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Learn how to effectively calculate and leverage key metrics like ARR, MRR, LTV, and churn rate to drive growth in your subscription-based business.
Want to understand how to measure and grow your subscription-based business? This guide breaks down four essential metrics: ARR, MRR, LTV, and churn rate. These numbers help you track revenue, customer value, and retention, ensuring you make smarter decisions for growth.
Here’s a quick summary of what you’ll learn:
ARR = MRR × 12MRR = Paying Customers × ARPULTV = ARPU ÷ User Churn RateCustomer Churn = (Lost Customers ÷ Starting Customers) × 100Key benchmarks to aim for:
| Metric | Target Range |
|---|---|
| ARR Growth Rate | 20-50% annually |
| LTV:CAC Ratio | Above 3:1 |
| Net Revenue Retention | 120% or higher |
These metrics are the foundation for scaling your SaaS business. Let’s dive into how to calculate and use them effectively.
Core revenue metrics are essential for evaluating business performance and understanding growth opportunities.
Annual Recurring Revenue (ARR) reflects the predictable yearly subscription income a business can rely on . For SaaS companies with an ARR between $1-5 million, the median annual growth rate typically falls between 52% and 59%, according to 2022 data . ARR is crucial for long-term planning, building investor confidence, assessing business value, and tracking growth trends.
Monthly Recurring Revenue (MRR) tracks the predictable monthly subscription income of a business .
"Monthly recurring revenue (MRR) is a financial metric that measures the total amount of predictable and consistent revenue that a business can expect to receive each month."
Here’s a breakdown of MRR components:
| MRR Component | What It Measures |
|---|---|
| New MRR | Revenue from new customers |
| Expansion MRR | Additional revenue from existing customers |
| Contraction MRR | Revenue lost from downgrades |
| Churned MRR | Revenue lost from cancellations |
Lifetime Value (LTV) estimates the total revenue a business can expect from a customer over the duration of their relationship . This metric is essential for determining how much to spend on acquiring customers. A profitable business typically keeps its CAC-to-LTV ratio below 1 .
Churn rate quantifies the loss of customers or revenue over a specific period . For SaaS companies, maintaining customer retention rates between 80% and 85% is a strong benchmark .
"If you charge per user or have different pricing tiers, revenue churn lets you put a dollar amount on what churn is actually costing you, and at what velocity. Revenue churn can be drastically different than customer churn, and will often tell a completely different story." - Steli Efti, CEO of Close.io
Two important types of churn to track:
These metrics provide a foundation for the strategies and calculations discussed in the next sections.
Accurate ARR and MRR calculations are essential for subscription-based businesses to measure performance effectively. Here’s how these metrics are calculated, along with practical examples.
The formula for Annual Recurring Revenue (ARR) is straightforward:
ARR = Monthly Recurring Revenue (MRR) × 12
ARR should also account for factors like new sales, expansions, contractions, and churn. For example, starting with an ARR of $500,000, adding $200,000 from new sales and $50,000 from expansions, then subtracting $20,000 in contractions and $80,000 in churn, results in an ARR of $650,000.
"Most enterprise SaaS companies should use annual recurring revenue (ARR), not monthly recurring revenue (MRR), because most enterprise companies are doing annual, not monthly, contracts..."
– Dave Kellog
To calculate Monthly Recurring Revenue (MRR), use this formula:
MRR = Number of Paying Customers × Average Revenue Per User (ARPU)
Here’s an example for a SaaS company with tiered subscription plans:
| Subscription Plan | Monthly Cost | Number of Customers | Monthly Revenue |
|---|---|---|---|
| Plan A | $10 | 100 | $1,000 |
| Plan B | $20 | 50 | $1,000 |
| Plan C | $30 | 30 | $900 |
| Total MRR | 180 | $2,900 |
For annual contracts, normalize the revenue by dividing the total annual amount by 12. For instance, a B2B software company charging $24,000 annually per user generates a monthly revenue of $2,000 ($24,000 ÷ 12) .
Keep in mind:
Did you know? A steady 10% monthly MRR growth rate can double revenue in just seven months .
These ARR and MRR calculations form the foundation for diving into metrics like LTV and churn in the next sections.
LTV (Customer Lifetime Value) helps businesses estimate the total revenue a customer generates over time, offering insight into long-term performance. Let’s break down both basic and advanced methods to calculate it effectively.
Here’s a simple way to calculate LTV:
LTV = ARPU ÷ User Churn Rate
For example, if your monthly ARPU (Average Revenue Per User) is $100 and your monthly churn rate is 2%, the calculation would look like this:
LTV = $100 ÷ 0.02 = $5,000
This quick formula gives a rough estimate but doesn’t factor in costs that influence profitability.
To get a more accurate picture, you can refine LTV by incorporating gross margin:
Advanced LTV Formula = ARPU × Gross Margin ÷ Revenue Churn Rate
| Component | Description | Impact on LTV |
|---|---|---|
| ARPU | Monthly recurring revenue per user | Directly increases LTV |
| Gross Margin | Profit after production costs | Shows actual profitability |
| Revenue Churn | Percentage of revenue lost over time | Higher churn lowers LTV |
"Knowing the value of a customer is an asset. It is a reference point that all other spending, decisions, and income can be measured against." - Jim Larkin
For subscription-based businesses, predictive LTV helps forecast future trends, while historical LTV highlights proven results. Both play a critical role in shaping strategies for marketing, product development, and customer support .
Churn rates help measure how well a business retains its customers and maintain steady revenue. They can be calculated using customer-based or revenue-based methods. Together with metrics like ARR and LTV, churn analysis provides valuable insights to improve retention and boost revenue.
Customer churn, also known as logo churn, calculates the percentage of customers who stop using a service. The formula is straightforward:
Customer Churn Rate = (Lost Customers ÷ Starting Customers) × 100
For example, if a company starts with 5,000 subscribers and loses 500, the churn rate is:
(500 ÷ 5,000) × 100 = 10%
Revenue churn focuses on the amount of recurring revenue lost from existing customers. Here's the formula:
Net Revenue Churn = (Lost Revenue - Upsells) ÷ Starting Revenue
Let’s break it down with an example:
Revenue Churn = ($115,000 ÷ $3,750,000) = 3.07%
"Broadly speaking, churn is much higher in the first three months of a customer's lifecycle. This is why onboarding is so critical to high retention: the customers that churn early on were likely never truly onboarded; they were essentially paying for a trial." - Corey Haines, Founder of SwipeWell
Here are some effective ways to tackle churn:
Real-world examples show how churn varies across industries. For instance, Netflix reported a monthly churn rate of 3.3% in March 2022 . On the other hand, Wayfair had a much higher churn rate of 34.5% in 2020 . These numbers highlight how business models can greatly influence churn rates.
When combined with ARR and LTV, churn metrics allow businesses to fine-tune their revenue strategies and retention efforts.
To effectively analyze revenue, focus on these areas:
Breaking down revenue this way not only helps project growth but also strengthens your retention strategies.
Retention plays a critical role in profitability. Studies show that increasing customer retention by just 5% can lead to profit increases of 25–95% .
Key retention metrics to monitor include:
| Metric | Purpose | Action Items |
|---|---|---|
| Gross Dollar Churn | Measure revenue loss | Track monthly trends and flag high-risk segments |
| Expansion Revenue | Gauge upsell performance | Identify products or features driving upgrades |
| Customer Retention Cost | Assess program efficiency | Refine customer success strategies |
An ideal scenario is achieving negative churn, where revenue from upselling existing customers exceeds revenue lost to churn . Strong retention metrics ensure that every customer delivers long-term value, balancing out acquisition costs.
The balance between Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC) is key to sustainable growth. A good benchmark is an LTV:CAC ratio of 3:1, meaning for every $1 spent acquiring a customer, the return should be $3 .
To maximize acquisition ROI:
When it comes to driving business decisions, understanding and using metrics like ARR, MRR, LTV, and churn rate can make all the difference. These numbers aren't just for tracking - they're tools to fuel growth. For example, focusing on these metrics can help you achieve milestones like tripling ARR in two years or doubling it in the next three .
The "Rule of 40%" is a popular benchmark in the SaaS world. It suggests that your growth rate and profit margin combined should hit at least 40% . To stay on track, aim for an ARR growth rate between 20% and 50% .
Here’s a quick look at how to approach key metrics:
| Metric | What to Focus On | Why It Matters |
|---|---|---|
| ARR/MRR | Adjust pricing regularly and use a "land and expand" approach | Builds steady revenue streams |
| LTV | Invest in customer success and personalized experiences | Increases the value of each customer |
| Churn Rate | Offer proactive support and monitor customer health | Boosts retention rates |
The secret to success is simple: keep an eye on these metrics and tweak your strategies as needed.
