magnus919_agent-skills/financial-modeling/references/saas-metrics.md

SaaS Metrics

SaaS metrics are useful operating measures only when their revenue definitions, customer population, and time periods are consistent. They are management heuristics, not accounting standards or universal thresholds.

Growth and Retention

ARR and MRR

ARR = recurring monthly revenue x 12

Alternatively, ARR can be the annualized committed recurring value of active subscriptions. State whether usage above committed minimums, services, one-time fees, credits, or foreign exchange effects are included. Do not add monthly and annual measures without converting them first.

Net new ARR = new ARR + expansion ARR - contraction ARR - churned ARR

Logo Churn and Retention

Monthly logo churn = customers churned during month / customers at start of month
Annualized logo churn = 1 - (1 - monthly logo churn)^12

Annualization assumes a stable monthly rate. Segment churn by contract cadence, customer size, product, cohort, and channel before comparing it to a benchmark. Enterprise and SMB businesses can have materially different normal churn profiles.

Net Dollar Retention (NDR)

NDR = (starting recurring revenue + expansion - contraction - churn)
      / starting recurring revenue

Use the same starting cohort and period for every component. NDR above or below 100% is informative, but its interpretation depends on segment, contract cadence, price changes, and whether expansion is durable. Do not use generic NDR bands as universal thresholds.

Efficiency Metrics

Rule of 40

Rule of 40 = revenue growth rate (%) + profit margin (%)

Specify the growth period and margin definition. EBITDA margin and free-cash-flow margin are common variants; neither is interchangeable with the other. The metric is generally more useful for scaled recurring-revenue businesses than for pre-revenue or early product-market-fit companies. Treat 40% and any score bands as contextual heuristics, and inspect the drivers and trend rather than optimizing one score.

Magic Number

Magic Number compares sales and marketing investment with incremental recurring revenue. The numerator and denominator must represent compatible periods and units.

If the numerator is the increase in quarterly recurring revenue (a quarterly amount), annualize it before comparing it with prior-quarter sales and marketing spend:

Magic Number = quarterly recurring revenue increase x 4
               / prior-quarter sales and marketing spend

If the numerator is net new ARR (already an annualized contract-value measure), do not multiply it by four:

Magic Number = net new ARR for the quarter
               / prior-quarter sales and marketing spend

The x 4 factor annualizes a quarterly revenue increment; it does not turn quarterly spend into annual spend and must not annualize ARR twice. Prior-quarter spend is a lagging convention, not a law. Use the same accounting classification and a stated attribution lag consistently. Magic Number thresholds are context-dependent heuristics, especially where sales cycles, ramping, channel mix, or capitalization policies differ.

Burn Multiple

Burn multiple = net cash burn during a period / net new ARR during that period

Use positive cash burn and net new ARR from the same period. A ratio can be distorted by one-time cash events, large contracts, annual billing, and a very small denominator. Interpret it alongside cash flow, growth quality, gross margin, and retention rather than against a fixed universal band.

Metric Discipline

• Keep bookings, billings, recognized revenue, cash collections, MRR, and ARR distinct.
• Use comparable period lengths and consistent cohorts in every ratio.
• Reconcile metric changes to customer-level or contract-level movements where possible.
• Inspect segments rather than allowing a blended average to hide poor retention or inefficient channels.
• Record definition changes, reclassifications, acquisitions, and currency effects alongside the metric trend.