1. LTV, or Customer Lifetime Value
LTV is the amount of net profit you will generate from a customer before they churn or stop paying.
Common mistake: Many companies end up calculating Customer Lifetime Revenue, instead of LTV. Calculate LTV correctly by excluding the cost of servicing a customer: salaries of the support team, the cost of running your servers, and so on.
Tip: If you want to start a boardroom fight, ask your investors about the correct way to calculate LTV. 🙂
2. CAC, or Customer Acquisition Cost
Take all your acquisition marketing costs, then divide by the number of paying customers acquired over a period of time.
Another way to compute CAC is to include salaries of your acquisition marketers, commissions of the sales reps, etc. into the calculation. This will make CAC partially account for the burn rate. LTV and CAC are the most important metrics of startup unit economics, and they are usually considered together as LTV/CAC ratio.
Benchmark: For a healthy SaaS startup, LTV/CAC ratio should be 3 and above.
3. ARPA, or Average Revenue per Account
ARPA is the worth of monthly “contract” with the customer or user. To put it simply, this is how much money an average paying customer gives you every month. If your pricing is stable, ARPA growth means your team is doing something right to provide customers with more value and generate revenue in return.
Tip: Try increasing your ARPA without changes in product or pricing. Often, better support, marketing, and branding can do exactly that.
4. MRR, or Monthly Recurring Revenue
MRR is self-explanatory, and this is simply your company’s revenue per month. Stable, and preferably non-linear, MRR growth is the best way to make your investors happy.
Pro tip: Make your investors happy.
5. Logo churn and Revenue churn rates
Logo churn rate, is the percentage of paying accounts your product loses per month. There are two ways to calculate it: per cohort and aggregated. Typically, cohort churn will yield higher numbers, so internally you should definitely use it instead. Revenue churn rate is the percentage of revenue you company loses per month due to churns or downgrades.
Tip: Pay less attention to logo churn and more attention to revenue churn. All in all, serving fewer customers and getting to pay more is better than serving a bunch and getting peanuts.
Benchmark: For a SaaS startup, your monthly logo churn rate should be below 2%. Your revenue churn should be negative.
6. Retention rate
Contrary to popular belief, retention rate isn’t as useful of a metric as churn rate. It’s good to be aware of it but it’s far less actionable, compared to other metrics.