Understanding Startup Metrics #3 – Billings, Deferred Revenue, and Customer Acquisition Cost

Yes, numbers, and here we go again. In our previous two posts, we’ve dissected crucial financial metrics that serve as indicators of a startup’s vitality. These numbers are like vitamins in the human body and present how well your company does. Today, we turn our attention to three key metrics: Unearned or Deferred Revenue, Billings, and Customer Acquisition Cost.

Deferred Revenue and Billings

In a Software as a Service (SaaS) business, you often collect payment at the time of booking but before the service is fully provided.

Think of it like buying a 24-month gym membership. You pay upfront, but you’re actually going to use the gym over the next 24 months.

In the SaaS world, even if a customer pays a large amount upfront, the company can only recognize this revenue over time as the service is delivered. This upfront payment is recorded as ‘deferred revenue’ on the company’s balance sheet. As the service is provided over time, this deferred revenue is gradually recognized as actual revenue.

Now, to gauge the growth and health of a SaaS company, we look at ‘billings’. This is calculated by taking the revenue in one quarter and adding the change in deferred revenue from the previous quarter to the current one. If a SaaS company is increasing its bookings (through new business or upsells/renewals to existing customers), billings will increase.

Billings is a better indicator of a SaaS company’s health than just looking at revenue because it captures the true value of the customer. However, it can be tricky. A SaaS company could show stable revenue for a long time by working off its billings backlog, which might make the business seem healthier than it actually is. So, it’s something to watch out for when evaluating the economics of such businesses.

Customer Acquisition Cost (CAC)

Customer Acquisition Cost, or CAC, is like the price tag on getting new users. But, CAC can be tricky.

Sometimes, people fail to include all the costs like referral fees or discounts. Also, some people calculate CAC by mixing up users who came in naturally and those who came in through paid marketing. This doesn’t really show if your paid ads are working well.

That’s why investors often look at the CAC of only those users who came in through paid marketing. This helps them see if a company can spend more on getting users and still make a profit.

Investors usually like to see both types of CAC: the mixed one and the one for paid marketing. They also like to see how much it costs to get a paying customer from different paid channels, like Facebook.

• Blended CAC is calculated as the total acquisition cost divided by the total number of new customers acquired across all channels.
• Paid CAC is calculated as the total acquisition cost divided by the new customers acquired through paid marketing.

Interestingly, as you try to reach more people, it usually costs more (Ofc, if there is not virality). So, getting your first 1,000 users might cost $1 each, but getting your next 10,000 users might cost $2 each, and so on. That’s why it’s important to keep track of how many users you’re getting from each channel.

Thank you! That was all for today. If you reach there, I wish you to achieve strong billings and with possible minimum CAC and maximum Customer Profitability(CP). Happy entrepreneuring!

Have a nice day😊