SaaS Metrics: Definitions, Excel Examples, and Real-World Uses

SaaS Metrics Definition: “Metrics” for software-as-a-service (SaaS) companies are numbers that tell you how quickly these firms are growing, how efficiently they’re operating and winning customers, and how appealing they are to investors; these metrics often influence their valuations directly.

The “Software as a Service” (SaaS) category includes software companies that offer their products as online subscription services. The most famous example is Salesforce.com, but virtually every software company today, large and small, uses a variation of this business model.

Since cash flow and fundraising are key concerns for early-stage startups, you use SaaS metrics to evaluate how long it takes a company to repay its sales & marketing expenses, how well it retains customers, and more.

Some of the most important SaaS metrics include Annual Recurring Revenue (ARR), Customer Lifetime Value (LTV), Customer Acquisition Costs (CAC), the LTV / CAC ratio, and the CAC Payback Period.

Traditional “efficiency metrics” like Return on Equity (ROE), Return on Invested Capital (ROIC), and Return on Assets (ROA) are often negative for startups and growth companies, so they’re rarely useful in this space.

Meanwhile, large public SaaS companies may not disclose enough data to calculate these metrics, especially when it comes to sales & marketing. For example, finding the spending split by new vs. renewal customers is difficult.

So, unless you get very lucky, please remember that most of these SaaS metrics are practical only for early-stage startups and growth companies that have provided you with all the required information.

Files & Resources:

• SaaS Metrics Overview – Presentation Slides (PDF)
• SaaS Metrics Overview File Corresponding to Video (XL)
• Annual Recurring Revenue (ARR) – Simple Examples (XL)
• Net Revenue Retention Examples (XL)
• SaaS Accounting – Simple Model (XL)

Video Table of Contents:

• 0:00: Introduction
• 1:16: The Short Answer
• 5:44: Part 1: Why the “Lifetime Value” Calculation is Tricky
• 13:32: Part 2: Calculating Customer Acquisition Costs (CAC)
• 15:30: Part 3: Is LTV / CAC Useful or Deceptive?
• 19:52: Part 4: A Better Alternative: CAC Payback Periods
• 23:32: Part 5: Other Common SaaS Metrics
• 26:43: Recap and Summary

SaaS Metric #1: Annual(ized) Recurring Revenue (ARR)

The “Annual Recurring Revenue” or “Annualized Recurring Revenue” (ARR) is one of the most important Saas metrics since it directly measures the company’s growth from its core business.

For a SaaS company, the “core business” means “subscription revenue,” rather than sales from one-time licenses, professional services, consulting, or other sources.

There’s nothing inherently wrong with earning money from these sources, but they’re considered less valuable than subscription revenue because they are more difficult to predict and tend to fluctuate significantly in each period.

ARR is calculated based on the subscription revenue from the most recent month or quarter, multiplied by 12 or 4 to get an annual figure.

Investors like ARR because they tend to value recurring revenue at higher valuation multiples than non-recurring revenue.

In the example below, to calculate ARR, we take the Subscription Revenue from one quarter and multiply it by 4 to get the annualized number.

We exclude the Professional Service and Perpetual License revenue because they are non-recurring and require customers to make separate purchases each time rather than renewing their existing subscriptions:

SaaS Metric #2: Customer Lifetime Value (CLTV or LTV)

Customer lifetime value (LTV) measures the total Gross Profits a SaaS company can expect to generate from the average customer over their subscription term.

For example, if the average customer stays subscribed for 5 years and pays $100 per year, which the company earns an 80% Gross Margin on, the LTV is 5 * $100 * 80% = $400.

This sounds simple to calculate, but it’s very tricky in practice because no one agrees on how to estimate a customer’s “average lifespan” – particularly for startups with limited operating histories.

Some people suggest using a formula based on the Churn Rate or Cancellation Rate:

Average Customer Lifespan = 1 / Average Cancellation Rate

For example, if 10% of customers cancel each year, the average customer should stay with the company for 1 / 10% = 10 years.

However, this does not always hold up in real life because cancellation rates change over time as companies and markets evolve.

You should apply an additional discount for startups and growth companies due to their limited operating histories and reduced visibility.

One easy method is to add the company’s estimated Discount Rate in the denominator of the formula:

Average Customer Lifespan = 1 / (Average Cancellation Rate + Discount Rate)

For example, if you’re analyzing a growth company with a 10% cancellation rate and an approximate 20% Discount Rate due to its high risk and limited operating history, the formula would be:

Average Customer Lifespan = 1 / (10% + 20%) = 3.3 years.

While this may seem like a dramatic reduction, it’s reasonable if the company has only 5 or 7 years of operating history. That’s not enough time to decide whether a 10-year average lifespan is plausible.

To estimate the average customer payment each year, you can take the current average payment, increase it by the average price increase per year, and add up the numbers over this 3.3-year period.

You normally multiply by the average Gross Margin to account for costs such as customer support, infrastructure, bandwidth, and payment processing.

So, the LTV metric is linked to the company’s Gross Profit rather than its Revenue.

Here’s an example calculation for a large/public company (Confluent):

In this case, a “Contract Cycle” means “1 year” because Confluent sells annual subscriptions.

If it sold 2-year subscriptions, we’d have to multiply the Average Annual Contract Value (ACV) by 2 to determine the income per “Contract Cycle” and then multiply by the number of cycles to get the Average Lifetime Revenue Contribution.

SaaS Metric #3: Customer Acquisition Costs (CAC)

Because SaaS companies lose customers each year, they must win new customers to offset their losses and grow to higher revenue levels.

Therefore, one of the most important SaaS metrics is “Customer Acquisition Costs,” also called CAC.

If you have detailed budget information from the company, calculating the CAC is straightforward; if not, it requires significant guesswork.

Customer Acquisition Costs should include the following expenses:

• Marketing salaries and benefits (ideally, only those linked to new customers rather than retention).
• Paid advertising and lead generation.
• Onboarding and hiring expenses for sales reps dedicated to winning new customers.
• Commissions paid to sales reps who win new customers.
• Salaries, bonuses, benefits, and travel expenses for sales reps associated with new customers.
• The value of executives’ time spent acquiring new customers (e.g., if the CEO needs to attend a meeting to win a deal).

Here’s a simple breakout for an early-stage startup:

Of course, this type of detailed calculation is unrealistic for large public companies because they do not disclose their expenses in this much detail.

At best, you might be able to say that certain percentages of the total Sales & Marketing are for new vs. renewal customers.

For example, some surveys say 2/3 to 3/4 of S&M spending is dedicated to winning new customers at the average enterprise SaaS firm.

We make a CAC estimate for Confluent based on a similar 2/3 estimate for new customer sales & marketing spending:

To calculate the average CAC per customer, you can divide this number by the total number of new customers in the period.

SaaS Metric #4: LTV / CAC Ratio

Once you’ve calculated the average Customer Lifetime Value and average Customer Acquisition Costs for a SaaS company, you can combine them to get the LTV / CAC Ratio.

This metric is very important because it tells you how much the company earns over the long term for each $1.00 spent to acquire a new customer.

Higher numbers are generally better, but only within reason.

For example, a 3x LTV / CAC is better than a 2x LTV / CAC, but a 10x LTV / CAC is unrealistically high in most cases.

It would raise questions about the company’s internal calculations and whether its recordkeeping is accurate.

Here’s the LTV / CAC calculation for Confluent:

The first LTV / CAC is 3.9x, and the second is 2.1x.

These are reasonable numbers, but the big difference in just two years raises questions about the company’s Sales & Marketing spending, as that change drives most of the difference in this LTV / CAC metric.

Smaller startups often report much higher LTV / CAC ratios because their estimates for the “lifetime value” of customers and their average lifespans are unrealistic.

Remember that these metrics should be discounted for any company with a limited operating history.

The Limitations of the LTV / CAC Ratio

The main issues are described above: Startups have limited operating histories and tend to produce unreliable “lifetime value” forecasts.

If a company has only existed for 3 years, how can it confidently predict that an average customer will stay for 5 years based on a 20% annual cancellation rate?

So, you should apply discount factors to all these metrics, and the earlier the company, the higher the appropriate discount factor.

The LTV / CAC Ratio is best used as:

• A Comparison / Benchmarking Metric – For example, it can tell you if one company is operating more or less efficiently than its peers.
• A Budgeting Metric – If you’re creating a budget or forecast for a startup, this metric can give you an idea of what the company must spend to grow to a certain level.

Most public companies do not disclose their LTV / CAC, so you must rely on metrics such as Gross and Net Revenue Retention instead.

SaaS Metric #5: CAC Payback Period

The CAC Payback Period measures the time a company takes to recover its initial sales & marketing costs to win an “average” new customer.

For example, if a company spends $100K to acquire a new customer, and the company earns $10K per month in Gross Profits from this customer, the CAC Payback Period is:

$100K / $10K = 10 months

The CAC Payback Period focuses on short-term performance, so it is more reliable than the Customer Lifetime Value (CLTV) or LTV / CAC metrics, which require forecasts many years into the future.

Customer retention and cancellation rates do not factor in at all, making this metric more reliable.

If you have a simple monthly model for a SaaS startup or growth company, you can calculate it as follows:

CAC Payback Period = Average Monthly CAC / Average Net New MRR

The “Average Monthly CAC” is the total Customer Acquisition Costs (defined above) divided by the number of new customers won that month.

The “Net New MRR” or “Net New Monthly Recurring Revenue” is normally defined as:

Net New Monthly Recurring Revenue = (Additional Monthly Subscription Revenue from New Customers – Lost Monthly Subscription Revenue from Cancelling Customers) * Gross Margin %

In other words, you exclude additional revenue from price increases and seat expansions and focus on only *new* customer revenue and *lost/cancelled/downgraded* revenue.

Here’s a simple calculation for a startup with a quarterly model:

Since this is a quarterly model, the “Net New MRR” here is more like the monthly average in this specific quarter.

The CAC Payback Period is then based on the Monthly Customer Acquisition Costs / Net New MRR.

We need to divide the Total CAC figure here by 3 because this is a quarterly model, but we are calculating monthly numbers:

The Average CAC Payback Period for this company varies, but the range is about 3 to 10 months over the quarters shown here:

This is a healthy result because most SaaS companies aim for payback periods under 1 year.

There are some exceptions for companies with longer-term, higher-priced contracts, but firms generally want to recover their upfront sales & marketing costs as quickly as possible; under 1 year is best for most enterprise SaaS companies.

If we were analyzing a similar SaaS company with a longer CAC Payback Period, such as 10 – 14 months, we would perceive that company as riskier and less efficient than the one shown here.

In addition to helping you assess the risk and efficiency of different firms, the CAC Payback Period is useful for determining companies’ funding needs.

For example, if Company A needs 1 year to recover its average sales & marketing costs for each new customer, but Company B needs 2 years to do the same, Company B will probably have to raise funds more quickly.

As with the CLTV and LTV / CAC metrics, it is very difficult to calculate the CAC Payback Period for large/public SaaS companies because they do not disclose enough information in most cases.

Other SaaS Metrics

There are many other SaaS metrics, so we recommend reviewing the Venture Capital & Startup Modeling page on this site to learn more.

We have covered some of the most common and useful ones here, but you should also know about the differences between Billings, Bookings, and Revenue, and performance metrics such as “The Rule of 40.”

You can find even more coverage and full models with walkthroughs in our full Venture Capital & Growth Equity Modeling course.