SaaS metrics and unit economics
Gross margin on Northwind's actuals, why it has no ARR, and NRR, GRR, CAC payback and the burn multiple worked on the subscription plan it's pricing.
Start with what Northwind's books can answer. Gross margin is a real, computed figure: $14,500 of gross profit on $31,500 of revenue, 46.0%. ARR is not. Northwind sells goods one order at a time, and ARR is only meaningful for subscriptions. Annualizing transactional revenue and calling it ARR is the most common misuse of the word.
The founders are pricing a subscription, "Northwind Care", a monthly tool-maintenance plan for trade customers. These are the assumptions of its year-one model, not results. Every metric below is a definition, and none is GAAP. Each has a contested input, so each is stated with its inputs.
A SaaS metric without its definition is a number people argue about. State the formula, the cohort and the period, or don't put it in the pack.
In this lesson: each metric worked on Northwind Care's plan: net and gross revenue retention, CAC and payback, and the burn multiple.
Pages in this lesson
3 pages go deeper, about 14 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 606-10-05-3, -05-4; 606-10-25-23, -25-30 (opens in a new tab)Revenue from Contracts with Customers — the core principle, and recognition when control transfersFree after registration
- SEC
- SEC Release 33-10751 (January 2020) — Commission Guidance on MD&A: key performance indicators (opens in a new tab)A metric needs its definition, its calculation and why it is usedPDF · Free to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Gross marginGross margin is a profitability metric, calculated as (Revenue − COGS) ÷ Revenue.Convention
- ARRARR is a recurring-revenue metric, calculated as MRR × 12.Convention
- MRRMRR is a recurring-revenue metric, calculated as Sum of normalized monthly recurring subscription value.Convention
- Net revenue retentionNet revenue retention is a recurring-revenue metric, calculated as (Starting + Expansion − Contraction − Churn) ÷ Starting.Convention
- Gross revenue retentionGross revenue retention is a recurring-revenue metric, calculated as (Starting − Contraction − Churn) ÷ Starting.Convention
- CACCAC is a unit-economics metric, calculated as Sales & marketing spend ÷ new customers.Convention
- CAC paybackCAC payback is a unit-economics metric, calculated as CAC ÷ (Monthly ARPA × Gross margin), in months.Convention
- Burn multipleBurn multiple is a cash and runway metric, calculated as Net burn ÷ Net new ARR, over the same period.Convention
- Expansion MRRExpansion MRR is a recurring-revenue metric, calculated as Upgrades and seat additions from existing customers.Convention
- Contraction MRRContraction MRR is a recurring-revenue metric, calculated as Downgrades, not cancellations.Convention
- Churned MRRChurned MRR is a recurring-revenue metric, calculated as Full cancellations.Convention
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Metric definitionsEvery metric in this system ships with its formula, period, inputs and source. A KPI without a definition is a number people argue about in meetings.
- Journal entry for deferred revenueWhen an annual contract is invoiced up front, debit Accounts receivable and credit Deferred revenue. As each month of service is delivered, debit Deferred revenue and credit Revenue for that month's share.
- CAC calculatorCAC is a unit-economics metric, calculated as Sales & marketing spend ÷ new customers.
- ARPA calculatorARPA is a unit-economics metric, calculated as MRR ÷ Active customers, per month.
- Customer lifetime value calculatorLTV is a unit-economics metric, calculated as (ARPA × Gross margin) ÷ Revenue churn rate, both in the same period unit.
- LTV to CAC calculatorLTV:CAC is a unit-economics metric. It has no single agreed formula — state the inputs.
- Magic number calculatorMagic number is a unit-economics metric, calculated as Net new ARR in the quarter ÷ prior-quarter S&M (equivalently (Δ quarterly revenue × 4) ÷ prior-quarter S&M).
- Logo churn calculatorLogo churn is a recurring-revenue metric, calculated as Customers lost ÷ starting customers.
- Net new MRR calculatorNet new MRR is a recurring-revenue metric, calculated as New + Expansion − Contraction − Churned.
- Rule of 40 calculatorRule of 40 is a profitability metric, calculated as Revenue growth % + EBITDA margin %.
- Contribution margin calculatorContribution margin is a profitability metric, calculated as (Revenue − Variable costs) ÷ Revenue.
- MRR vs ARRMRR is recurring revenue normalized to one month. ARR is MRR × 12, the same contracts measured in years.
- Net revenue retention vs gross revenue retentionNet revenue retention counts expansion from existing customers and can exceed 100%. Gross revenue retention ignores expansion and tops out at 100%. Together they separate churn from upsell.
- Gross margin vs net marginBoth are a share of revenue. Gross margin subtracts only the cost of delivering the product, while net margin subtracts every cost, including operating expenses, interest and tax.
- MRR vs GAAP revenue under ASC 606MRR and ARR are operating metrics; revenue under ASC 606 is earned over time. How annual prepayments and churn split them, and how to reconcile the two.
- Deferred revenue for SaaS startups, explainedAn annual prepayment is cash today and revenue over a year. How deferred revenue works under ASC 606, why it’s a liability, and the schedule behind it.
- MrrBridgeThe movement, not a single number with a percentage.
- MetricDefinitionEvery metric requires one. Formula with values substituted.
- KpiRow2–4 KPI cards with aligned baselines.
- RevenueTrackerRevenue by stream, with mix, growth and concentration.