Many users find SaaS terminology confusing at first, especially people new to the cloud technologies. Understanding SaaS terminology is essential in building a solid SaaS strategy or buying SaaS services. Below we outline all of the important terminologies and acronyms related to SaaS and provide a brief overview of each.
Some of the terms included here are also common to other fields such as finance, but they make sense when you are dealing with SaaS (that’s why they have also been included). Let’s jump straight to the SaaS dictionary (arranged alphabetically) that helps users better understand the cloud technology, which many believe is the future of computing.
ARR: Annual Recurring Revenue
In simple words, ARR = recurring monthly revenue x 12. It’s the total recurring revenue generated by a subscription in a calendar year.
ARRR: Annual Run Rate Revenue
ARRR = ARR + revenue not attributed to recurring subscription such as deployment fees, training and other professional services
ARPU: Average Revenue Per User
Pretty self-explanatory, it’s the average revenue generated per user per month
ASP: Average selling price
It’s the average price of a subscription per month, year and so on and should be greater than CAC (customer acquisition cost)
It’s the value of contracts (in dollars) during a certain time period and includes subscription based as well as non-subscription revenue.
BR: Burn Rate
Burn rate is the monthly rate at which a new service provider spends its (venture) capital before turning profitable. In other words, it helps understand how long it would take for a provider to keep operating before being able to generate positive cash flows. The two different types of burn rate include gross and net burn rate. Gross burn rate refers to the total amount of provider’s expenses over a given time period, while net burn rate happens when a company is spending beyond its means i.e. spending more than what it’s earning.
CAC: Customer Acquisition Cost
The amount a provider spends in acquiring customers divided by the total number of customers acquired during a certain time period. The cost covers various efforts including business development and marketing.
CR: Churn Rate aka Customer Churn Rate aka Logo Churn Rate
It’s an important indicator of business performance and shows the rate at which the clients/customers are cancelling/not renewing their subscriptions during a time period. It’s critically important for businesses that offer recurring subscriptions. A provider might be in trouble if it’s not able to recoup the average CAC (customer acquisition cost).
Calculating the churn rate requires you to designate a specific time period and tally the total acquired and churned customers. Although there isn’t any definitive formula to calculate the CR (many providers use it as per their own convenience), it can be calculated as Churn Rate (in percentage) = (total customers during the beginning of the specified time period – customers at the end of that period) / (customers at the end of the specified time period).
CLV: Customer Lifetime Value
Also referred to as CLTV, the customer lifetime value is the recurring profit over the lifetime of a customer minus CAC (customer acquisition cost)
Committed Monthly Recurring Revenue
CMRR is projection of the monthly recurring revenue (see MRR) into the future accounting. It’s used to anticipate churn and account expansion.
Contracted Monthly Recurring Revenue
It’s the contractually guaranteed monthly recurring revenue. The difference between committed and contracted MRR is that contracted MRR only includes the revenues that are guaranteed by the contract, but some providers also use them interchangeably.
As the name suggests, cohorts in SaaS means the customer group that signed up for a subscription around the same time or were part of the same onboarding group.
CRC: Customer Retention Cost
Costs related to retaining existing customers, including marketing, renewal, promotion and other service costs.
CRR: Customer Retention Rate
It’s the rate at which customers are retained from the start till the end and does not include any new customers.
A balance sheet liability account, deferred revenue in simple words is the cash collected from a customer which is then recognized as actual revenue over the agreement term. However, cash and deferred revenue are not the same as cash is collected up front while the deferred revenue is something that has not been recognized yet.
It’s a liability because you have received the money, but have not yet fully delivered the services (in other words you have not ‘earned’ it yet). A provider can be in trouble if a customer asks for a refund after a provider has collected, and spent the collected money. It might not be a big issue if it involves a small number of customers, but things can get ugly when a large number of customers are involved.
In the SaaS world dunning refers to contacting the customer after expiration of their payments and is essentially insistent demands for debt payment.
MRR: Monthly Recurring Revenue
This is what the SaaS business mainly revolves around as the trade is mostly about monthly subscriptions. MRR is one of the most important terms used in relation to SaaS and refers to the total monthly revenue (expected) to be generated from subscribers. MRR does not include non-recurring payments such as training or fees for other professional services. MRR only includes predictable and recurring monthly subscription payments, but a provider may also include services such as training fees if they are also subscribed on a recurring/monthly basis.
You can also calculate the MRR by multiplying ARPA (average revenue per account) with the total number of subscribers. There are three different aspect of MRR i.e. New MRR, Expansion MRR and Churn MRR, which help analyze MRR growth. New MRR is the revenue generated by new customers, while expansion MRR is the revenue generated by customers who have upgraded their subscription. Churn MRR refers to the lost revenue due to customers cancelling their subscription.
MRR Growth = New MRR+Expansion MRR-Churn MRR
As discussed in MRR, MRR Churn is the total recurring revenue lost or in simple words the erosion of monthly revenue. MRR Churn is essentially the extension of Customer Churn rate and calculated by replacing MRR with the total number of customers.
As the name suggests, new bookings is just another name for new contracts, upgrades, renewals and other subscription changes that impact revenues or total bookings.
Normalizing contracts is the process of standardizing contracts so the provider can measure them in relation to each other. Normalization makes it easier to put contracts into perspective by assigning either ARR (annual recurring revenue) or MRR to a contract element. For example, a provider can assign an average MRR to an annual contract, which allows them to compare it to monthly contracts.
Just like other disciplines, it’s the process of setting up the tone for business relationships and refers to the process that subscribers have to go through at the beginning of their journey with the provider.
In addition to recurring subscriptions, providers also offer different professional services such as training, deployment services, integration services and more. Professional services are not necessarily paid services and may also include assisting customers in running their business.
Renewal Bookings and Renewal rate
Renewal bookings refer to the booking from existing contracts, while renewal rate is another term for customer retention and is essentially the opposite of customer churn rate.
Revenue backlog is the revenue that’s not recognized yet but will be recognized over the contract term.
Revenue churn refers to the amount of lost revenue and is usually reported as an annual number (can also be normalized according to contract terms). Although it can be reported aggregately, most providers choose to report it in different categories such as RC because of cancellations (usually reported as the contract value if it was renewed) and downgrades (reported as decrease in the contract value compared to the previous value).
A generally accepted principle of accounting, revenue recognition refers to measurable revenue. The principles state that revenue should only be recorded when a revenue generation process has been completed or in other words it has been earned. In the SaaS trade, it means the revenue recognized from a contract, including subscriptions paid in advance.
Runway refers to the number of months a provider can operate at the current burn rate. Burn Rate refers to the amount of money a provider is losing over a specified time period e.g. a provider may be burning $5,000 each month before finally turning profitable.
TCV: Total Contract Value
TCV represents the total contract value that is calculated as (one-time and recurring charges) – (usage charges). It helps project the booking revenue, plan expenditure and manage business growth. TCV is different than the total invoice amount over the contract term. It refers to the committed contract value. TCV for an evergreen subscription that never expires can be null, while TCV for a subscription that expires after a specified time is calculated as per the contract term from the start to the end date (can be weekly, monthly or other subscription term).