SaaS metrics explained from first principles with an 11-year-old

Executive overview

Most founders absorb SaaS metrics through jargon, which hides how simple the underlying concepts are. Walking through them from scratch — money, revenue, profit, then software, then recurring revenue — reveals which terms are intuitive and which are just bad names.

The conversation covers every core revenue metric: MRR, ARPA, ACV, churn, LTV, and CAC, building each from the one before it.

The definitions are already in the words — jargon is the only thing making them hard.

What a business is and why profit matters

• A business produces something people value enough to pay for, seeking profit in return.
• Revenue is money received; COGS (cost of goods sold) is the direct cost to produce and deliver it.
• Profit is what remains after all expenses — if costs exceed revenue, the business fails.
• SaaS differs from physical products: marginal COGS is near zero; the dominant costs are salaries.

Software as a service

• SaaS means software where your data lives on the provider's servers, not your device.
• The name is widely acknowledged as poor; "hosted software" or "cloud software" would be clearer.
• Revenue model: customers pay monthly or annually rather than a one-time purchase.
• This creates recurring revenue — predictable income that reoccurs each period.

Core revenue metrics

• MRR (monthly recurring revenue): total revenue received from all customers in a month.
• ARPA (average revenue per account): MRR divided by number of customers — e.g. $200 MRR ÷ 20 customers = $10 ARPA.
• ACV (annual contract value): the revenue from one customer over a year — e.g. $10/month = $120 ACV. "Annual customer value" would be a better name.
• These three metrics all measure money coming in; none captures what can be lost.

Churn

• Churn is the percentage of customers who cancel in a given month.
• Example: 10 cancellations from 100 customers = 10% customer churn.
• Revenue churn measures the MRR lost, not the headcount — $1,000 lost from $10,000 MRR = 10% revenue churn.
• 10% monthly churn means losing roughly 90% of customers within a year — the death of SaaS growth.
• Low churn is non-negotiable; acquiring new customers is expensive and cannot outpace high churn indefinitely.

Lifetime value

• LTV (lifetime value): average revenue earned from a customer over the full relationship.
• Average customer lifetime (months) = 1 ÷ monthly churn rate. At 5% churn: 1 ÷ 0.05 = 20 months.
• LTV = average lifetime × ARPA. At 20 months and $10 ARPA: LTV = $200.
• $200 LTV is workable for small businesses but very hard to scale — higher ARPA or lower churn is required.

Cost to acquire a customer

• CAC (cost to acquire a customer): total marketing and sales spend divided by new customers gained.
• Easy to calculate for paid ads (e.g. $1/click, 10% conversion = $10 CAC); harder for content or founder time.
• Drill down by channel: ads at $10 CAC, content at $50, outbound at $100 — cut the weakest, reinvest elsewhere.
• Knowing CAC by channel tells you where growth is efficient and where spend is being wasted.