# 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.

Source: https://lopifi.com/learn/saas-metrics-and-unit-economics
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What SaaS metrics do investors look at, and how are they calculated?** 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](https://lopifi.com/md/glossary/gross-margin) is a real, computed figure: $14,500 of gross profit on $31,500 of revenue, 46.0%. [ARR](https://lopifi.com/md/glossary/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.

| Metric | Formula | The contested part |
| --- | --- | --- |
| [MRR](https://lopifi.com/md/glossary/mrr) | Normalized monthly recurring subscription value | Excludes setup fees, services, usage overage and taxes |
| [NRR](https://lopifi.com/md/glossary/net-revenue-retention) | (Starting + expansion − contraction − churn) ÷ starting | Which cohort, over which period |
| [GRR](https://lopifi.com/md/glossary/gross-revenue-retention) | (Starting − contraction − churn) ÷ starting | Caps at 100%; report it beside NRR |
| [CAC](https://lopifi.com/md/glossary/cac) | Sales and marketing spend ÷ new customers | Which costs count, and which period they're matched to |
| [CAC payback](https://lopifi.com/md/glossary/cac-payback) | CAC ÷ (monthly revenue per customer × gross margin) | Whether gross margin is applied |
| [Burn multiple](https://lopifi.com/md/glossary/burn-multiple) | Net burn ÷ net new ARR, same period | Undefined when ARR didn't grow |

The definitions, and the input each one turns on.

> “A clear definition of the metric and how it is calculated; A statement indicating the reasons why the metric provides useful information to investors; and A statement indicating how management uses the metric in managing or monitoring the performance of the business.”

— [SEC Release 33-10751 (January 2020) — Commission Guidance on MD&A: key performance indicators](https://www.sec.gov/rules/interp/2020/33-10751.pdf) (PDF), A metric needs its definition, its calculation and why it is used

> **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.**

*[Figure: deferred revenue]*

Illustrative: subscription cash arrives up front and becomes revenue as the service is delivered. MRR is neither.

**Use case — The pre-meeting data request.** An investor asks for ARR, NRR and CAC payback before a first meeting. Send each with its formula and inputs, one line apiece. Send ARR next to recognized revenue, with a sentence on why they differ: annual plans billed up front and revenue recognized monthly under ASC 606.

**In this lesson:** each metric worked on Northwind Care's plan: [net and gross revenue retention](https://lopifi.com/md/learn/saas-metrics-and-unit-economics/nrr-and-grr), [CAC and payback](https://lopifi.com/md/learn/saas-metrics-and-unit-economics/cac-payback), and [the burn multiple](https://lopifi.com/md/learn/saas-metrics-and-unit-economics/burn-multiple).

## Pages in this lesson

- [Net and gross revenue retention](https://lopifi.com/md/learn/saas-metrics-and-unit-economics/nrr-and-grr) — 5 min. How do I calculate net revenue retention and gross revenue retention?
- [CAC and CAC payback](https://lopifi.com/md/learn/saas-metrics-and-unit-economics/cac-payback) — 5 min. How do I calculate CAC payback period?
- [The burn multiple](https://lopifi.com/md/learn/saas-metrics-and-unit-economics/burn-multiple) — 4 min. What is the burn multiple, and how is it calculated?

## Where this lesson's rules come from

- [SEC Release 33-10751 (January 2020) — Commission Guidance on MD&A: key performance indicators](https://www.sec.gov/rules/interp/2020/33-10751.pdf) (PDF) — A metric needs its definition, its calculation and why it is used (sec)
- [ASC 606-10-05-3, -05-4; 606-10-25-23, -25-30](https://asc.fasb.org/606/tableOfContent) — Revenue from Contracts with Customers — the core principle, and recognition when control transfers (codification)

## Read further

- https://lopifi.com/md/journal-entries/deferred-revenue
- https://lopifi.com/md/calculators/cac
- https://lopifi.com/md/calculators/arpa
- https://lopifi.com/md/calculators/ltv
- https://lopifi.com/md/calculators/ltv-to-cac
- https://lopifi.com/md/calculators/magic-number
- https://lopifi.com/md/calculators/logo-churn
- https://lopifi.com/md/calculators/net-new-mrr
- https://lopifi.com/md/calculators/rule-of-40
- https://lopifi.com/md/calculators/contribution-margin
- https://lopifi.com/md/differences/mrr-vs-arr
- https://lopifi.com/md/differences/net-revenue-retention-vs-gross-revenue-retention
- https://lopifi.com/md/differences/gross-margin-vs-net-margin
- https://lopifi.com/md/startups/mrr-vs-gaap-revenue
- https://lopifi.com/md/startups/deferred-revenue-for-saas
- https://lopifi.com/md/accounting/arr
- https://lopifi.com/md/accounting/gross-margin
- https://lopifi.com/md/accounting/net-revenue-retention
- https://lopifi.com/md/accounting/gross-revenue-retention
- https://lopifi.com/md/accounting/cac-payback
- https://lopifi.com/md/accounting/burn-multiple
- https://lopifi.com/md/docs/domain/10-metrics

- **Track:** [Finance](https://lopifi.com/md/learn/finance)
- **Lesson:** Lesson 6 of 8 — 7 min
- **Terms taught:** [Gross margin](https://lopifi.com/md/glossary/gross-margin), [ARR](https://lopifi.com/md/glossary/arr), [MRR](https://lopifi.com/md/glossary/mrr), [Net revenue retention](https://lopifi.com/md/glossary/net-revenue-retention), [Gross revenue retention](https://lopifi.com/md/glossary/gross-revenue-retention), [CAC](https://lopifi.com/md/glossary/cac), [CAC payback](https://lopifi.com/md/glossary/cac-payback), [Burn multiple](https://lopifi.com/md/glossary/burn-multiple), [Expansion MRR](https://lopifi.com/md/glossary/expansion-mrr), [Contraction MRR](https://lopifi.com/md/glossary/contraction-mrr), [Churned MRR](https://lopifi.com/md/glossary/churned-mrr)
- **Previous:** [The operating model: three statements, linked, Finance · Lesson 5](https://lopifi.com/md/learn/three-statement-operating-model)
- **Next:** [Net and gross revenue retention](https://lopifi.com/md/learn/saas-metrics-and-unit-economics/nrr-and-grr)
- **The course:** https://lopifi.com/md/learn