SaaS Metrics Explained: MRR, ARR, Churn, LTV, and CAC

Software as a Service changed how we think about business metrics. When customers pay monthly instead of once, the math of running a business changes completely. Traditional metrics like quarterly revenue or annual sales don’t capture what’s actually happening. You need different numbers to understand subscription businesses.

I’ve tracked these metrics across my own subscription products and consulted on SaaS analytics for client projects. The alphabet soup of acronyms can be intimidating, but the underlying concepts are straightforward. Once you understand what each metric measures and why it matters, you can evaluate any subscription business, including your own.

Let me break down the five metrics that matter most.

MRR: Monthly Recurring Revenue

MRR is the heartbeat of any subscription business. It’s the predictable revenue you can count on receiving every month from your current subscribers, normalized to a monthly amount. If you have 100 customers paying $50 per month, your MRR is $5,000.

The key word is recurring. One-time purchases, setup fees, or consulting revenue don’t count toward MRR. Only the predictable, repeating subscription payments qualify. This distinction matters because recurring revenue has different value than one-time revenue. You can plan around it. You can borrow against it. You can sleep at night knowing next month’s income is mostly locked in.

MRR isn’t just one number. It breaks down into components that tell a richer story. New MRR is revenue from customers who signed up this month. Expansion MRR is additional revenue from existing customers who upgraded or added services. Churned MRR is revenue lost from customers who cancelled. Contraction MRR is revenue lost from downgrades without full cancellation.

Net MRR is what you’re left with after adding new and expansion MRR, then subtracting churned and contraction MRR. Positive net MRR means your revenue base is growing. Negative net MRR means you’re losing ground even if new customers are coming in. A business can acquire lots of new customers and still shrink if churn is eating faster than acquisition is adding.

ARR: Annual Recurring Revenue

ARR is simply MRR multiplied by 12. If your MRR is $50,000, your ARR is $600,000. It’s the same revenue viewed through an annual lens, which is useful for bigger-picture planning and comparisons.

Why have both metrics? Different audiences care about different time frames. Investors often talk in ARR because it sounds larger and fits how they value companies. Operators often prefer MRR because it’s closer to the monthly cash flow reality. Both represent the same underlying business, just at different scales.

ARR becomes more meaningful once your business has some stability. A brand new SaaS with $500 MRR claiming $6,000 ARR is technically correct but possibly misleading. That run rate assumes a full year with no changes, which is unlikely for an early-stage product. ARR is most useful when the business is mature enough that the monthly pattern is likely to continue.

For businesses with annual contracts rather than monthly, ARR is often the primary metric and MRR is the derived one. If a customer signs a $12,000 annual contract, you’d count that as $1,000 MRR regardless of how they actually pay.

Churn Rate

Churn measures customer loss. It’s the percentage of customers or revenue that you lose over a given period. This is arguably the most important metric for subscription businesses because it determines whether your growth is sustainable or just feeding a leaky bucket.

Customer churn rate is the number of customers lost divided by the number of customers you started with. If you start January with 200 customers and 10 cancel during the month, your monthly churn rate is 5%.

Revenue churn rate uses dollars instead of customers. If you start the month with $20,000 MRR and $1,500 cancels, your revenue churn is 7.5%. Revenue churn is often more informative because it accounts for customer value. Losing one $500/month customer hurts more than losing five $10/month customers, even though the customer count is lower.

Net revenue churn factors in expansion revenue. If you lost $1,500 to cancellations but gained $2,000 from upgrades, your net revenue churn is negative 2.5%. This is actually a good thing. Negative churn means your existing customer base is becoming more valuable over time, even before you add new customers. Some of the best SaaS businesses have negative net revenue churn because their customers naturally expand usage.

Monthly churn that looks small compounds into significant annual losses. A 3% monthly churn rate seems manageable, but over a year it means losing roughly 30% of your customers. To maintain your current size, you need to replace nearly a third of your base every year. To grow, you need even more.

LTV: Customer Lifetime Value

LTV estimates the total revenue you’ll earn from a customer over their entire relationship with you. It’s a prediction, not a historical fact, which means it involves some assumptions and uncertainty.

The simplest LTV formula is average revenue per customer divided by churn rate. If your average customer pays $100 per month and your monthly churn is 5%, your LTV is $100 divided by 0.05, which equals $2,000. That customer is expected to stay for 20 months on average (1 divided by 0.05) and generate $2,000 total.

More sophisticated LTV calculations factor in gross margin, the time value of money, and variable churn rates at different customer stages. But the simple formula gets you most of the way there for practical decision-making.

LTV matters because it tells you how much you can afford to spend acquiring customers. If a customer is worth $2,000 over their lifetime, spending $500 to acquire them might be a good deal. Spending $2,500 probably isn’t. The relationship between LTV and customer acquisition cost is what determines whether your unit economics work.

LTV is also sensitive to churn rate. If you can reduce monthly churn from 5% to 3%, LTV jumps from $2,000 to $3,333. That’s a 67% increase in customer value from a 2-percentage-point improvement in churn. This is why smart SaaS operators obsess over retention as much as acquisition. See our complete guide to SaaS customer success for retention strategies.

CAC: Customer Acquisition Cost

CAC measures what it costs to acquire a new customer. Total sales and marketing expenses divided by the number of new customers acquired gives you CAC. If you spent $50,000 on marketing and sales last month and got 100 new customers, your CAC is $500.

Calculating CAC honestly is harder than it sounds. Do you include salaries of the marketing team? What about the cost of free trials that didn’t convert? The portion of your website hosting that supports the signup flow? Different companies calculate CAC differently, which makes cross-company comparisons tricky. What matters is that you’re consistent in your own tracking.

CAC should be viewed alongside LTV. The ratio between them tells you if your customer economics work. A commonly cited benchmark is that LTV should be at least 3 times CAC. If it costs $500 to acquire a customer worth $1,500, the math works. If it costs $500 to acquire a customer worth $400, you’re losing money on every customer you add.

CAC also has a time component that matters. If your CAC is $600 and customers pay $100 per month, it takes 6 months to recover acquisition costs. Until then, you’re cash negative on that customer. If churn happens before month 6, you never recover the CAC. This payback period affects how fast you can grow and how much working capital you need.

How These Metrics Connect

These metrics don’t exist in isolation. They form an interconnected system that describes your business health.

MRR tells you the current state. It’s the snapshot of what’s coming in. But MRR alone doesn’t tell you if that level is sustainable or growing. Understanding cohort analysis helps reveal trends beneath the surface.

Churn tells you about retention. High churn means your MRR is constantly leaking and you need aggressive acquisition just to maintain. Low churn means your revenue base is stable and growth accumulates.

LTV depends on churn and revenue per customer. Improve either one and LTV goes up. LTV determines what you can spend on acquisition.

CAC determines what acquisition actually costs. The gap between LTV and CAC is where profit lives. A large gap means healthy unit economics. A small gap means you’re barely breaking even on each customer.

Together, these metrics answer fundamental questions. Are we acquiring customers profitably? Are we retaining them long enough to earn back acquisition costs and then some? Is our revenue base growing or shrinking? Can we afford to invest more in growth?

Benchmarks and Reality

Industry benchmarks give rough guidelines. Best-in-class SaaS companies often have monthly churn below 2%, LTV to CAC ratios above 3x, and CAC payback periods under 12 months. Achieving these numbers requires strong SaaS marketing and retention strategies. Enterprise SaaS tolerates higher CAC but expects longer customer relationships. SMB SaaS needs low-touch acquisition because individual customer values are smaller.

But benchmarks are just averages. Your specific market, pricing, and business model determine what’s good for you. A 5% monthly churn might be acceptable in a commoditized market and unacceptable in one with switching costs. A 12-month CAC payback might be great for enterprise sales and terrible for self-serve products.

The most important comparison isn’t to industry averages. It’s to your own history. Are these metrics improving month over month? Are your experiments moving the numbers in the right direction? Trend matters more than absolute position.

Using These Metrics

Track these five metrics monthly at minimum. Watch the trends. When something changes, investigate why. Consider using dedicated SaaS tools to automate metric tracking. New MRR dropped. Was it marketing, conversion rates, or market conditions? Churn spiked. Was it a cohort of unhappy customers, a product issue, or seasonal patterns?

These metrics should inform decisions. If CAC is rising, you might need new channels or better targeting. If churn is high, you might need product improvements or better onboarding. If LTV/CAC ratio is strong, you might have room to invest more aggressively in growth. Strong email marketing funnels can improve both CAC and LTV.

The numbers don’t run the business. But they tell you whether the business is actually working.