In the world of SaaS business, there are a lot of specific words used to indicate an entire concept. To an outsider these words make no sense and it is very hard to understand even a basic conversation without understanding their meaning. Those words and acronyms are very important when creating financial models for SaaS business as they represent key metrics.
MRR? LTV? CAC? CHURN? What are these words? Those are the secret ingredients to any successful SaaS business, every member in the team of a SaaS company should know the meaning of those words and how they reflect on the company performance.
These metrics are at the basis of any SaaS financial model and should be carefully analyzed and observed over the lifetime of your startup.
Let's see together the meaning of these words and what they express and understand why they are so useful and valuable to a SaaS business.
Most of these words are acronyms and are used to describe a specific performance indicator of the business. These names are called KPI Key Performance Indicator (KPIs for plural).
First of all, let's take a look at what I call the good KPIs, the numbers that, the bigger they are, the better it is:
- MRR: Monthly Recurring Revenue. How much recurring revenue you are generating each month. If you have a subscription that costs 10$ and 20 customers, your MMR is 10$ x 20 = 200$.
- ARR: Annual Recurring Revenue. The same as MRR, but annual. Usually MRR x 12.
- LTV: Life Time Value. Also called Customer LTV is one of the most important KPI for any business. It shows how much revenue you can expect from a single customer in all its lifetime in the app. From the day the subscription start since the day it ends.
For instance, with a 10$ subscription, if you know that your customer usually stay an average of 7 months, your LTV is 10$ x 7 = 70$.
- DAU/MAU: Daily Active Users / Monthly Active Users. How many active users your app has each day or each month.
- MRR: Monthly Recurring Revenue. How much recurring revenue you are generating each month. If you have a subscription that costs 10$ and 20 customers, your MMR is 10$ x 20 = 200$
- ARPU: Average Revenue per User. How much revenue each single user is driving into your app.
- ARPA: Average Revenue per Account. The same as ARPU, but used to track accounts instead of users, more suited to business models that have a free tier or where the revenue is best linked to an account instead of each single user (for instance Slack).
Now let's take a look at the other KPIs, the one that should be small:
- CHURN rate: The percentage of paying customers that you lose each passing month. This is one of the most important KPIs. The lower the churn rate, the longer the customer will stay and the higher the LTV will be. A Churn rate of 10% means that if you have 1000 active subscription, you will lose 100 of them at the end of the month, leaving you with 900 active subscriptions the next month.
- CAC: Customer Acquisition Cost. How much you are spending to get a new paying user into your platform. This value should always be less than the LTV and usually around or below 1/3 of the LTV (as a rule of thumb).
We hope that you now have a better understanding of the key indicator of a SaaS business and why it is so helpful to know these terms.
If you think we helped, you want to put into action what you learned or you are trying to make an excel to calculate these KPIs, we have the perfect solution for you.
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