SaaS Pricing Metrics Glossary

Concepts & Acronyms

Before we go any further, let’s break down the basic concepts and acronyms we’re using.

This is not a complete glossary of Growth Metrics, just the ‘What you absolutely need to know’ list. For a full list, check out the reading in the ProfitWell Learning Center. Also take a look at this article on Medium to see how other SaaS systems pitched or presented their metrics.

Annual Recurring Revenue (ARR)

This is how much revenue you are generating on a recurring basis each year. This is not the same as your monthly recurring revenue because you may have customers who have purchased annual or lifetime memberships to your SaaS or discounts you offered during the year. These kinds of variations make it important to note ARR as well as MRR.

ARR = Total revenue in a year that is expected to renew the following year.

Average Revenue Per User (ARPU)

This gives you the amount the average user is worth in revenue. This could be by any amount of time, but is often calculated per month. This is a great article on ARPU and how to use this metric.

ARPU = Total revenue for time period / Total number for time period

Churn Rate or Attrition

This is also known as attrition, stated in the 3 A’s of SaaS. This is the annual rate at which your user stop using your service, or churn. Churn rate helps you determine the lifetime value (LTV) of a customer. Churn rate is an important factor for many reasons. Understanding what is causing a high churn rate and how to reduce that churn is very important to growing your SaaS.

When churn rate is positive, it means you’re losing customers. However, churn can become negative as well. This essentially means you have a money machine since you aren’t losing any customers, but instead are just gaining them. That means that for every dollar you spend on your SaaS, you make much more.

Churn rate = # of customers who left / total number of customers

Customer Acquisition Cost (CAC):

The cost of acquiring a new customer. This price is different for different kinds of customers. Very often, but not all the time, the cost of acquiring a customer that pays you more money or has a higher lifetime value (LTV) is higher.

CAC = Total Cost of Marketing & Sales / # of Customers Acquired

You can also break this down into channels by determining the number of customers acquired by, say, outbound campaigns, divided by the number of customers acquired with that method.

Growth

The total total amount of new subscription revenue from new and existing users in a given month. For growth, you also have to take into account your churn rate.

Growth = New subscriptions + upgrades - churn

Month over Month Growth Rate (MoM or M/M)

This the growth of this month over the previous month.

MoM = (Current month total revenue / Last month total revenue) - 1

Lifetime Value (LTV):

This is how much money you will make from a customer from the time they signup and pay their first bill until the end of that customers lifecycle with your business. The problem with this metric can swing drastically based on retention. That means that if your retention drops quickly, your LTV can drop as well, even though they may come back the next month. So it’s important to understand that this metric is not always accurate. It will give you a good idea you can work with, but you need to understand how it swings. You could work a smoothing variable into this formula, but we’re going to keep it simple for this book.

LTV = Average Revenue Per User (ARPU) / Churn Rate to date

Or in other words:

LTV = (Total revenue to date / Total number of users to date) / (# of customers who left / total number of customers)

Marketing Qualified Lead (MQL)

This is a customer that has been, generally via an automatic system, vetted as a potential customer. The MQL is a person that usually downloaded a lead magnet and followed up with some measured actions that put them into the MQL category.

Monthly Recurring Revenue (MRR)

How much total money you have coming in from subscriptions each month. This is measured per month, so if you are growing, your MRR this month should be higher than last month.

MRR = Amount of recurring revenue from the most recent month

Sales Qualified Lead (SQL)

The SQL - not to be confused with Structured Query Language which is also abbreviated as SQL - is a lead that has been vetted by the SALES TEAM. This means that a sales person has usually talked to them and designated them as a sales lead. They are usually the closest to closing as a sale.

Value Metric

This is the item or items that you are selling that scale with your customer’s needs. The most common value metric is the number of users. So as the number of users in the system goes up, so does the price. The value metric needs to increase along with the value of the system to your target user. There can be multiple value metrics for a SaaS that scale with different kinds of users.