SaaS Metrics That Matter: MRR, ARR, Gross Margin, NRR, Churn, CAC, and LTV

Recurring revenue: MRR and ARR

Monthly Recurring Revenue (MRR) is the predictable subscription revenue you earn each month. Annual Recurring Revenue (ARR) is the same figure annualized. They exclude one-time fees so you can see the durable base of the business.

Keep these clean by counting only recurring subscription revenue and normalizing annual contracts to a monthly figure. One-time setup or services revenue belongs in total revenue, not MRR.

• MRR = sum of normalized monthly subscription revenue
• ARR = MRR x 12
• Exclude one-time and services revenue from both
• Normalize annual deals to a monthly equivalent

Gross margin

Gross margin is the share of revenue left after the direct cost of delivering your service, known as cost of goods sold or cost of revenue. For software that typically includes hosting, third-party infrastructure, payment processing, and customer support tied to delivery.

Gross margin equals revenue minus cost of revenue, divided by revenue. Healthy software businesses tend to run high gross margins, and the figure matters because it determines how much of each new dollar of revenue is available to fund growth.

• Gross margin = (revenue - cost of revenue) / revenue
• Cost of revenue: hosting, infrastructure, processing, delivery support
• Higher margin means more of each dollar funds growth
• Categorizing costs correctly is what makes the number trustworthy

Retention: net revenue retention and churn

Churn is what you lose. Revenue churn is the recurring revenue lost from cancellations and downgrades in a period; customer churn is the count of customers lost. Lower is better, and the cause matters as much as the number.

Net Revenue Retention (NRR) measures how revenue from your existing customers changes over a period, counting expansion and contraction and churn but excluding new customers. NRR above 100 percent means your existing base grows on its own even before new sales, which is one of the strongest signals of product-market fit.

• Revenue churn = recurring revenue lost / starting recurring revenue
• NRR = (starting revenue + expansion - contraction - churn) / starting revenue
• NRR is measured on existing customers only, excluding new logos
• NRR over 100% means the existing base expands net of churn

Unit economics: CAC, CAC payback, and LTV

Customer Acquisition Cost (CAC) is the fully loaded sales and marketing spend in a period divided by the number of new customers won in that period. It tells you what each new customer costs to acquire.

CAC payback is how many months of gross profit from a customer it takes to recover that CAC; shorter paybacks mean growth funds itself faster. Lifetime Value (LTV) estimates the total gross profit a customer generates before they churn, often calculated as average monthly gross profit per customer divided by monthly churn rate. Comparing LTV to CAC shows whether acquisition is economically sound.

• CAC = sales and marketing spend / new customers acquired
• CAC payback (months) = CAC / monthly gross profit per customer
• LTV = average monthly gross profit per customer / monthly churn rate
• An LTV to CAC ratio around 3x or higher is a common health benchmark

Why these metrics depend on clean books

Every metric here traces back to your ledger. Gross margin needs cost of revenue categorized correctly, LTV needs accurate gross profit, and CAC needs sales and marketing spend cleanly separated. If the ledger is wrong, every metric built on it is wrong too.

Median keeps revenue, cost of revenue, and operating expenses categorized correctly on a daily cadence, with feeds from Stripe and your card and payroll systems. That means the SaaS metrics you report to your board derive from posted books, not estimates.