Glossary
We believe in eliminating the language barrier of complex jargon between technology companies and their investors.
SaaS Reporting
- The world of SaaS (Software as a Service) reporting is full of specialised terminology.
- Investors use a number of KPIs to analyse and determine the value of software companies.
- It is important to gather, analyse, reconcile and present your financial data in the format investors want to see it.
- We break down the most common jargon to help you navigate this complex area and improve dialogues with investors.
Recurring Revenue
Annual Recurring Revenue (ARR)
The total recurring revenue a company generates from its customers’ subscriptions or ongoing services over the course of a month, multiplied by 12. ARR is used by investors to assess revenue predictability and is often a key component in calculating the company’s valuation.
Monthly Recurring Revenue (MRR)
The total recurring revenue a company generates from its customers’ subscriptions or ongoing services over the course of a month. MRR is used by investors to assess revenue predictability and is often a key component in calculating the company’s valuation.
Gross retention
Gross retention = (Starting ARR – Downsells – Losses) / Starting ARR
The percentage of customers who renew their subscriptions for another period of time on a dollar basis. A high gross retention rate indicates the product works well and the business has an effective customer success process.
Net retention
Net retention = (Starting ARR – Downsells – Losses + Upsells) / Starting ARR
The percentage of revenue retained from existing customers after accounting for churn, as well as upsells and downsells. A high net retention rate indicates that the company is able to retain and grow its customer base.
Net retention is seen as one of the most important metrics for any software business alongside revenue growth.
Logo retention
Logo retention = (closing # of customers – new customers) / opening # of customers
The percentage of customers who renew their subscriptions for another period of time, based solely on the number of customers retained. A high logo retention rate indicates that the company has a strong brand and a loyal customer base.
Downsell
The act of generating less recurring revenue from a customer compared to 12 months ago. This metric is used to evaluate a company’s ability to retain its customers at the current price point.
While a downsell is usually viewed as a negative by investors, there are cases where the flexibility to offer a lower-priced plan may prevent the customer from churning. This means that the recurring revenue from that customer is merely reduced, rather than being totally lost.
For example, if a customer’s MRR was £10k in June 2022 and the same customer’s MRR is £8k in June 2023, then this would be calculated as a £24k downsell ((10k-8k) x 12).
Loss
Customers who were generating revenue 12 months ago but are not now. This metric is used to evaluate a company’s ability to retain existing customer subscriptions.
Low loss numbers show investors that a company can maintain customer satisfaction and provide ongoing value. It is a crucial factor in improving customer retention rates.
For example, if a customer’s MRR in June 2022 was £5k, but in June 2023 there was no longer any recurring revenue being recognised from this customer, then this would be calculated as a £60k loss (5k x 12).
Upsell
The act of generating more recurring revenue from a customer compared to 12 months ago. This metric is used to evaluate a company’s ability to sell customers additional products or services beyond their initial subscription.
Strong upsell numbers show investors that a company can offer additional value to its customers over time. This leads to increased lifetime value (LTV) and improved revenue predictability.
For example, if a customer’s MRR was £10k in June 2022 and the same customer’s MRR is £12k in June 2023, then this would be calculated as a £24k upsell ((12k-10k) x 12).
Win
Customers who are generating revenue now but were not 12 months ago. This metric is used to evaluate a company’s ability acquire new customer subscriptions.
Strong win numbers show investors that a company can identify new market opportunities and convert them into paying customers. This demonstrates market competitiveness, customer appeal and potential for long-term growth.
For example, if a customer’s MRR in June 2023 is £5k, but there was no recurring revenue being recognised from this customer in June 2022, then this would be calculated as a £60k win (5k x 12).
Ratios & Metrics
Customer Lifetime Value (LTV)
Lifetime value (LTV) = (average revenue per customer x gross margin) / (1 – gross retention %)
The total value of revenue that a customer generates over the course of their relationship with a company. This metric helps investors assess long-term profitability and the stickiness of customers.
Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) = total sales and marketing costs / number of customers acquired
The total cost incurred to acquire a new customer, including marketing and sales expenses. This metric is used to evaluate the efficiency of a company’s sales and marketing strategies.
CAC payback period
CAC payback period (# months) = ((Total sales and marketing spend / # of new customers) / (Average ARR per customer x gross margin)) x 12
The breakeven point when the revenue generated from the customer equals the cost to acquire them, typically measured in months. Billing customers annually in advance can give software companies an almost instant payback on a cash basis.
This metric helps businesses understand the efficiency of their customer acquisition strategies and determine the profitability of acquiring new customers. It is particularly valuable for earlier stage businesses that do not have enough data to calculate customer LTV accurately.
LTV:CAC ratio
LTV:CAC ratio = Customer Lifetime Value (LTV) / Customer Acquisition Cost (CAC)
One of the most important metrics for any business. It compares the lifetime value of a customer to the cost of acquiring that customer. This provides insight into the effectiveness of the sales and marketing strategy, as well as the stickiness of customers. This is a key focus for many investors as it is a good indication of a business’s long-term profitability and sustainability.
Burn multiple
Burn multiple = Net cash decrease / Net new ARR
The burn multiple measures how efficiently a company uses its capital to create new recurring revenue.
This is a crucial metric for investors to determine the capital deployment efficiency of a SaaS company and is therefore very useful for evaluating sustainability of the business model.
A low burn multiple (e.g. less than 1) is indicative of efficient growth as it shows that the net new ARR which a company is generating is superior to the amount of cash being spent to acquire it.
SaaS magic number
SaaS Magic Number = Net new ARR in quarter / previous quarter sales & marketing expense
Measures ARR growth for every dollar spent on sales & marketing (S&M). This therefore indicates how many dollars of ARR are generated per S&M dollar.
This metric provides valuable insights into a company’s sales efficiency. However, it should be used alongside other metrics such as LTV and churn rate to fully understand the business’s performance.
For example, a magic number of 1.0 means that you earn customer acquisition costs back in one year. This metric measures total growth, which includes both new and existing customers.
Rule of 40
Rule of 40 = Revenue growth % + Adjusted EBITDA %
A benchmark used to evaluate growth potential. The rule states that the aggregate of a company’s growth rate and profit margin should add up to 40% or more. This metric helps investors assess a company’s financial efficiency as it combines both growth and profitability.
Rule of 200
Rule of 200 = Revenue growth % + Adjusted EBITDA margin + LTM Net dollar retention + Gross margin
A benchmark used to evaluate growth potential. The rule states that the aggregate of a company’s revenue growth percentage, adjusted EBITDA margin, LTM net dollar retention and gross margin should add up to 200% or more. This metric helps investors assess a company’s financial efficiency as it combines growth, profitability and customer retention.
