ARR, MRR, and Churn: The SaaS Holy Trinity
In a SaaS (Software as a Service) company, we don't just care about "sales." We care about Recurring Revenue. This is money that customers pay every month or year automatically.
The Revenue Metrics
- MRR (Monthly Recurring Revenue): The total predictable revenue earned each month.
- ARR (Annual Recurring Revenue): The yearly version of MRR. (ARR = MRR x 12).
- Expansion Revenue: Extra money from existing customers (e.g., they upgraded their plan).
- Contraction Revenue: Money lost when customers downgrade to a cheaper plan.
The "Leaky Bucket": Churn
Imagine your company is a bucket. New customers are water being poured in. Churn is a hole in the bottom of the bucket.
- Logo Churn: The % of customers who leave.
- Revenue Churn: The % of money lost from those customers.
Common Phrase: "We have negative churn." (This is the "holy grail" of SaaS-it means expansion revenue from existing customers is greater than the revenue lost from churn).
Talking about Growth
- "Our MRR is up 15% month-over-month."
- "We need to reduce churn in the enterprise segment."
- "What's our Net New MRR for Q2?"
Alex's Tip: When talking to investors, always lead with ARR. It sounds much larger and more impressive than MRR, even though the math is the same!
Notice the vocabulary: SaaS product, subscription, free tier, paid tier, recurring revenue.
Common mistakes
- Saying SaaS is the same as cloud. Cloud is where the software runs; SaaS is how it is sold. A product can be in the cloud without being SaaS.
- Confusing freemium with free trial. Freemium is free forever with limited features; a free trial is the full product for a limited time.
- Calling every software company a SaaS company. SaaS specifically means subscription, cloud-delivered software. A company selling permanent licenses is not SaaS.
Practice
Explain the SaaS model using one company you know:
- Name the company and its product: _
- How does it charge (subscription, freemium, per user)?: _
- Why is recurring revenue valuable to the company?: _
In the next lesson, you will learn the unit economics, the metrics like CAC and LTV, that investors use to judge whether a SaaS business is healthy.