SaaS products live on recurring revenue. Specific metrics help you understand business health and growth. This guide presents the essential metrics and how to interpret them.
Why SaaS Metrics Are Different
Recurring Revenue
Unlike one-time sales.
Ongoing Relationship
Customer pays as long as you use it.
Unit Economics
Cost x value over time.
MRR (Monthly Recurring Revenue)
Definition
Normalized recurring monthly revenue.
Components
- New MRR: new customers
- Expansion MRR: upgrades
- Churned MRR: cancellations
- Contraction MRR: downgrades
Net New MRR
New + Expansion - Churned - Contraction.
ARR (Annual Recurring Revenue)
Definition
MRR × 12.
Usage
Enterprise companies often use ARR.
Valuation
ARR multiples for valuation.
Churn
Customer Churn
Percentage of customers who cancel.
Revenue Churn
Percentage of MRR lost.
Net Revenue Retention
Account expansion vs churn.
Benchmark
< 5% monthly for B2B. < 7% for B2C.
Net Revenue Retention (NRR)
Definition
MRR of the same cohort after period.
Calculation
(final MRR + expansion - churn) / initial MRR.
###Target
100% means expansion exceeds churn.
Top SaaS
Better ones have 120%+.
LTV (Lifetime Value)
Definition
Total expected revenue from a customer.
Simple Calculation
ARPU / Churn Rate.
Importance
How much can you spend to purchase it?
CAC (Customer Acquisition Cost)
Definition
Cost to acquire a customer.
Calculation
(Marketing + Sales) / New Customers.
Components
Ads, salaries, tools, events.
LTV/CAC Ratio
What is it
How much you earn per dollar invested in acquisition.
###Target
3:1 or greater.
Interpretation
< 1: Loses money per customer. 1-3: Viable but tight.
3: Healthy.
CAC Payback
Definition
Months to recover CAC.
Calculation
CAC / (ARPU × Gross Margin).
###Target
< 12 months for B2B SMB. < 18 months for Enterprise.
ARPU/ARPA
ARPU
Average Revenue Per User.
ARPA
Average Revenue Per Account.
Usage
It depends on whether you count users or accounts.
Quick Ratio
Definition
(New MRR + Expansion) / (Churn + Contraction).
Interpretation
4: Healthy growth. 2-4: Good. < 2: Worrying.
Gross Margin
Definition
(Revenue - COGS) / Revenue.
COGS in SaaS
Infrastructure, support, success.
###Target
70% for SaaS.
Magic Number
Definition
Sales efficiency.
Calculation
Net New ARR / S&M Spend from the previous quarter.
Interpretation
0.75: Scale aggressively. 0.5-0.75: Keep investing. < 0.5: Optimize before scaling.
Rule of 40
Definition
Growth Rate + Profit Margin > 40%.
Usage
Balances growth and profitability.
Application
Mature companies.
Cohort Analysis
Purpose
Understand behavior over time.
MRR Cohorts
Revenue from each acquisition cohort.
Retention Cohorts
Cohort retention.
Funnel Metrics
Visitors to Sign-up
Visitor conversion.
Sign-up to Activated
Activation after registration.
Trial to Paid
Trial conversion.
Paid to Churned
Retention.
Essential Dashboards
Growth
MRR, new customers, growth rate.
Retention
Churn, NRR, cohorts.
###Efficiency
LTV/CAC, CAC payback, gross margin.
Common Errors
Vanity Metrics
Downloads, signups without looking at conversion.
Ignore Churn
Focus only on acquisition.
Do Not Segment
Averages hide reality.
Compare Wrong
Benchmarks for different segments.
Conclusion
SaaS metrics are the language of the subscription business. Understand each one, constantly monitor it and use it to guide decisions. The objective is efficient and sustainable growth.
##FAQs
1) What is the most important metric? It depends on the stage. Early: growth. Mature: NRR and efficiency.
2) Is 5% churn good? Monthly is high. Annual is excellent.
3) How to calculate LTV without history? Estimate churn and project. Review according to real data.
4) Is LTV/CAC of 2 bad? Viable but indicates tight margin. Improve unit economics.
5) When to focus on profitability vs growth? Early: growth. Mature: Rule of 40 as a guide.
Also read
- MRR: the monthly recurring revenue that anchors all other metrics of your SaaS
- What are SaaS metrics and why they organize (or mess up) your operation
- Churn in applications: trends and examples of those who lose users without realizing it
- Revenue churn versus customer churn: why losing a big one is not losing a small one
- Churn in Applications: How to Reduce and Retain Users
- User retention in apps: why they come back (or not)