SaaS Finance, Part 3: Acronyms and Profitability Metrics
The metrics that show up in every SaaS board deck, investor memo, and financial model — defined precisely enough to actually compute them.
Revenue Metrics
MRR (Monthly Recurring Revenue)
Predictable revenue earned each month from subscriptions.
Formula: MRR = Sum of (Monthly Price × Active Subscribers) for all tiers
Professional: 50 customers × \$299/month = \$14,950
Enterprise: 20 customers × \$999/month = \$19,980
Total MRR = \$34,930
For annual plans, divide the annual price by 12 to get the MRR contribution.
ARR (Annual Recurring Revenue)
MRR annualized. The standard metric for SaaS company valuation.
Formula: ARR = MRR × 12
$34,930 MRR × 12 = $419,160 ARR
ACV (Annual Contract Value)
The annualized value of a customer contract.
Formula: ACV = Total Contract Value / Contract Years
3-year contract: \$144,000 total
ACV = \$144,000 / 3 = \$48,000
MRR Components
| Metric | Definition | Formula |
|---|---|---|
| New MRR | From new customers | New Customers × Tier Price |
| Expansion MRR | From upgrades | Upgraded Customers × (New Price - Old Price) |
| Churned MRR | From cancellations | Churned Customers × Their Price |
| Net New MRR | Total change | New + Expansion - Churned |
Margin Metrics
Gross Margin %
Percentage of revenue retained after COGS.
Formula: Gross Margin = (Revenue - COGS) / Revenue × 100
| Range | Assessment |
|---|---|
| Below 60% | Concerning |
| 60-70% | Acceptable for ML/data |
| 70-80% | Good |
| 80%+ | Excellent |
Contribution Margin %
Percentage of revenue retained after COGS and variable costs.
Formula: Contribution Margin = (Revenue - COGS - Variable Costs) / Revenue × 100
If negative, you lose money on every customer — growth makes losses worse.
| Range | Assessment |
|---|---|
| Negative | Unsustainable |
| 0-30% | Thin |
| 30-50% | Acceptable |
| 50%+ | Strong |
EBIT Margin % / EBITDA Margin %
Formulas:
EBIT Margin = EBIT / Revenue × 100EBITDA Margin = EBITDA / Revenue × 100
EBITDA ≈ EBIT for asset-light SaaS (D&A is small).
| Range | Assessment |
|---|---|
| Negative | Pre-profitability (normal early) |
| 0-10% | Breakeven |
| 10-20% | Healthy |
| 20%+ | Strong |
Customer Metrics
Churn Rate
Percentage of customers lost per period.
Formula: Churn Rate = Churned Customers / Starting Customers × 100
| Segment | Monthly | Annual |
|---|---|---|
| SMB | 3-5% | 30-45% |
| Mid-market | 1-2% | 12-22% |
| Enterprise | 0.5-1% | 6-12% |
Net Revenue Retention (NRR)
Revenue retained from existing customers, including expansion. This is the metric that tells you whether your installed base is growing or shrinking independent of new sales.
Formula: NRR = (Starting MRR + Expansion - Contraction - Churn) / Starting MRR × 100
| NRR | Assessment |
|---|---|
| Under 100% | Shrinking base |
| 100-110% | Stable |
| 110-130% | Strong |
| 130%+ | Exceptional |
NRR above 100% means your existing customers are spending more over time — even if you stopped acquiring new customers, revenue would grow. This is the strongest signal of product-market fit an investor can find.