The revenue metrics
MRR (monthly recurring revenue) is the sum of all active subscriptions expressed as a monthly rate. A customer paying $1,200 annually contributes $100 of MRR. A customer paying $800 monthly contributes $800. MRR is the SaaS equivalent of a run-rate revenue figure, updated monthly.
ARR (annual recurring revenue) is simply MRR × 12, or the sum of all active subscriptions expressed as annual rate. For companies with mostly annual contracts, ARR feels more natural. For companies with mostly monthly contracts, MRR is more precise. Either works; pick one and stick with it.
The distinction between "new MRR" (from new customers), "expansion MRR" (from existing customers upgrading), "contraction MRR" (from existing customers downgrading), and "churned MRR" (from lost customers) is where the real insight lives. The net of these four is your MRR change for the month.
Retention and churn
Gross retention is the percentage of MRR retained from a cohort excluding any upsell. If a cohort started at $100K MRR and has $90K MRR 12 months later (ignoring expansion), gross retention is 90%. This measures your ability to hold on to customers at their starting price.
Net retention includes expansion. The same cohort with $90K retention but $115K in MRR (because some customers upgraded) has 115% net retention. Net retention above 100% means expansion exceeds churn, which is the healthiest growth pattern.
Gross churn is the mirror of gross retention: 100% minus gross retention, typically expressed monthly or annually. Logo churn is different, it measures customer count rather than revenue. A single enterprise customer leaving can produce a big revenue churn number with small logo churn impact. Both views matter.
LTV and unit economics
LTV (lifetime value) is the total revenue or gross profit a customer produces during their relationship with you. Calculation: average monthly revenue per customer × gross margin × average customer lifetime. A SaaS customer at $500/month with 80% margin and 5-year lifetime has LTV of $24K.
CAC (customer acquisition cost) is the total cost to acquire a new customer. Sales compensation, marketing spend, related overhead. Divide by new customers acquired. A CAC of $2,400 means you spent that to acquire each new customer.
LTV:CAC ratio of 3:1 is the benchmark for healthy SaaS unit economics. Above 3:1 is healthy. Below 3:1 means acquisition is too expensive relative to value. The ratio depends on your assumptions about lifetime and churn, which can shift the math significantly. Use it as one data point, not the single number.
What investors watch
The trend matters more than the absolute number. A SaaS company with 90% net retention trending up to 105% over 18 months is more attractive than one at stable 110%. The trajectory tells investors whether the fundamentals are improving or stalling.
Cohort analysis is what sophisticated investors dig into. Do cohorts from 2024 retain better than cohorts from 2023? Is expansion consistent across customer sizes? Does churn concentrate in specific segments? The answers reveal product-market fit, pricing, and go-to-market efficiency.
Consistency of reporting builds credibility. If your MRR calculation includes one-time implementation fees one quarter and excludes them the next, investors lose trust in the number. Document methodology clearly, apply consistently, and flag any changes explicitly.