organizations are adopting SaaS solutions into their tech stack.
This has also attracted new SaaS companies hence making the competition in this market more fierce than ever.
To survive the competition and scale your SaaS subscription business, you need to strike a balance between your revenue and overall expenses to maintain long-term profitability.
In that case, you need to monitor your top revenue-generating sources, your inefficient processes, your customer lifecycle, and more.
Having all this data helps you to accurately forecast revenue for your B2B SaaS subscription business.
Subscription revenue forecasting is the process of predicting the total revenue your B2B SaaS business would generate over a pre-specified period—could be month, quarter, or year.
Key Metrics for Predicting Subscription Revenue
These are the key metrics you need to accurately forecast revenue in B2B SaaS subscription businesses:
Average Revenue Per User - ARPU
ARPU, otherwise known as APRA, is your business predictable revenue your business generates per each active subscriber over a pre-specified period.
Thus, ARPU = Total revenue/Active subscribers
Average Monthly Recurring Revenue - MRR
MRR is your business’ predictable total monthly revenue generated from recurring charges from discounts, add-ons, and coupons.
Hence, MRR = ARPU x Total subscribers
Customer Churn Rate – CCR
Customer churn rate is the percentage of customers your business loses over a given period.
Therefore, CCR = (Total subscribers at the beginning of the tracking period – subscribers at the end of the tracking period)/subscribers at the beginning of the tracking period × 100
Customer Lifetime Value- CLV
Customer lifetime value indicates the total revenue your business generates from a subscriber during the period the subscriber will be actively using your services.
Thus, CLV = ARPU / Churn rate
Practical Strategies for Revenue Forecasting in B2B SaaS
Follow these simple steps to accurately forecast revenue for your B2B subscription business.
1. Leverage Subscription Management Software
While you can forecast your SaaS subscription revenue by manually calculating the metrics using a spreadsheet, you’ll probably not get accurate results.
Moreover, revenue forecasting for a subscription-based business model isn’t that straightforward.
Fortunately, a subscription management software solution like Younium can automatically analyze your historical data to forecast customer churn, acquisition, and retention rates and compute your future revenue.
2. Analyze Past Performance
To make accurate revenue predictions for your B2B SaaS subscription business, you need to start with past performance.
In this case, you will need to analyze your previous year’s annual recurring revenue (ARR). From there, you find out all the factors that can affect the annual recurring revenue for the next year.
3. Evaluate Your Sales Pipeline
Evaluating your sales pipeline keenly can help you determine how much revenue you can expect to gain in the near future.
Here, you need to gather previous records of the number of subscribers who were at a certain stage in your sales pipeline as your current customers.
You can then predict the results for the next year based on your subscriber’s past conversion rate.
4. Evaluate the Possibility of Renewals
In most cases, you will probably know how many of your subscribers will likely renew their subscriptions in the next renewal period.
In this case, you need to consider the adoption rate, net promoter score, CSAT, and other indicators.
These metrics can help you determine whether your subscribers will generate more recurring revenue for your business.
5. Consider Add-on Sales
The beauty of the SaaS subscription-based business model is that revenue from existing customers keeps on increasing with time.
This happens due to:
- Additional purchase of a supplementary product
- Upgrade of subscription plan when customers purchase more licenses
- Upgrade to a higher version
- When you increase the product pricing
To forecast revenue for add-on sales, you need to determine the growth rate of your customers in revenues in the previous year.
Pro tip: To effectively manage your subscription-based business model, leverage a robust subscription management system. Here are some of the best solutions listed by Attrock.
Conclusion
Forecasting revenue in subscription-based businesses is a complex task, but once you understand how to evaluate the key metrics for predicting revenue, the whole process becomes simple.
As mentioned, the best way to simplify the whole revenue forecasting process for your B2B subscription business is to use a subscription management system.
