SaaS Metrics Explained
One of the most important things founders building software companies need to understand is how to measure the health of their business.
Software-as-a-Service (SaaS) companies operate very differently from traditional businesses. Because revenue is generated through subscriptions rather than one-off transactions, understanding the underlying metrics becomes essential for evaluating growth, efficiency and long-term sustainability.
SaaS metrics help founders understand how quickly their business is growing, how efficiently they are acquiring customers, and whether those customers generate meaningful long-term value. Identifying and tracking the critical metrics—and selecting the right SaaS metrics for your stage and model—are essential for accurately evaluating business health and financial health.
For investors, these metrics provide a clear view of the quality of a startup’s growth and the strength of its business model.
Understanding the most important SaaS metrics allows founders to make better decisions about product development, marketing investment and capital allocation as the business scales.
SaaS Metrics Explained
Introduction to SaaS Companies
SaaS (Software as a Service) companies have fundamentally changed how businesses and individuals access and use software. Instead of purchasing and installing software on local machines, customers now subscribe to cloud-based applications that are delivered over the internet. This shift allows SaaS companies to rely on a subscription-based business model, where customers pay a recurring fee—often monthly or annually—to access the service.
This recurring revenue model provides SaaS companies with predictable income streams, making it easier to plan for growth and invest in product development. Because customer acquisition is ongoing, understanding the customer acquisition cost (CAC) is essential for SaaS companies to ensure that their marketing and sales efforts are efficient and sustainable. Monthly recurring revenue (MRR) is another key SaaS metric, offering a real-time snapshot of how much revenue the business is generating from active subscriptions each month. Over time, the customer lifetime value (LTV) becomes a critical measure, helping SaaS companies understand how much revenue they can expect from each customer over the entire customer lifetime.
By focusing on these key SaaS metrics—customer acquisition cost CAC, monthly recurring revenue MRR, and customer lifetime value LTV—SaaS companies can better evaluate the effectiveness of their customer acquisition strategies, optimise their business model, and drive long-term success in the competitive software as a service landscape.
SaaS Business Model
The SaaS business model is built around delivering scalable, flexible solutions through recurring subscriptions. SaaS companies typically offer a variety of pricing plans, including both monthly and annual options, to meet the diverse needs of their customer base. The revenue generated from these subscriptions is known as recurring revenue, which forms the backbone of the SaaS business.
A primary goal for SaaS companies is to grow their annual recurring revenue (ARR) by acquiring new customers and, just as importantly, retaining existing customers. Customer retention is a cornerstone of the SaaS business model, as retaining customers over a longer customer lifetime directly increases customer lifetime value and supports sustainable revenue growth. To achieve this, SaaS companies invest in customer success initiatives, ensuring that users derive ongoing value from the product and remain satisfied with the service.
In addition to retaining customers, SaaS companies often focus on increasing average revenue per user (ARPU) through upselling and cross-selling additional features or higher-tier plans. These strategies not only boost total revenue but also improve net revenue retention (NRR), a key metric that measures how much revenue is retained from existing customers after accounting for upgrades, downgrades, and churn. High net revenue retention NRR is a strong indicator of customer satisfaction and product-market fit, signalling that the SaaS business is well-positioned for long-term growth.
By prioritising customer retention, delivering consistent value, and leveraging recurring revenue streams, SaaS companies can build a resilient business model that supports ongoing innovation and expansion.
Why SaaS Metrics Matter
Subscription businesses are built around recurring revenue.
Unlike traditional companies that rely on individual transactions, SaaS companies generate predictable income from customers who continue paying over time.
This model creates a powerful compounding effect. Customers acquired today continue generating revenue in future months while new customers are added to the platform.
However, this model only works if the underlying economics of the business are healthy.
SaaS metrics help founders answer critical questions such as:
Is revenue growing consistently?
Are customers staying on the platform?
Is the cost of acquiring customers sustainable?
Is the business becoming more efficient as it scales?
Without a clear understanding of these metrics, founders may struggle to identify whether growth is truly sustainable.
Annual Recurring Revenue (ARR)
One of the most important SaaS metrics is Annual Recurring Revenue (ARR).
ARR measures the predictable revenue generated by subscription customers over a twelve-month period.
Because SaaS businesses rely on recurring subscriptions, ARR provides one of the clearest indicators of growth.
ARR is typically calculated by multiplying the number of active customers by the annual subscription price they pay.
For example:
If a company has 1,000 customers paying $100 per year, its ARR would be:
$100,000
ARR is often the headline metric used to track the progress of SaaS startups and is frequently one of the first numbers investors ask about when evaluating a company.
Monthly Recurring Revenue (MRR)
Closely related to ARR is Monthly Recurring Revenue (MRR).
MRR measures subscription revenue on a monthly basis.
Many startups track MRR because it allows founders to monitor changes in revenue more frequently and identify growth trends earlier.
MRR can also be broken down into several components:
New MRR – revenue from new customers
Expansion MRR – revenue from upgrades or additional purchases
Churned MRR – revenue lost from customers leaving
Net New MRR – the net change in revenue after accounting for all of the above
This breakdown provides a clearer picture of what is driving growth within the business.
Customer Churn
Another critical SaaS metric is churn.
Churn rate measures the percentage of customers who cancel their subscriptions over a specific period. Customer churn rate specifically measures the proportion of customers lost during a given period. A high customer churn rate can indicate problems with aspects of the customer experience, such as product pricing or customer service.
High churn rates can be a warning sign that the product is not delivering enough value to retain customers. The number of customers lost directly impacts revenue and growth potential.
Even if a company is acquiring new customers quickly, high churn can weaken the long-term health of the business. In addition to customer churn, revenue churn rate measures the percentage of revenue lost due to customers cancelling their subscriptions or downgrading their plans.
Retention is therefore one of the most important drivers of sustainable growth in SaaS companies.
Strong retention increases customer lifetime value and strengthens the economics of the business.
Customer Acquisition Cost (CAC)
Customer Acquisition Cost measures how much it costs to acquire a new customer.
This includes expenses such as:
marketing and advertising
sales team salaries and commissions
marketing tools and software
agencies or external growth support
Marketing expenses and marketing efforts are key components of CAC, as they encompass all activities and costs related to promoting and acquiring customers.
CAC is calculated by dividing the total cost of sales and marketing by the number of new customers acquired during a specific period. A lower CAC is generally preferred as it indicates more efficient customer acquisition strategies. The CAC payback period measures how long it takes for a business to earn back the money spent on acquiring a customer—a shorter CAC payback period is favorable as it allows companies to reinvest in acquiring new customers more quickly.
Optimising CAC is crucial for SaaS businesses to ensure sustainable growth and profitability. The CAC-to-LTV ratio measures the ratio of the cost of acquiring a new customer compared with the total revenue that customer is expected to generate over their lifetime. An ideal CAC-to-LTV ratio is less than one, indicating that the revenue generated from a customer exceeds the cost of acquiring them. A high Customer Acquisition Cost relative to customer value indicates inefficient spending.
SaaS companies can improve their CAC by adopting product-led growth strategies, where the product itself drives customer acquisition. Understanding customer behavior and refining marketing strategies as part of your customer acquisition strategy can help reduce CAC and improve overall business efficiency.
CAC helps founders understand how expensive growth really is.
If the cost of acquiring customers is too high relative to the value those customers generate, the company may struggle to sustain its growth.
Lifetime Value (LTV)
Lifetime Value estimates the total revenue a business expects to generate from a customer over the duration that they remain a customer. Customer lifetime value (LTV) is calculated using the average transaction value and the average customer lifespan, representing the total long-term value generated by an average customer.
In subscription businesses, customer lifetime value LTV is heavily influenced by customer retention. The longer customers stay on the platform, the higher their lifetime value becomes.
LTV is often analysed alongside CAC to understand the overall efficiency of customer acquisition.
A commonly referenced benchmark in SaaS is a 3:1 LTV to CAC ratio, meaning customers generate three times more revenue than the cost required to acquire them.
Gross Margin
Gross margin measures how efficiently a SaaS company delivers its product relative to the revenue it generates.
It is calculated by subtracting direct costs associated with delivering the service from revenue. Gross margin is calculated as the difference between revenue and the direct costs, divided by revenue.
For software businesses, direct costs often include:
cloud infrastructure
hosting and platform costs
customer support related to service delivery
One of the reasons SaaS companies are attractive to investors is that they often operate with high gross margins, typically around 70–80% or higher.
High margins reflect the scalability of software products, where revenue can grow significantly without costs increasing at the same rate.
Net Revenue Retention
Net Revenue Retention (NRR) measures how revenue from existing customers changes over time after accounting for upgrades, downgrades, expansion revenue, and revenue churn.
Revenue churn measures the percentage of recurring revenue lost due to customers cancelling their subscriptions or downgrading their plans. The revenue churn rate is a key metric for SaaS businesses, as it directly impacts growth and retention strategies.
If existing customers expand their spending through upsells, cross-sells, or increased usage (expansion revenue) faster than revenue is lost through churn, NRR can exceed 100%. Expansion revenue plays a crucial role in increasing net revenue retention by offsetting losses from revenue churn.
For example:
If a company begins the year with $1 million in revenue from existing customers and ends the year with $1.2 million from the same customers, its NRR would be:
120%
High NRR indicates strong product value and customer satisfaction.
Many of the most successful SaaS companies achieve NRR above 110%.
Lessons from Scaling a SaaS Company
During my time helping scale Canva from roughly US$10 million in revenue to more than US$2 billion, understanding SaaS metrics was central to managing the company’s growth.
Metrics such as ARR, retention and customer acquisition efficiency helped leadership teams understand which investments were driving sustainable growth and which areas required improvement.
As companies scale, maintaining visibility into these metrics becomes increasingly important. They help ensure that growth is supported by strong underlying economics rather than short-term momentum.
Common Mistakes Founders Make
While SaaS metrics are powerful tools, they are sometimes misunderstood.
Some common mistakes include:
Focusing only on revenue growth
Rapid growth can look impressive, but without strong retention and healthy unit economics it may not be sustainable.
Ignoring churn
Customer churn has a major impact on long-term growth and lifetime value.
Overcomplicating early metrics
Early-stage startups do not need highly complex dashboards. Tracking a few core metrics consistently is usually more valuable.
Looking at metrics in isolation
Metrics like CAC, LTV and retention are most useful when analysed together.
Final Thoughts
SaaS metrics provide the foundation for understanding the health and scalability of subscription businesses.
They help founders measure growth, identify operational strengths and weaknesses, and communicate the performance of the company to investors.
By focusing on a small number of core metrics — including ARR, retention, customer acquisition efficiency and gross margins — founders can develop a clearer view of whether their business model is working.
Understanding these metrics early allows companies to build stronger, more sustainable businesses as they scale.
Many SaaS investors reference benchmarks such as those published by Bessemer Venture Partners when evaluating growth metrics.
Author
Damien Singh is the former CFO of Canva, where he helped scale the company from approximately US$10 million to more than US$2 billion in revenue.