SaaS Revenue Recognition

Saas Revenue Recognition is a term used to describe the point in time when a Saas vendor can post revenue for the delivery of its services to a given client. Under the Saas delivery software model, revenue may be recognized at the point of registration (i.e. under a Pay-Per-User Saas Billing Model) or it may recognized at the point of consumption (i.e. under a Pay-As-You-Go Saas Billing Model).

In a Pay-Per-User Saas Billing Model, a client can begin using a Saas application as soon as they have been given access to it, which is where revenue recognition begins under this model. This is similar to how revenue is recognized for on-premise software, which occurs as soon as a product is delivered, even if the product remains in a box on the shelf. With Saas delivery, once a client has been granted access to a software application, revenue can be recognized, regardless of whether or not the client actually consumes or uses the service. It is relatively easy for Saas vendors to estimate revenue streams for the services that they deliver under the Pay-Per-User Saas Billing Model.

Under a Pay-As-You-Go Saas Billing Model, a client may not begin using a particular Saas offering until a certain condition is met, such as crossing a specific threshold of CPU usage, etc. Likewise, under this billing model, revenue can not be recognized by a Saas provider until the required set of usage conditions have been met. By its very nature, the Pay-As-You-Go Saas Billing Model makes it difficult for Saas vendors to estimate revenues.

Some Saas vendors extend cloud based computing services that are billed on both a Pay-Per-User and Pay-As-You-Go basis. In such cases, Saas vendors will be able to easily estimate revenues for the Pay-Per-User portion of the their business, but will be unable to do the same for the Pay-As-You-Go portion of their businesses. The impact of the variable ability to recognize revenue will depend on the distribution of the services delivered. For example, if a Saas vendor’s clients rarely invoke features that are billed on a Pay-As-You-Go basis, it will be much easier to estimate revenues than if the reverse is true, where clients frequently use features that are billed on a Pay-As-You-Go basis.

Revenue recognition is also impacted by whether or not a Saas vendor offers its services on a contract basis, under a signed Saas Agreement. If, for example, a client signs a $18,000 annual contract for a particular Saas offering on December 31st of a given year, then the Saas vendor would be able to recognize the full value of the contract as revenue, in the current year. In the absence of a contract – a client will mostly like be using a Saas product on a subscription basis, which will allow the Saas vendor to recognize revenue at the beginning of each billing period.

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