SaaS Metrics: ARR, Churn, LTV/CAC

In subscription software, metrics are not a reporting frill: they are the language used to judge the health of the business. A SaaS founder who cannot read ARR, churn and the LTV/CAC ratio negotiates blind with investors and customers alike. The beauty of this model is that every lever is measurable; the risk is drowning in dozens of indicators without understanding which ones truly count. Here are the few that explain almost everything.

Recurring revenue: MRR and ARR

The heart of the SaaS model is recurring revenue. It is measured in two cuts:

• MRR (Monthly Recurring Revenue): the monthly recurring revenue from active subscriptions.
• ARR (Annual Recurring Revenue): the annualised version, generally MRR × 12.

What matters is not just the level, but how it moves. MRR breaks down into new customers, expansion (upgrades), contraction (downgrades) and churn. This breakdown tells you whether growth comes from new sales or from existing customers buying more. One-off revenues (setup, consulting) do not belong in ARR: inflating it with non-recurring items is a mistake investors spot immediately.

Churn: the leak in the bucket

Churn measures how much you lose. It should be viewed in two forms:

• Customer churn: the share of customers who cancel in a given period.
• Revenue churn: the share of MRR lost, which weighs more heavily when large customers leave.

The most revealing metric is net revenue retention (NRR): what a cohort of customers from a year ago is worth today, factoring in expansion and churn. An NRR above 100% means existing customers grow more than those lost: the business grows even without new acquisitions. It is one of the indicators funds look at first. High churn renders any acquisition effort pointless: you fill the bucket while it leaks.

LTV and CAC: what a customer is worth, what it costs

Two metrics must always be read together:

• CAC (Customer Acquisition Cost): how much you spend on marketing and sales to acquire a customer.
• LTV (Lifetime Value): the margin a customer generates over their entire tenure.

The LTV/CAC ratio tells you whether the model is economically sustainable. A value around or above 3 is often considered healthy: every franc invested in acquisition returns several over time. Below 1 you are losing money on every customer. Note: LTV depends directly on churn, because a customer who stays only briefly is worth little. Improving retention raises LTV without spending a single franc more on acquisition.

Payback and magic number

The LTV/CAC ratio ignores the time factor, which for cash is everything:

• CAC payback: how many months it takes for a customer’s margin to repay the cost of acquiring them. A long payback, even with a good LTV/CAC, drains liquidity because you pay for acquisition today and recover tomorrow.
• Magic number: how much new recurring revenue you generate for every franc spent on sales and marketing. It measures the efficiency of the commercial engine and helps decide when to press the accelerator.

A startup can have excellent ratios on paper and still run out of cash if payback is too long relative to available capital.

Read them together, not in isolation

No metric should be viewed on its own:

• High ARR but high churn = growth that hides a leak.
• Excellent LTV/CAC but long payback = a healthy model that is starved of cash.
• Growth only from new customers, low NRR = costly acquisition and customers who do not stay.

The useful picture is the intersection: ARR growth, retention strength, acquisition efficiency and recovery time. These four dimensions also form the basis of the story you tell investors. For tax and accounting purposes, remember too that ARR and MRR are management metrics: revenue must be recognised according to the accounting rules of the Swiss Code of Obligations, and in the case of annual advance payments the accruals must be handled correctly. In Switzerland, VAT (standard rate 8.1% from 2024) applies under the ordinary rules, with the registration threshold set at CHF 100,000 in turnover.

In summary

• ARR and MRR measure recurring revenue: break them down to understand where growth comes from.
• Churn is the leak: net revenue retention is the most revealing indicator.
• LTV/CAC tells you whether the model is sustainable; churn is its hidden engine.
• Payback measures time, that is, the pressure on cash.
• Metrics must be read together: one brilliant number can conceal a critical one.

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