SaaS Metrics 2.0 – Detailed Definitions


This page is a supplement to the the SaaS Metrics 2.0 blog post. It provides detailed definitions for each of the key metrics used in that post.


Calculating LTV and CAC for a SaaS startup

Unit Economics is a very powerful way to analyze the long term profitability of a SaaS business.

I am often asked for the details of how to compute the various elements, such as CAC and LTV. This post gives the formulae.

CAC – Cost to Acquire a Customer

CAC is defined as follows:
There is a problem with using this formula in the early days, as you may several expensive people in the team that should scale to handle a far number of customers as you grow. In that case, your CAC will be too high. I suggest doing a very simple adjustment to the Sales & Marketing expenses to take only a portion of those salaries and expenses in the early days. That will give a better indication of how CAC will look in the future when you are at scale.

Customer Lifetime

If you start with a cohort of 100 customers and apply a constant churn rate every month, you’ll get an exponential decay, as shown in the following graph (which uses a 3% monthly churn rate):

Mathematically this can be simplified to the following formula to find the average Customer Lifetime:

Note that if the Customer Churn rate is a monthly % or yearly %, then the Customer Lifetime will be for the same time period. Here is a monthly and annual example to illustrate the point:

a) If the Monthly customer churn rate is 3%, then the Customer Lifetime will be 1/0.03 which is 33 months.

b) if the Annual customer churn rate is 20%, then the Customer Lifetime will be 1/0.20 which is 5 years.

Lifetime Value of Customer

In the situation where there is no expansion revenue expected over the lifetime of a customer, you can use this simple formula:

which can also be expressed as follows:
Once again if ARPA is monthly, the churn rate should be monthly.

To truly get an accurate picture of LTV, you should take into consideration Gross Margin. i.e.


However in most SaaS businesses, the gross margin % is high (above 80%), and it’s quite common to use the simpler version of the formula that is not Gross Margin adjusted.

Ron Gill, NetSuite: I’m surprised at how often I see a SaaS product architected in a way that means they’ll never clear a decent gross margin. Including GM in the calc is a great way for you to see there is a big lever on LTV/CAC that is worth focusing on.

For NetSuite, we’ve not only calculated LTV/COCA, but also calculated r-squared of each of the components (to see what has driven improvement) and sensitivity analysis on them (to see what might drive it in the future). GM is an important component.

More complex case
In the specific situation where you expect ARPA to change over the lifespan of the customer due to expansion revenue, this simple version of the formula will not work. We ran into this situation with ZenDesk, where there is a pretty reliable increase in revenue over the life of a customer.

Here’s a graph showing what would happen if you had a cohort of 100 customers that initially started paying you $100 a month, but increased their payment by $5 every month. The monthly Customer Churn Rate is 3%:


As you can see the expansion revenue initially is greater than the losses from churn, but over time the churn takes over and brings down the value of that cohort.

I asked my partner, Stan Reiss, to help with the math to calculate LTV in this more complex situation. Here is what he came up with:

a = initial ARPA per month ( x GM %, if you prefer)
m = monthly growth in ARPA per account
c = Customer Churn Rate % (in months)


(This formula makes an assumption that revenue increases at a roughly fixed rate every month for the entire lifetime of the customer. That probably doesn’t hold true for many SaaS businesses, but the goal is to get a rough idea, not to have the absolute perfect answer.)

LTV : CAC Ratio


Our guideline for a successful SaaS business is that this number should be higher than 3.

Ron Gill, NetSuite: It is most important to track this metric over time to make sure you’re driving improvement. And, look at investment and how it will impact.

(The guideline assumes you are using the simpler LTV formula that does not include a Gross Margin adjustment, and that you have a Gross Margin of 80% or higher.)


Months to recover CAC

To be perfectly accurate, this should include a Gross Margin adjustment as follows:
However in our guideline which states that Months to Recover CAC should be less than 12, we are assuming that you are using the simpler formula, and have a Gross Margin of 80% or higher.

The Metrics to help understand Bookings

MRR The Monthly Recurring Revenue at the end of each month. Computed by taking the MRR from the previous month and adding Net New MRR.
ARR Annualized Run Rate = MRR x 12ARR is annual run-rate of recurring revenue from the current installed base. This is annual recurring revenue for the coming twelve months if you don’t add or churn anything.
ACV Annual Contract Value of a subscription agreement.
New MRR/ACV The increase in MRR from new customers in the current month.
Churned MRR/ACV The lost MRR from churning customers in the current month.
Expansion MRR/ACV The increase in MRR from expansion in your installed base in the current month.
Net New MRR/ACV Net New MRR = New MRR + Expansion MRR – Churned MRRThis is the sum of the three different components that will change MRR during each month.
Bookings The total dollar value of all new contracts signed. Usually taken as an annualized number even if the contract period is longer than one year.Since the bookings number might have a mix of different durations (e.g. month-to-month;  6 months; 12 months) this number is not very helpful for understanding the business.To really understand what is going on in your SaaS Business, you should look at the following components:a) What happened with new customers:

  • New MRR/ACV from new customer contracts

b) What happened in your installed base:

  • Renewals
  • Churned MRR/ACV
  • Expansion bookings

The sum of all of the above:

  • Net New MRR/ACV
Billings Billings is the amount that you have invoiced that is due for payment shortly.
Revenue Revenue is amount of money that can be recognized according to accounting policy. Even if it is paid for upfront, usually subscription revenue can only be recognized ratably over time as the service is delivered.If more money has been paid than can be recognized, the difference goes into a balance sheet item called Deferred Revenue.
Average Contract Length Assuming a mix of different contract lengths, this gives you the average duration in months or years.
Months up front Average of months (or years) of payment received in-advance with new bookings. Getting paid in advance has a big positive impact on cash flow. This metric has been used at both HubSpot and NetSuite in the past as a way to incent sales people to get more paid up front when a new customer is signed. However asking for more money up front may turn off certain customers, and result in fewer new customers, so be careful how you balance these two conflicting goals.
ARPA – Average monthly recurring Revenue per Account This number is tells you the average monthly revenue per customer. It is useful to look at this for just the new customers booked in the month. Plot a trend line to show you the average price point that your new customers have chosen.

Bookings, Billings and Revenue – An example

Since there can be some confusion around the difference between bookings, billings and revenue, here is a simple example to help clarify them: Imagine you signed a new contract with a customer with a one year term, specifying that you provide your service to them for $1,000 per month, with an upfront payment of six months:

  • Your bookings would be $12,000 (the entire contract value)
  • You would bill $6,000 in the first month, then $1,000 per month from the seventh month onwards.
  • You would recognized $1,000 in revenue for each month of the contract. (This is dictated by GAAP accounting policy.)

For the example above, the balance sheet and income statement impact of these items is as follows:

  • Bookings do not affect either the balance sheet or the income statement.
  • When you bill $6,000 in the first month, but can only recognize $1,000 in revenue (income statement), and the other $5,000 goes into deferred revenue on the balance sheet (a liability).
  • Each month thereafter until another $1,000 can be recognized as revenue (income statement), and that reduces the deferred revenue liability on the balance sheet.

The Metrics for Churn (Renewals)

The following shows the metrics to understand Churn:

# of new Customers The number of new customers added this month
# of churned Customers The number of customers lost due to churn this month
Net New Customers Net New Customers = # of new Customers – # of churned CustomersThis is the net number of new customers added once lost customers due to churn has been taken into account.
% Customer Churn image
% MRR Churn Defined as lost revenue due to churned customers as a percentage of total recurring revenue.image(See below for a description of why this is different to % Customer Churn.)
% MRR Expansion Defined as the expansion revenue from existing customers as a percentage of total revenue.image
% Net MRR Churn imageThis is the number that will go negative if the Expansion revenue from existing customers starts to outstrip the lost revenue from churn. Getting to negative Net MRR Churn is a great goal for a SaaS company.
Customer Renewal Rate renewal-rate-custs It can be confusing to look at both your renewal rate (which should be just 1- Churn) in addition to churn. However in a model where you have yearly contracts being renewed, the two numbers can actually be different. For example, in the early days of a startup, you might have low churn because many of your customers have not yet reached the point where they could drop your service because of the length of their contract. In that situation, your churn number will not accurately predict what is really going to happen when you reach steady state. So a better number to look at is how many of your customers are renewing at the point where their contract expires. That is what this number measures.When you reach steady state, this number should be equal to 1 – % Customer Churn.
Renewal Rate ($’s) renewal-rate-dollars
Similar to the number above, but instead of looking at the number of customers, it looks at the dollar value of the renewed contracts. It’s important to look at both, as they each tell an useful part of the story. If you were losing a lot of customers, you’d want to know why. Similarly, if you were only losing a few customers, but they were your biggest $ value customers, you’d also want to know that as well.
DRR (Dollar Renewal Rate) Similar to the metric above, but also takes into consideration Expansion MRR:DRRIf your Dollar Renewal Rate is greater than 100%, you have negative churn, which is a very good thing to have achieved.Example: If you are looking at DRR on an annual basis, another way to think about what DRR represents, is to think of a specific month’s cohort (e.g. the January cohort). Asa an example, let’s say that at the end of January the revenue from this cohort is $100k. A year later, you will have lost some customers, (for example let’s say $10k of that cohort’s revenue), but the remaining customers have also purchased $20,000 more from you (Expansion MRR). So we will have $110k of revenue left from that January cohort a year later. This means that our DRR is equal to 110%.


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  • Rohit D

    Great post David. I have a question regarding the LTV calculation.

    All over the web, the calculation for LTV has been a variation of (ARPA/Churn%) * Gross Margin. Why aren’t a lot of people looking at expansion %?

    One formula I have come across is: (ARPA/Expansion %) *((1+Expansion %)^(1/Churn%)-1) * Gross Margin.

    When applying the formulas to a business, the advanced formula displays a higher LTV since it includes expansion % but could also have more fluctuation is LTV M/M.

    In your opinion, what are the benefits and disadvantages of each of these formulas and are there any other variations to calculate LTV?


  • David Skok

    Hi Rohit, in the following blog post, I did provide a formula that takes expansion into account. Take a look and let me know if it appears to work for your situation. If not, it would be good to email privately to understand your situation.
    Thanks, David

  • David Chen

    Thanks so much for the post David! I wish I have read all of your posts a year ago. I have a quick question on MRR calculation. How do you factor in one time discount when calculating MRR. For example, we sometimes give a 15% discount to a user for their first purchase, and the discount is not recurring. If the user apply that 15% discount on a monthly or yearly plan, do we need to subtract that discount amount from MRR or do we put that as a cost to acquire a user since it’s one time. Thanks so much in advance!

  • Rohit D

    Thanks David, missed that formula at first. Just to clarify, does m refer at absolute $ growth rate or growth (expansion %)? I’m also assuming c refers to logo/account/customer churn rate and not mrr churn rate?

    I used all 3 models to calculate LTV and found that your advanced model outputs the highest ltv, then the advanced formula I posted in my initial comment followed by the simple ltv calc.

    Thanks for your help!

  • Rohit D

    IMO – One time discounts should be brought into the MRR Table. You will create unnecessary churn (when the discount is applied) or expansion (when the discount expires and the customer pays the full amount). But, it will be 100% accurate.

    You should also bring in the yearly discount, since you will have annual contracts ( 1 or 2 years), your MRR for that customer will be more consistent. If the discount ends up expiring after the term of the contract and the customer now pays the full amount, you can count that as expansion.

    I think it’s wise to track the discount (might be required if you are reporting revenue according to GAAP – ask an accountant), but not factor it into COGS. You really didn’t incur the cost. It’s an opportunity cost and you already factored it in the MRR table.

  • David Chen

    Robit, thanks so much for your response! I have a quick follow up question, you mentioned yearly discount. Can you tell me the difference between yearly discount and the one time discount I mentioned in my question above? Thanks again!

  • Rohit D

    I meant that as 2 separate items.

    One time discount could be 20% off the first month, usually though a coupon code.

    Yearly discount could be 20% off off 1 year if a customer purchases an annual plan or through a coupon code.

  • David Skok

    Hi David, I would suggest simply subtracting that discount from the LTV (Lifetime Value of the Customer) value that the formula yields.
    Best, David

  • David Skok

    Hi Rohit, you are correct on both counts.

  • David Skok


  • David Chen

    Thanks David! So does that mean it doesn’t affect MRR, but just the LTV?

  • Benjamin Hoffman

    I am not 100% confident in my response but I believe that coupon codes should not be treated as revenue expansion. Instead, they should receive their own line item in your calculation as a one time reduction of MRR for that given month. This way, you can still accurately calculate negative churn through subscription expansion, upsells, and downsells while also lowering your MRR to reflect those one time coupons.

    @dskok:disqus’s response about including discounts into LTV and not adjusting MRR is an interesting way to approach coupons. Although, I still prefer including it in MRR.

  • David Skok

    Correct, unless it’s a regular recurring discount.

    Best, David

  • David Chen

    Really appreciate it! I have learned so much from every one of your blog posts. Thank you for sharing your wisdom with the world.

  • Jason Seed

    David, how do you treat Reseller margin? We sell direct to end users but also sell via a VAR channel. We rebate reseller margin back to the reseller on a monthly basis. Expectation is that they will continue to receive the rebate if they continue as a VAR (hitting a minimum number of new clients each period).
    Should it be treated as part of the CAC?

  • David Skok

    For sales made via the VAR channel, I would reduce the MRR by the amount that you are rebating, as it is a regular on-going event. If if were just a single payment at the time of acquisition of the customer, it might be better as part of CAC. The fact that you are willing to continue paying this indicates that the VAR is providing some on-going value add. I hope this helps.


    Hi David, none of the images (formulas) are loading for me. You may want to check.

  • David Skok

    You are right. This must be to do with my translation software to support other languages. I will diagnose it and get back to you. Sorry for the inconvenience!

  • David Skok

    All is now fixed. Thanks for letting me know.

  • Nelly

    Hi David,

    We are actually working on the calculation of our CAC and I need to determine the amount of Sales and Marketing expenses dedicated to our SaaS revenues.
    The tricky thing is that I’ve tried to build an allocation key based on our revenue split between our products but it doesn’t give an appropriate result. Actually, we are selling 2 products : monthly and annual licences + customed applications and this latest represent a minor part of our revenues. How would you allocate our sales and marketings costs so that we can split them reasonably and given that our salesforce is mainly spending its time on annual licences and customed applications sale?
    Thanks for your help

  • David Skok

    I would use my best guess as to what % of each of your resources is being allocated to each of the different areas. It doesn’t have to be perfect to be useful. I hope that helps.

  • Robert

    Hi David,

    Question about how you understand LTV. When I think about LTV is it not more a predictive than an actual? In your excel workbook LTV uses the ARPA for new customers and a trailing 4quarters for churn to predict an LTV for those new customers. Should it rather be that the formula should use is the
    average ARPA across the entire installed base rather than merely the new
    business? The reason for this is that the churn rate is on the installed
    base not the new business as it is a trailing metric. The LTV should
    be a future predictive value of a customer in your installed base not merely a
    short term predictor of the value of a single customer booking in the current
    quarter. Would appreciate your feedback. BTW, have you seen this?

  • David Skok

    Hi Robert, if you believe that your installed base’s LTV will be different from the new customers just booked, then you might possibly want to track them both separately to know where the business is heading. However do the calc any way that you believe is going to give you the best information for analyzing your business.
    Re-the Forbes article, yes I did see that, and Forbes asked me to post a rebuttal, as they thought there was another point of view. That rebuttal appeared here:

  • sunil*j

    Are the custom application also sold on subscription? If not, might want to take that whole part of the business out. Why does the split on revenue (or resources as David suggests) not give you an ‘appropriate’ result?

  • sunil*j

    This is just an absolutely terrific blog post, as is the related one linked at the top. Thank you David!

  • David

    In the customer lifetime : b) is 5 months

  • kathleen

    Hi thanks for the post. Are one time set up fees included in LTV? I would think so.

  • David Skok

    Yes. Those should be considered as part of your Cost of Goods Sold, so would impact the LTV.

  • Kumar

    Hi David, For a churn management program that predicts the churn using analytics and provides incentives to those customers who are likely to churn (to prevent them from churning), What would be the best business metric to measure the success of the data analytics project?

  • David Skok

    The obvious metric is churn or customer retention rate (CRR). Also worth measuring is the Dollar Retention Rate (DRR). However all this metrics won’t help you anticipate the churn before it happens for that you need a way to measure customer happiness. My suggestion there is start with looking at on-boarding success, and then to look at the business outcomes your customer was hoping to see by using your software and try to find a way to measure those to make sure the software is delivering the expected benefits.
    Many vendors don’t look at business outcomes and rely instead on measuring usage of the software, giving higher scores for use of certain more “sticky” features. This can work, but I think it’s less effective than looking at business outcomes. The best SaaS software requires minimal user engagement to produce excellent business outcomes.
    Best, David

  • Jon


    I’m currently in the number crunching/R&D phase for a B2C SaaS that provides a streamlined marketing solution. I believe that I can get an avg 8 months out of each paid user, but I haven’t been able to find any useful information online for SaaS offerings intended for shorter term subscriptions. Here are my projections:
    – Churn rate of 12.5% (based on the avg 8 months of use).
    – 4.3m new consumers entering my target market each year in the US, so my idea is
    that a very large cycling market will make up for the high churn rate.
    – The value of this product yields an ARPA of $50/mo and then $75 with expansions after 6 months of business.
    – CAC (paid users) starts at $65/mo and then decreases to $30 after 6 months of business.
    – This type of SaaS is focused on selling itself through UX/UI

    I attached an image of what I have so far, but would you mind looking at it to see if you find any red flags or objections?

    Also, what advice could you give to a new SaaS with term subscriptions weighing on the churn rate?

    Thank you, David.

  • Paul Orovan

    David, how do I measure customer retention activity spend effectiveness?

  • David Skok

    It’s always hard to measure effectiveness of spend unless you have a baseline. The only clear way that I can think of doing that would be to take a control set of customers and don’t spend anything on them, and another set that you do spend on, and look for the difference in $ churn. However most companies wouldn’t want to do an experiment like that, as they would care more about keeping all customers more than they’d care about getting a precise measurement of effectiveness.
    So what I would do in this case is find ways to measure:

    1) Happiness and effectiveness after the on-boarding period. (This is usually the most important time to address churn, not later at the time of renewal)
    2) Happiness after the on-boarding period

    3) Customer Churn

    4) $ churn

    Then I would start taking actions to address these metrics, and watch to see how the numbers change from their current levels. Use your current levels as the baseline.

  • Cameron

    David – You suggest adjusting sales and marketing down in the early days to get a more accurate CAC. Is it accepted practice to adjust customer support and infrastructure costs down when calculating gross margin, again w/ the assumption that those resources aren’t yet operating at 100%?

  • David Skok

    Yes – for planning purposes that also makes sense.

  • Cameron

    Awesome. Thanks for the quick reply.

  • Matt Singer

    Hi David,

    Great article. I love your stuff! I’m trying to reconcile your definition of CAC and I keep getting stuck on your denominator. If I’m reading your fraction right, it requires total cost of sales and marketing to be divided by number of customers. I’ve always thought it needed to be divided by the total ARR for those customers rather than just the customer count, thus accounting for ASP. Please confirm.



  • David Skok

    Hi Matt, the formula is correct, as ASP doesn’t play a role in the CAC side of the equation. But it does impact the other side of the LTV:CAC relationship, as higher ASP will result in higher LTV.
    Using an example may help. If you spent a total of $1m in sales and marketing expenses to acquire 10 customers, your cost to acquire each of those customers will be $100,000.
    Please keep questioning if I haven’t made this clearer.
    Best, David

  • Tapiteow

    Hi David,
    You don’t make the difference between blended CAC (all the new customers) and paid CAC (only customers acquiered by “paid” marketing) : is it because you think this difference is not so important ? Is it because you consider that paid acquisition has also an effet on organic acquisition ?
    Thx for your blog !

  • David Skok

    Hi Thomas, it’s actually a great idea to track CAC by different acquisition channel, as that will help you to understand which are your highest performing channels.
    I do also typically see that organic acquisition is helped by paid, and rises as you invest more in paid.
    Best, David