Understanding SaaS Revenue Metrics and Growth
Software-as-a-Service (SaaS) business models feature unique revenue dynamics that require specialized metrics and projections. Unlike traditional businesses with one-time sales, SaaS companies build recurring revenue streams where customer lifetime value (LTV) far exceeds initial acquisition cost. Understanding key SaaS metrics—Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), churn rate, customer acquisition cost (CAC), and LTV/CAC ratio—is essential for evaluating business health and growth potential.
Monthly Recurring Revenue (MRR) represents the predictable revenue stream from active subscriptions, providing the foundation for SaaS financial planning. MRR growth comes from three sources: new customer acquisition, expansion revenue from existing customers upgrading or buying add-ons, and reducing churn (customer cancellations). Healthy SaaS businesses maintain 10-20% monthly MRR growth in early stages, slowing to 5-10% as they mature. Expansion MRR from existing customers (often called Net Revenue Retention when over 100%) indicates strong product-market fit and compounds growth through customer base monetization.
Churn rate—the percentage of customers or revenue lost each month—critically impacts SaaS sustainability. Monthly churn rates above 5-7% make sustainable growth nearly impossible as you must replace lost customers before adding new growth. Best-in-class SaaS businesses maintain under 2% monthly revenue churn (under 5% customer churn). Annual churn compounds dramatically—5% monthly churn means 46% annual customer loss, requiring constant replacement. Reducing churn from 5% to 2% monthly roughly doubles sustainable growth rate and dramatically increases company valuation.
The LTV/CAC ratio measures business model efficiency by comparing customer lifetime value to acquisition cost. LTV is calculated as average revenue per customer divided by monthly churn rate, minus gross margin. CAC includes all sales and marketing costs divided by new customers acquired. Healthy SaaS businesses target LTV/CAC ratios of 3:1 or higher—spending $1,000 to acquire customers worth $3,000+ in lifetime value. Ratios below 3:1 suggest unsustainable unit economics, while ratios above 5:1 may indicate under-investment in growth. Additionally, CAC payback period (months to recover acquisition cost) should be under 12 months for sustainable scaling.