From my notes on the Y-Combinator talk by Anu Hariharan
🚨 tl;dr: SAAS company growth is best measured through MRR (monthly recurring revenue), ARR (annual recurring revenue), MRR churn (loss of MRR), and Paid CAC (customer acquisition cost).
☁️ What is SAAS?
As everyone Knows, SAAS is software-as-a-service. It’s essentially a software subscription for cloud-based software. Think products like Segment, Metadata.io, Lately
- Software as a service or SAAS is a subscription business that is charged monthly for web-based software.
- Most often the commitment is month-to-month but sometimes there can be annual contracts as well.
- Note here: I worked at Knowi where we were a bit of a hybrid between SAAS and enterprise. This seems to be fairly common for data SAAS Products (like Fivetran) and business intelligence SAAS products (like Knowi, SiSense) where the price tag is higher.
📊 The Most Important Metrics
MRR (monthly recurring revenue)
- Simply put: how much are you making monthly.
- Revenue is recognized as it is paid monthly.
- Does not include one-time or non-recurring revenue such as professional services or fees.
ARR (annual recurring revenue)
- This metric is a measure of revenue contributions that are billed annually.
- In theory this should simply be the MRR * 12. Although if a company has a significant churn, this metric could over-represent the revenue.
- I’m really surprised the presenter said that ARR = MRR * 12. If that’s the case then the metrics are redundant. I think at the very least we should have monthly commitment companies use MRR and annual contract companies us ARR and just eliminate the redundant metric.
Gross MRR Churn
- The amount of Monthly Recurring Revenue lost in a given month as compared to what was expected from the MRR calculation.
- So if you had 10k MRR, you lost a customer who was paying 1k monthly, then you have 1k Gross MRR Churn for that month and your MRR for the next month goes down to 9K.
- For a lot of companies the annual version of this is more useful: Gross ARR Churn
Paid CAC (customer acquisition cost)
- If you are using paid marketing channels (Google Ads, Facebook Ads, buying leads, etc) then you have a Paid Customer Acquisition Cost.
- This is the cost of all those paid leadgen efforts divided by the number of customers brought in through those channels.
- So if you were running affiliate marketing, Google Ads, and sponsoring an event, and the combined cost for all three came out to 5k, and from those channels you brought in 10 new customers, then your Paid CAC is $100 per customer.
- Note: early stage startups can often grow organically through product led growth and do not need to use paid channels. But it depends on the industry, product, startup model, etc.