SaaS Metrics 2.0 – Detailed Definitions

Calculating LTV and CAC for a SaaS startup

CAC – Cost to Acquire a Customer

\begin{equation} CAC=\frac{Sum\ of\ all\ Sales\ &\ Marketing\ expenses}{Number\ of\ new\ customers} \end{equation}

Customer Lifetime

\begin{equation} {Customer\ lifetime}=\frac{1}{Customer\ churn\ rate} \end{equation}

If churn is using monthly, then lifetime is month, if yearly, then years.

Customer Lifetime Value

LTV-CAC Ratio

Months to Recover CAC

\begin{equation} {Months\ to \recover\ CAC}=\frac{CAC}{ARPU} \end{equation}

To be perfectly accurate, this should include a Gross Margin adjustment as follows:

\begin{equation} {Months\ to \recover\ CAC}=\frac{CAC}{{ARPU}\times{Gross\ Margin\ \%}} \end{equation}

Sales Efficiency

\begin{equation} {Gross\ sales\ efficiency}=\frac{Gross\ new\ ARR\ booked\ in\ current\ quarter}{Total\ sales\ & \marketing\ expenses\ in\ the\ prior\ quarter} \end{equation}

\begin{equation} {Net\ sales\ efficiency}=\frac{Net\ new\ ARR\ booked\ in\ the\ current\ quarter}{Total\ sales\ & \ marketing\ expenses\ in\ the\ current\ quarter} \end{equation}

The Relationship between Sales Efficiency and Months to recover CAC

Magic Number

\begin{equation} {Magic\ number}=\frac{({{GAAP\ Revenue\ this\ quarter}-{GAAP\ Revenue\ in\ the\ prior\ quarter}})\times{4}}{Sales\ and\ marketing\ expense\ in\ the\ prior\ quarter} \end{equation}

There are two shortcomings of the Magic Number that are worth knowing:

It does not take into consideration Gross Margin %. We have already pointed out that if you have low gross margins, you really need to have much higher sales efficiencies to make up for that.
It does not take into consideration the mix between Subscription Revenue and Services Revenue, which is far less valuable, and typically lower margin.

The Metrics to help understand Bookings

Bookings are one of the most important metrics for non-SaaS company. for SaaS company, we need replace it with Net MRR.

Concpet	Description
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MRR	The Monthly Recurring Revenue at the end of each month. Computed by taking the MRR from the previous month and adding Net New MRR.
ARR	Annualized Run Rate = MRR x 12ARR is annual run-rate of recurring revenue from the current installed base. This is annual recurring revenue for the coming twelve months if you don’t add or churn anything.
ACV	Annual Contract Value of a subscription agreement.
New ARR	The increase in MRR from new customers in the current month.
Churned ARR	The lost MRR from churning customers in the current month.
Expansion ARR	The increase in MRR from expansion in your installed base in the current month.
Net New ARR	Net New ARR = New ARR + Expansion ARR – Churned ARR This is the sum of the three different components that will change MRR during each month.
Bookings	The total dollar value of all new contracts signed. Usually taken as an annualized number even if the contract period is longer than one year.Since the bookings number might have a mix of different durations (e.g. month-to-month; 6 months; 12 months) this number is not very helpful for understanding the business. To really understand what is going on in your SaaS Business, you should look at the following components:a) What happened with new customers: New ARR from new customer contracts b) What happened in your installed base: Renewals Churned ARR Expansion bookings The sum of all of the above: Net New ARR
Billings	Billings is the amount that you have invoiced that is due for payment shortly.
Revenue	Revenue is amount of money that can be recognized according to accounting policy. Even if it is paid for upfront, usually subscription revenue can only be recognized ratably over time as the service is delivered.If more money has been paid than can be recognized, the difference goes into a balance sheet item called Deferred Revenue.
Average Contract Length	Assuming a mix of different contract lengths, this gives you the average duration in months or years.
Months up front	Average of months (or years) of payment received in-advance with new bookings. Getting paid in advance has a big positive impact on cash flow. This metric has been used at both HubSpot and NetSuite in the past as a way to incent sales people to get more paid up front when a new customer is signed. However asking for more money up front may turn off certain customers, and result in fewer new customers, so be careful how you balance these two conflicting goals.
ARPA – Average monthly recurring Revenue per Account	This number is tells you the average monthly revenue per customer. It is useful to look at this for just the new customers booked in the month. Plot a trend line to show you the average price point that your new customers have chosen.

Bookings, Billings and Revenue – An example

Imagine you signed a new contract with a customer with a one year term, specifying that you provide your service to them for $1,000 per month, with an upfront payment of six months:

Your bookings would be $12,000 (the entire contract value)
You would bill $6,000 in the first month, then $1,000 per month from the seventh month onwards.
You would recognized $1,000 in revenue for each month of the contract. (This is dictated by GAAP accounting policy.)

For the example above, the balance sheet and income statement impact of these items is as follows:

Bookings do not affect either the balance sheet or the income statement.
When you bill $6,000 in the first month, but can only recognize $1,000 in revenue (income statement), and the other $5,000 goes into deferred revenue on the balance sheet (a liability).
Each month thereafter until another $1,000 can be recognized as revenue (income statement), and that reduces the deferred revenue liability on the balance sheet.

The Metrics for Churn (Renewals)

Conceptt	Description
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\# of new Customers	The number of new customers added this month
\# of churned Customers	The number of customers lost due to churn this month
Net New Customers	Net New Customers = # of new Customers – # of churned CustomersThis is the net number of new customers added once lost customers due to churn has been taken intoq account.
% Customer Churn
% MRR Churn	Defined as lost revenue due to churned customers as a percentage of total recurring revenue.(See below for a description of why this is different to % Customer Churn.)
% MRR Expansion	Defined as the expansion revenue from existing customers as a percentage of total revenue.
% Net MRR Churn	This is the number that will go negative if the Expansion revenue from existing customers starts to outstrip the lost revenue from churn. Getting to negative Net MRR Churn is a great goal for a SaaS company.
Customer Renewal Rate	It can be confusing to look at both your renewal rate (which should be just 1- Churn) in addition to churn. However in a model where you have yearly contracts being renewed, the two numbers can actually be different. For example, in the early days of a startup, you might have low churn because many of your customers have not yet reached the point where they could drop your service because of the length of their contract. In that situation, your churn number will not accurately predict what is really going to happen when you reach steady state. So a better number to look at is how many of your customers are renewing at the point where their contract expires. That is what this number measures.When you reach steady state, this number should be equal to 1 – % Customer Churn.
Gross Dollar Renewal Rate ($’s)	Similar to the number above, but instead of looking at the number of customers, it looks at the dollar value of the renewed contracts. It’s important to look at both, as they each tell an useful part of the story. If you were losing a lot of customers, you’d want to know why. Similarly, if you were only losing a few customers, but they were your biggest $ value customers, you’d also want to know that as well.
NRR (Net Revenue Retention) also referred to as: DRR (Net Dollar Renewal Rate)	Similar to the metric above, but also takes into consideration Expansion MRR:If your Dollar Renewal Rate is greater than 100%, you have negative churn, which is a very good thing to have achieved. Example: If you are looking at NRR on an annual basis, another way to think about what NRR represents, is to think of a specific month’s cohort (e.g. the January cohort). As an example, let’s say that at the end of January the revenue from this cohort is $100k. A year later, you will have lost some customers, (for example let’s say $10k of that cohort’s revenue), but the remaining customers have also purchased $20,000 more from you (Expansion MRR). So we will have $110k of revenue left from that January cohort a year later. This means that our NRR is equal to 110%. NRR is one of the four most important metrics for evaluating the health of a SaaS business. If you were to look at public SaaS companies, you will find that most are at 120% or higher. Public company investors understand that this is a very important metric, and pay attention to it in earnings reports. If your NRR is 120%, investors understand that if you stopped investing any dollars in acquiring new logos, but simply focused on expanding your current customers, your business would still grow by 20% every year. It also indicates to investors that your product works well, as customers wouldn’t continue expanding their usage of the product if it were not working well.