Important SaaS terms (simplified)

Hello!

For me, it’d have helped me a lot if there was a post to cover all the fancy terms of SaaS, in a simple, basic way. I think this would have allowed me to be aware of things that I didn’t even know exist, which is great.

This post will be longer than usual, as I’ll try to go over all the main SaaS terms over time. I’ll try to come back here and update it whenever I discover a new term. I’ll stick with the very basic explanation of the terms, if you feel like you need to know more about any of the terms, simply Google that or click the links below it:

 

Churn / Churn Rate:

“Next to MRR, Churn is probably the most widely discussed subscription metric. Churn has no actual agreed-upon definition. In the end, you define churn in a way that works for your business and in a way that is defensible. While there are many variations of churn, churn is always a measure of attrition or loss, and it can be lost customers, contracts, MRR, GAAP revenue, contract value, or bookings. Churn is most frequently expressed as a rate or ratio (churn rate of 12%), but churn can also be discussed as a whole number (“churned 10K of MRR” or “churned 2 customers”). When discussed as a rate, Churn is the inverse of your renewal rate. An 80% renewal rate is the equivalent of a 20% churn rate.”

More: 1, 2

 

Burn Rate:

Gross burn rate is the total amount of money the company spends in a month. Net burn rate (or burn rate), is the amount the company loses in a month.

So, (net) Burn rate = Gross burn rate – MRR

More: 1, 2

 

Customer Lifetime Value (CLV/LTV/CLTV):

CLV is the average revenue your company makes during a customer’s lifetime – from the moment of subscription until cancellation.

CLV is one of the most important metrics for SaaS, as it can make it easier for you to take decisions about the company’s spent (e.g. for marketing, support, etc).

More: 1

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.”

More: 1, 2, 3

 

Billings:

“Billings is the amount that you have invoiced that is due for payment shortly.”

More: 1, 2

 

Gross Margin:

“Gross Margin is the percent of revenue left over after the cost of servicing that revenue is taken into account.
For example, with a SaaS company, things like application hosting costs, customer on-boarding costs, customer service costs, and any third-party fees like software licenses or data fees that are required to use the product are included in the calculation.”

More: 1, 2, 3

 

MN (Magic Number):

“SaaS Magic Number can be used to tell you the health of your company from the perspective of growing monthly recurring revenue (“MRR”). The MN provides insight into the effectiveness of previous quarter Sales and Marketing spend on MRR growth.”

More: 1

 

Retention Rate / Renewal Rate:

“Retention rate is the percentage of customers that renew at the point at which their contract expires (the inverse of churn).”

More: 1

 

Cash Collection:

Cash collection is the act of collecting money from a customer to the company’s bank account. Proper/bad cash collection can highly affect a company’s cash flow.

More: 1, 2

 

NPS (Net Promoter Score):

Net Promoter Score (NPS) measures the loyalty that exists between a company and the user.

It is calculated based on responses to a single question: “How likely is it that you would recommend our company/product/service to a friend or colleague?” The scoring for this answer is most often based on a 0 to 10 scale.

More: 1, 2

 

TTV (Time to Value):

Is the time the product takes before providing its value to a new user. The less the TTV is, the better off the company is (less churn, higher customer life value, etc).

More: 1, 2, 3

 

ROI (Return on investment) :

Is the benefit to an investor (can be a company) resulting from an investment of some resource. A high ROI means the investment gains compare favorably to investment cost.

Anything that brings a positive ROI (higher returns than costs), is theoretically good for the company.

 

Funnel:

The funnel is the path the users have from the moment they visit your website (or even contacted as a lead), until converting into a customer.

It’s important to remember that every step along the funnel affects the bottom line revenues. For example, if you improve the top of your funnel; say the landing page; so in overall it converts 15% better, this can (if done right) often lead to 15% increase in total sales.

More: 1, 2

 

Cold email/call:

This term is used for when you contact someone via email or phone, usually to pitch or sell something.

 

Monthly/Annual Recurring Revenue (ARR or MRR):

Is the total revenue your SaaS is receiving from all subscribed members, per month or yer. For example, if you have 100 customers, each paying $50/mo, your MRR would be $5,000.

 

Average Revenue per Account (ARPA):

Is the average revenue each of your active (paying) users is generating. Or, in other words, the average MRR per customer.

More: 1

 

CAC (Customer Acquisition Cost):

Is the average cost your company has to pay for acquiring a customer. CAC varies a lot between different traffic sources, countries, etc.

Arguably, CAC and CLV are the two metrics that sums up how well your SaaS is doing. Theoretically, as long as CLV is higher than CAC, the company is in a good position to scale.

 

Cohorts:

Often used in SaaS, specially for calculating CLV/CAC, cohort simply means a group of people with a shared characteristic.