SAAS metric are different from on-premise software metric due to the subscription model. Even if “Recognized Revenue” is valid from an accounting perspective, metrics such as ARR, CAC Ratio and CLTV are far more meaningful to drive a SAAS business.
This is the value of the subscribed recurring revenue, normalized to an annual period. This is the main metric for company growth and revenue forecasting.
It is usually broken into:
Note: there can also be a separate category for clients which downgraded there contract.
It can also be broken into product type, client segments, etc.
This is the cost of acquiring a new customer compared to the ARR. A healthy CAC Ratio is expected to be around 1.
There different ways to calculate it, including or excluding some costs, defining the correct time period for the Sales and Marketing costs, using gross margin or ARR.
\[ \begin{align*} CACRatio_{1} &= \frac{(SalesCost + MarketingCost)}{ARR}\\ \\ CACRatio_{2} &= \frac{(SalesCost + MarketingCost)}{AnnualGrossMargin}\\ \\ CACRatio_{3} &= \frac{(SalesCostQ_{n-1}+MarketingCostQ_{n-1})}{(GrossMarginQ_n - GrossMarginQ_{n-1})\times 4}\\ \\ CACRatio_{4} &= \frac{(GrossMarginQ_n - GrossMarginQ_{n-1})\times 4}{(SalesCostQ_{n-1}+MarketingCostQ_{n-1})} \end{align*}\]
It quantifies the average revenue per client before the client cancels the subscription.
\[\sum_{client_1}^{client_n} MonthlyRevenue \times \#MonthsAsAClient\]
It helps compare customer segments and the category more likely to churn.
Additionally, it defines the value the Customer Acquisition Cost should not exceed because \(\frac{CLTV}{CAC} > 3\)