Software-as-a-Service businesses seem to run on acronyms. Even the name of the industry is nearly always referenced as the acronym SaaS. Important metrics that measure revenue, business success, and even the types of audiences reached are all usually referred to using acronyms. In this article, we untangle the alphabet of SaaS, with definitions and examples for each of the most common industry acronyms. We’ll tackle the acronyms in alphabetical order:
ACV - Annual contract value
ACV is the average yearly contract value of a single subscription agreement.
How to calculate:
ACV = Total Contract Value (TCV) / # of years in contract = ACV
Example:
Business A signs up for a 5 year contract with SaaS company A. The TCV is $55,000. Dividing the total by 5 results in an ACV for that contract of $11,000.
ARPU - Average revenue per user
ARPU stands for Average Revenue Per User, and it represents the average revenue across all users. This figure can be calculated using either monthly revenue or annual revenue.
How to calculate:
Monthly ARPU = MRR (monthly recurring revenue) / total users
or
Annual ARPU = ARR (annually recurring revenue) / total users
Example:
Company B offers its professional level SaaS subscription at $79 per month, and its enterprise level subscription at $849. It has 4,000 users at the professional level, and 1,000 at the enterprise level. To calculate ARPU:
ARPU = ((79 x 4,000) + (849 x 1,000)) / (4,000 + 1,000)
= (316,000 + 849,000) / 5,000
= $233
ARR - Annual recurring revenue
ARR (and MRR, which we get to below) is one of the most foundational metrics for a SaaS company. Annual recurring revenue is the amount of annual revenue that is currently set to auto-renew. Thus, it excludes one-time revenue items such as setup fees, migration fees, or other ad hoc line-items.
How to calculate:
To get ARR, simply add up the value of all your yearly renewing contracts.
Example:
HubSpot just reached $1B ARR with 100,000 customers (that’s an ACV of $10,000).
B2B - Business-to-business
Most SaaS is sold and used within the business-to-business context. B2B simply stands for business-to-business, meaning businesses selling to other businesses.
Example:
Act-On is a B2B marketing automation SaaS.
B2C - Business-to-consumer
B2C stands for business-to-consumer. Oftentimes, solutions sold directly to consumers are referred to colloquially as apps (short for applications).
Example:
Mint (by Intuit) is a personal finance app aimed at the everyday consumer.
CAC - Customer acquisition cost
CAC, sometimes pronounced “cack,” stands for customer acquisition cost, and can be calculated by dividing your total sales and marketing spend in a particular timeframe by the number of new customers acquired in that same timeframe.
How to calculate:
CAC = Marketing/Sales Spend / # of New Customers
Example:
SaaS company C spent $47,145 last year on marketing and sales, and acquired 1,598 new customers .
CAC = 47,145 / 1,598
= $29.50
CLTV (LTV) - Customer lifetime value
CLTV (or LTV) is a predictive metric that represents the expected lifetime value of each customer. If you only had 1 customer on a monthly subscription plan, you’d multiply the customer’s monthly subscription price by the number of months you expect her to stay with your solution. If you have had, say, 10 customers, you would average out the number of months they have stayed with you. So if you had 3 customers who stayed with you for 10 months, 3 customers that stayed with you for 19 months, and 4 customers who stayed with you for 37 months, then the average number of subscription months per customer would be 23.5, or ((3*10) + (3*19) + (4*37)) / (3+3+4).
How to calculate:
LTV = monthly recurring revenue x average number of subscription months
Example:
If you take the 10 customers in the above paragraph who stay as subscribers for an average of 23.5 months, and they are all paying you $179/month, then your average CLTV is $4,206.50, or $179 * 23.5.
Churn
The number of subscribers who unsubscribed or stopped paying in a particular period (monthly or yearly), normally expressed as a percentage.
How to calculate:
Churn Rate = Customers churned (lost) / Total customers at the start of the time period
Example:
SaaS company E had 100 subscribers last year and lost 5. Their churn rate is 5%.
MRR - Monthly recurring revenue
Monthly recurring revenue (MRR) is the amount of subscription money coming in monthly from your SaaS customers. It does not include non-subscription revenue, such as on-boarding, training, or migration fees.
How to calculate:
Simply add up all monthly recurring subscription amounts. The total is your MRR.
DAU/WAU/MAU - Daily/weekly/monthly active users
One of the golden metrics of SaaS is the DAU/WAU/MAU. These stand for daily, weekly and monthly active users, and is a measure of how engaged your user base is. To calculate, the first step is having a clear definition of a “user.” Next, there must be a clear definition of an “action.” For a SaaS solution, common actions include creating a task and completing a task.
To calculate, your app or SaaS simply needs to be able to identify and track user activity. Since there are so many unique configurations of what to track and how to use it, a simple definition of how to calculate is not possible, but tracking actions like logins, completion of tasks, or publishing of user generated content can provide insights into how engaged users are in your solution, how often they log in, where they get stuck, and how you can better monetize.
Example:
During the fourth quarter of 2020, Facebook reported almost 1.85 billion daily active users.
mDAU - Monetizable daily active users
Twitter defines monetizable active users as “users who logged in or were otherwise authenticated and accessed Twitter on any given day through twitter.com or Twitter applications that are able to show ads.” The difference between mDAU and DAU as defined above is that sometimes DAU are not monetizable. In the case of Twitter, non-monetizable DAU include people who saw embedded tweets on other sites, and people who viewed Twitter content without logging in. Most of Twitter’s monetization comes through in-app advertising, and most types of content in embedded tweets are incapable of showing ads - thus, people who view embedded tweets generally are not monetizable.
Example:
In the 4th quarter of 2020, Twitter reported 192 million mDAU.
MUP
MUP stands for Minimum Usable Product. For SaaS businesses, this means a product with the minimum features that make the product usable as intended for your intended public.
MVP
MVP is Minimum Viable Product. As opposed to the MUP, which reflects an existing knowledge of customer needs and the effort to meet them, the MVP is designed to assist you in gathering intelligence on what your audience needs and wants. Typically built out less fully than an MUP, the primary goal of the MVP is to get information.
ROAS - Return on Ad Spend
Return on Ad Spend (ROAS) is a broad-strokes metric for monitoring the performance of ad campaigns. It represents the return on each dollar invested in advertising (but it does not factor in the other components of the customer acquisition costs, such as marketing staff salaries or sales commissions). For companies selling physical products, the calculation may be a bit more straightforward. For SaaS businesses, considerations like LTV and Churn must be considered. Ad platforms like Google Search Advertising include a ROAS metric that reports based on your conversion configuration.
How to calculate:
ROAS = (revenue gained from ads / amount spent on ads) x 100
Example:
ABC SaaS spends $10,000 on an advertising effort for its product launch, including Google Search, Google Display and social advertising through Facebook Business. As a result of the campaign, ABC earns $50,000 on its offer for lifetime access to the app. The ROAS for the ABC SaaS advertising effort is:
ROAS = ($50,000 / $10,000) x 100
= 500%
ROI - Return on Investment
Return on investment (ROI) can be a complicated metric to calculate, but put very simply it is a measure of profitability. For SaaS businesses, cash flow is not as simple as selling a product for a higher price that it cost to make. Instead, you must worry about customer acquisition and retention to reach profitability.
How to calculate:
ROI = Net Profit / Cost of the investment * 100
Example:
SaaS company F made $400,000 profit in 2020. They invested $200,000 to make that $400,000.
ROI = $400,000 / 200,000 * 100
= 200%
TAM - Total addressable market
Total addressable market is something that should be estimated before the launch of any SaaS product. According to For Entrepreneurs, “there are three distinct ways to calculate TAM:
- Top-down, using industry research and reports.
- Bottom-up, using data from early selling efforts.
- Value theory, using conjecture about buyer willingness to pay.”
Examples:
- A top-down approach might lead to a statement like: “according to industry research, this segment is predicted to reach $xbn by 2022”
- A bottom-up TAM would sound more like a company describing the “breadth of its current customer base in terms of industries and geographies as evidence that the product works broadly, and then [citing] how the product roadmap will gradually take it up-market or into new verticals”
- Using value theory is more of a guess, but a SaaS company may take a look at food consumption data and ask itself: “how much would a person pay to order dinner delivery instead of cooking, shopping or stopping at a fast food restaurant?”
UI/UX - User Interface/User Experience
These two terms are often paired together and sometimes even used interchangeably but in reality, they are very different. The user interface is the graphical layout of an application, think buttons, text entry fields, transitions, layouts - really anything the user interacts with.
Where UI designers are concerned with the look and feel of an app or site, UX designers care about functionality, ease of use, and how the interface operates. Good user experience means an app is logical, smooth, and seamless. Both UI and UX decisions should be backed by research and thought-out decisions. Together, UI and UX can make or break the success of your site or app.
Example:
For great UI design, check out Dribbble.
For great UX examples, check out UX Planet.
This post was originally published May 2021 and has been updated for accuracy and completeness.
