ARR (Annual Recurring Revenue) is the annualized value of all active subscription contracts at a point in time. It excludes one-time fees (implementation, training) and usage-based revenue that is not contractually committed. ARR is the most widely used top-line metric for SaaS businesses and is calculated as MRR × 12 or by summing the annualized value of all active subscriptions.

What is a good churn rate for a SaaS company?

For enterprise SaaS companies (ACV above $50K), best-in-class gross revenue churn is below 5% annually. For mid-market SaaS (ACV $10K-50K), 5-7% annual churn is considered good. For SMB SaaS with lower ACVs, 10-15% annual churn is common. Net revenue retention (NRR) above 110% is considered excellent because it means expansion revenue more than offsets churn.

How do you calculate LTV/CAC ratio?

LTV/CAC ratio is calculated by dividing Customer Lifetime Value by Customer Acquisition Cost. LTV = ARPA × Gross Margin % / Churn Rate. CAC = (Total Sales & Marketing Spend) / (Number of New Customers Acquired). A healthy LTV/CAC ratio is typically 3:1 or higher, meaning the lifetime value of a customer is at least three times what it cost to acquire them.

What is the Rule of 40 in SaaS?

The Rule of 40 states that a healthy SaaS company's revenue growth rate plus profit margin should equal or exceed 40%. For example, a company growing at 30% with a 10% free cash flow margin scores 40. It is a balancing metric that measures the trade-off between growth and profitability and is commonly used by investors and boards to evaluate SaaS business health.

The Essential SaaS Metrics Guide: ARR, Churn, LTV, CAC, and Unit Economics

SaaS finance runs on a specific set of metrics that differ from traditional business KPIs. Understanding these metrics—how to calculate them, what they mean, and what benchmarks look like—is essential for every finance professional working at a subscription business.

This guide covers the core SaaS metrics that boards, investors, and operating teams care about.

Recurring Revenue Metrics

MRR (Monthly Recurring Revenue)

MRR is the monthly value of all active subscriptions, normalized to a monthly figure. It is the building block of all SaaS revenue metrics.

MRR = Sum of all active subscription values, expressed monthly

MRR can be decomposed into components:

New MRR: Revenue from new customers acquired in the period
Expansion MRR: Revenue from existing customers who upgrade or add seats/products
Contraction MRR: Revenue lost from existing customers who downgrade
Churned MRR: Revenue lost from customers who cancel entirely

Net New MRR = New MRR + Expansion MRR − Contraction MRR − Churned MRR

ARR (Annual Recurring Revenue)

ARR is the annualized run-rate of recurring revenue. For companies with annual contracts:

ARR = Sum of annualized active contract values

For companies with monthly contracts:

ARR = MRR × 12

ARR is the primary top-line metric for SaaS businesses. It represents the “run rate” of the business assuming no new sales, no churn, and no expansion.

ARR Movement Waterfall

The most useful way to report ARR is as a waterfall:

Component	Q4 FY25	Q1 FY26
Beginning ARR	$18.0M	$20.0M
+ New ARR	$2.5M	$2.8M
+ Expansion ARR	$0.8M	$0.9M
− Contraction ARR	($0.3M)	($0.2M)
− Churned ARR	($1.0M)	($0.8M)
Ending ARR	$20.0M	$22.7M

Retention and Churn Metrics

Gross Revenue Retention (GRR)

GRR measures how much revenue you retain from existing customers, excluding expansion:

GRR = (Beginning ARR − Contraction − Churn) / Beginning ARR

GRR has a maximum of 100%. It tells you how durable your customer base is without relying on upsell.

Benchmarks: - Enterprise SaaS: 90-95% GRR is strong - Mid-market: 85-90% - SMB: 70-85%

Net Revenue Retention (NRR)

NRR includes expansion revenue:

NRR = (Beginning ARR − Contraction − Churn + Expansion) / Beginning ARR

NRR above 100% means your existing customer base grows even without new customer acquisition. This is the single most powerful indicator of product-market fit.

Benchmarks: - Best-in-class: 120%+ NRR - Good: 110-120% - Acceptable: 100-110% - Concerning: Below 100%

Logo Churn vs. Revenue Churn

Logo churn measures the percentage of customers lost. Revenue churn measures the percentage of ARR lost. These can diverge significantly:

10% logo churn but 3% revenue churn → You are losing small customers
3% logo churn but 10% revenue churn → You are losing large customers (more concerning)

Always track both, but revenue churn matters more for financial planning.

Customer Economics

CAC (Customer Acquisition Cost)

CAC measures the total cost to acquire a new customer:

CAC = Total Sales & Marketing Spend / New Customers Acquired

Include all fully loaded costs: sales compensation (base + variable), marketing spend, sales tools, SDR team costs, and marketing team compensation.

LTV (Customer Lifetime Value)

LTV estimates the total revenue a customer will generate over their lifetime:

LTV = ARPA × Gross Margin % / Annual Revenue Churn Rate

Where ARPA = Average Revenue Per Account (annual).

Example: ARPA = $50,000, Gross margin = 80%, Annual churn = 10%

LTV = $50,000 × 0.80 / 0.10 = $400,000

LTV/CAC Ratio

The ratio of lifetime value to acquisition cost:

LTV/CAC = LTV / CAC

LTV/CAC	Interpretation
< 1:1	Unsustainable: you are losing money on every customer
1:1 – 3:1	Below target: improve efficiency or reduce churn
3:1 – 5:1	Healthy: good balance of growth and efficiency
> 5:1	Potentially under-investing in growth

CAC Payback Period

How many months it takes to recover the cost of acquiring a customer:

CAC Payback = CAC / (ARPA per month × Gross Margin %)

Benchmarks: - Enterprise SaaS: 18-24 months is acceptable - Mid-market: 12-18 months - SMB: 6-12 months

Efficiency and Growth Metrics

Rule of 40

The Rule of 40 balances growth and profitability:

Rule of 40 Score = Revenue Growth Rate + Free Cash Flow Margin

A company growing at 50% with a −15% FCF margin scores 35 (below 40). A company growing at 20% with a 25% FCF margin scores 45 (above 40).

Burn Multiple

Burn multiple measures how much cash a company burns to generate each dollar of net new ARR:

Burn Multiple = Net Cash Burned / Net New ARR

Burn Multiple	Rating
< 1x	Excellent
1x – 1.5x	Good
1.5x – 2x	Concerning
> 2x	Poor efficiency

Magic Number

The magic number measures sales efficiency:

Magic Number = Net New ARR (Quarterly) / Sales & Marketing Spend (Prior Quarter)

A magic number above 1.0 means every dollar of S&M produces more than a dollar of new ARR—a signal to invest more in growth.

Building a SaaS Metrics Dashboard

A comprehensive SaaS metrics dashboard should include:

ARR waterfall (new, expansion, contraction, churn)
NRR and GRR (trailing 12 months)
CAC, LTV, LTV/CAC (by customer segment)
CAC payback (months)
Rule of 40 score (trailing 12 months)
Burn multiple (trailing quarter)
Cohort retention curves (show how revenue retention evolves over time by customer cohort)

Key Takeaways

SaaS metrics are the language of subscription business performance. ARR tells you how big the business is. NRR tells you how healthy it is. LTV/CAC tells you how efficient it is. The Rule of 40 tells you how well it balances growth and profitability. Master these metrics and you can analyze, forecast, and communicate the financial health of any SaaS business.