Bessemer Venture Partners’ annual State of the Cloud report tracks a cohort of public SaaS companies by a set of financial metrics that has become the de facto standard for SaaS financial performance evaluation. The same metrics appear in term sheets, due diligence questionnaires, and investor presentations across the venture capital and growth equity markets because they solve a specific measurement problem unique to SaaS: revenue is recurring and therefore predictable, but the value of that predictability depends on understanding the rate at which existing revenue is growing, shrinking, or churning. Standard accounting statements (income statement, balance sheet) are poorly designed for this measurement challenge. SaaS-specific metrics are purpose-built for it.
This guide explains each core SaaS metric, its formula, what it measures, and what benchmark ranges investors consider at different company stages.
MRR and ARR: The Foundation
Monthly Recurring Revenue (MRR) is the normalised monthly value of all active subscription contracts. A company with 200 customers paying 100 US dollars per month has an MRR of 20,000 US dollars. The critical word is normalised: contracts paid annually or quarterly are divided by their contract length in months to produce the monthly equivalent. A customer paying 1,200 US dollars annually contributes 100 US dollars to MRR, not 1,200.
MRR should be decomposed into its movement components for investor reporting:
- New MRR: revenue from newly acquired customers in the period.
- Expansion MRR: additional revenue from existing customers through upsells, seat additions, or plan upgrades.
- Churned MRR: revenue lost from customers who cancelled.
- Contraction MRR: revenue lost from existing customers who downgraded.
- Net New MRR: New MRR + Expansion MRR minus Churned MRR minus Contraction MRR.
Annual Recurring Revenue (ARR) is MRR multiplied by 12. It is the metric most commonly used in investor communications because it provides a single year-equivalent figure that is easier to compare across companies at different growth rates. The distinction between ARR and actual annual revenue matters: ARR is a point-in-time annualisation of current recurring revenue, not the actual revenue recorded over the past 12 months. If a company has grown significantly, its ARR will be higher than its trailing 12-month revenue.
Churn Rate: Customer and Revenue Churn
Customer churn rate is the percentage of customers who cancel in a given period. Monthly customer churn is calculated as: (customers who cancelled in the month) divided by (customers at start of month) multiplied by 100.
Revenue churn rate (or MRR churn) is the percentage of MRR lost from existing customers. Monthly MRR churn: (churned MRR + contraction MRR in the month) divided by (MRR at start of month) multiplied by 100.
Benchmark context: SaaS investors use different churn benchmarks depending on the market segment. Enterprise SaaS (annual contract value above 25,000 US dollars): acceptable annual churn below 5 percent, strong below 2 percent. Mid-market SaaS: acceptable annual churn below 8 to 10 percent, strong below 5 percent. SMB and self-serve SaaS: acceptable annual churn below 12 to 15 percent (monthly churn of 1 to 1.25 percent), which reflects higher natural customer mortality in small business markets.
Net Revenue Retention: The Metric That Shows Compounding
Net Revenue Retention (NRR), also called Net Dollar Retention (NDR), is the metric that reveals whether existing customers are becoming more or less valuable over time. It measures what percentage of last period’s recurring revenue from existing customers is retained and expanded in the current period.
NRR formula: (Starting MRR from a cohort of existing customers + Expansion MRR from that cohort – Churned MRR – Contraction MRR from that cohort) divided by Starting MRR from that cohort, multiplied by 100.
An NRR of 100 percent means existing customers are paying exactly the same in aggregate this period as last period: expansion exactly offsets churn. An NRR above 100 percent means the existing customer base is growing in revenue even without any new customer acquisition. The compounding implication is significant: a company with 120 percent NRR grows existing revenue by 20 percent per year from its own installed base before counting new customer acquisition.
Benchmark context: NRR above 120 percent is considered outstanding and typically requires strong upsell motions or usage-based pricing models that grow with customer usage. NRR between 100 and 120 percent is healthy and indicates expansion is offsetting churn. NRR below 100 percent means new customer acquisition is required just to maintain flat total ARR. Public SaaS companies that sustain NRR above 130 percent (Snowflake maintained 166 percent at its peak) attract premium revenue multiple valuations.
Customer Acquisition Cost and LTV
Customer Acquisition Cost (CAC) is the total sales and marketing expenditure required to acquire one new customer. CAC formula: (total sales + marketing spend in a period) divided by (new customers acquired in the same period).
The CAC Payback Period is the number of months required to recover the CAC from the gross margin generated by the customer. CAC Payback formula: CAC divided by (monthly MRR from a new customer multiplied by gross margin percentage).
A 12-month CAC payback is considered strong for enterprise SaaS; 18 to 24 months is acceptable for high-ACV (Annual Contract Value) enterprise products with long customer lifetimes. SMB SaaS should target under 12 months given higher churn.
Customer Lifetime Value (LTV) is the total revenue (or gross profit) a company expects to receive from a customer over the full customer relationship. Simplified LTV formula: Average MRR per customer multiplied by gross margin percentage, divided by monthly churn rate.
LTV to CAC Ratio: the ratio of LTV to CAC is the standard profitability gauge for SaaS unit economics. A ratio of 3:1 (LTV is three times CAC) is the widely cited minimum threshold for viable SaaS unit economics. A ratio below 3:1 suggests the acquisition model is uneconomical. A ratio above 5:1 typically suggests the company is underinvesting in growth and could accelerate customer acquisition profitably.
The Rule of 40
The Rule of 40 is a heuristic for evaluating the balance between growth and profitability in a SaaS business. It states that a healthy SaaS company’s ARR growth rate plus its EBITDA (or free cash flow) margin should sum to 40 percent or above.
A company growing at 60 percent ARR with a negative 20 percent EBITDA margin (Rule of 40 score: 40) is considered as healthy as a company growing at 20 percent with a positive 20 percent EBITDA margin (Rule of 40 score: 40). The framework acknowledges that high-growth companies will sacrifice margin to fuel growth, and that slow-growth companies should compensate with profitability.
In the 2021 and 2022 low-interest-rate environment, investors weighted growth heavily and accepted very negative EBITDA margins. In the 2023 to 2026 higher-rate environment, the Rule of 40 has been recentred as a balanced standard, with investors less willing to fund sustained negative EBITDA margins without commensurate growth.
| Metric | Formula | Good Benchmark |
|---|---|---|
| ARR | MRR x 12 | Track absolute level and growth rate |
| Monthly Churn | Churned customers / Start customers | SMB: <1.25%; Enterprise: <0.4% |
| Net Revenue Retention | (Start MRR + Expansion – Churn – Contraction) / Start MRR | >100% good; >120% strong |
| CAC Payback | CAC / (Monthly MRR x Gross Margin%) | <12 months SMB; <24 months enterprise |
| LTV:CAC | LTV / CAC | >3:1 viable; >5:1 strong |
| Rule of 40 | ARR Growth% + EBITDA Margin% | >40 healthy |
| Gross Margin | (Revenue – COGS) / Revenue | 70-85% for software-primary SaaS |
