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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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Quick Answer: SaaS pricing metrics are financial indicators that measure subscription business health; the most critical include ARR (Annual Recurring Revenue), MRR (Monthly Recurring Revenue), LTV (Customer Lifetime Value), churn rate, CAC (Customer Acquisition Cost), and expansion revenue—each calculated with specific formulas and used to assess growth, retention, and profitability.
Understanding SaaS KPIs isn't optional for subscription business leaders—it's foundational. Whether you're preparing for a board meeting, evaluating a pricing change, or benchmarking against competitors, these metrics tell the story of your company's financial health. This customer lifetime value guide and annual recurring revenue formula breakdown will give you the practical knowledge to calculate, track, and optimize the numbers that matter most.
What Are SaaS Pricing Metrics and Why They Matter
SaaS KPIs are standardized financial measurements designed specifically for subscription-based business models. Unlike traditional businesses that count one-time transactions, SaaS companies must track recurring revenue streams, customer retention patterns, and the long-term value of each account.
These metrics matter for three critical reasons:
Strategic pricing decisions: Your MRR and LTV data reveal whether your pricing captures appropriate value. If your LTV:CAC ratio is 2:1 instead of 3:1+, you may need to raise prices or reduce acquisition costs.
Investor and board communication: VCs and board members evaluate SaaS companies primarily through these metrics. A company with $5M ARR growing at 100% YoY with 5% monthly churn tells a very different story than one with $5M ARR growing at 30% with 2% churn.
Operational decision-making: SaaS pricing metrics connect product, sales, and customer success teams around shared objectives. When everyone understands how their work impacts MRR expansion or churn, alignment follows.
Annual Recurring Revenue (ARR): Definition and Formula
Annual Recurring Revenue represents the normalized yearly value of your subscription contracts. The annual recurring revenue formula is straightforward:
ARR = MRR × 12
Or, calculated directly:
ARR = (Total Active Subscriptions) × (Average Annual Contract Value)
For example, if your company has 200 customers paying an average of $24,000 annually, your ARR is $4.8M.
When to use ARR: ARR works best for companies with predominantly annual contracts or those at scale ($1M+ in recurring revenue). Early-stage startups with monthly contracts often focus on MRR for more granular tracking.
ARR benchmarks by stage:
- Seed stage: $0–$1M ARR
- Series A: $1M–$5M ARR
- Series B: $5M–$15M ARR
- Series C+: $15M+ ARR
Note that ARR excludes one-time fees like implementation, professional services, or usage overages that aren't contractually recurring.
Monthly Recurring Revenue (MRR): Calculation and Variations
MRR provides a monthly snapshot of predictable revenue. The base MRR calculation is simple:
MRR = Number of Active Customers × Average Revenue Per Customer
However, sophisticated SaaS operators track MRR movement through its components:
- New MRR: Revenue from first-time customers acquired this month
- Expansion MRR: Additional revenue from existing customers (upgrades, add-ons)
- Contraction MRR: Lost revenue from downgrades (customers still active, but paying less)
- Churned MRR: Lost revenue from cancelled customers
Net MRR Movement = New MRR + Expansion MRR - Contraction MRR - Churned MRR
Example: A company starts January with $100,000 MRR. During the month:
- New MRR: $15,000
- Expansion MRR: $8,000
- Contraction MRR: $3,000
- Churned MRR: $5,000
Net MRR Movement: $15,000 + $8,000 - $3,000 - $5,000 = $15,000
Ending MRR: $115,000
ARR vs MRR Comparison
| Aspect | ARR | MRR |
|--------|-----|-----|
| Calculation | MRR × 12 | Sum of monthly subscriptions |
| Best for | Annual contracts, investor reporting | Monthly tracking, operational decisions |
| Granularity | Annual snapshot | Monthly movement tracking |
| Common stage | Series A+ | All stages |
Customer Lifetime Value (LTV): How to Calculate and Optimize
Customer Lifetime Value measures the total revenue you can expect from an average customer relationship. This customer lifetime value guide covers both simple and advanced approaches.
Simple LTV Formula:
LTV = ARPU ÷ Monthly Churn Rate
Or equivalently:
LTV = (Average Monthly Revenue Per Customer) × (Average Customer Lifespan in Months)
Example: If your average customer pays $500/month and your monthly churn is 2.5%, then:
LTV = $500 ÷ 0.025 = $20,000
Gross Margin-Adjusted LTV: For more accuracy, multiply by your gross margin:
LTV = (ARPU × Gross Margin %) ÷ Monthly Churn Rate
The LTV:CAC Ratio
The relationship between LTV and Customer Acquisition Cost reveals business viability:
- LTV:CAC below 1:1 – You're losing money on each customer
- LTV:CAC of 3:1 – Healthy SaaS benchmark
- LTV:CAC above 5:1 – You may be underinvesting in growth
Worked example connecting metrics:
- Monthly Revenue Per Customer: $500
- Monthly Churn: 2%
- Gross Margin: 80%
- CAC: $6,000
LTV = ($500 × 0.80) ÷ 0.02 = $20,000
LTV:CAC = $20,000 ÷ $6,000 = 3.33:1 ✓ Healthy
Strategies to increase LTV:
- Reduce churn through better onboarding and customer success
- Increase ARPU through upsells and pricing optimization
- Improve product value to extend customer lifespan
Churn Rate: Types, Formulas, and Benchmarks
Churn measures customer or revenue loss over a period. Track both types:
Customer Churn Rate:
Customer Churn = (Customers Lost This Period ÷ Customers at Start of Period) × 100
Revenue Churn Rate (Gross):
Revenue Churn = (MRR Lost to Cancellations ÷ MRR at Start of Period) × 100
Example: You start the month with 500 customers and $250,000 MRR. You lose 10 customers representing $8,000 MRR.
- Customer churn: 10 ÷ 500 = 2%
- Revenue churn: $8,000 ÷ $250,000 = 3.2%
The difference indicates you're losing higher-value customers—a warning sign.
Acceptable churn benchmarks:
- SMB-focused SaaS: 3–5% monthly (higher acceptable)
- Mid-market SaaS: 1–2% monthly
- Enterprise SaaS: <1% monthly (often negative)
Negative churn occurs when expansion revenue from existing customers exceeds lost revenue from churned customers. This is the gold standard—your customer base grows in value even without new acquisitions.
Other Essential SaaS KPIs to Track
Beyond the core metrics, monitor these complementary SaaS KPIs:
CAC (Customer Acquisition Cost):
CAC = Total Sales & Marketing Spend ÷ New Customers Acquired
Example: $150,000 spend acquiring 25 customers = $6,000 CAC
Net Revenue Retention (NRR):
NRR = (Starting MRR + Expansion - Contraction - Churn) ÷ Starting MRR × 100
Top-performing SaaS companies achieve 110–130% NRR.
ARPU (Average Revenue Per User):
ARPU = Total MRR ÷ Total Active Customers
Quick Ratio:
**Quick Ratio = (