saas-metrics

Files (6)

• README.md
• SKILL.md
• evals.json
• board-reporting.md · references/
• cohort-analysis.md · references/
• metric-formulas.md · references/

SKILL.md (first lines)

## Key principles

1. **MRR is the atomic unit** - Every SaaS metric derives from Monthly Recurring
   Revenue. Get MRR calculation right first - it must exclude one-time fees,
   professional services, and usage overages. All other metrics (ARR, churn,
   LTV, NRR) build on top of a clean MRR number.

2. **Churn compounds relentlessly** - A 3% monthly churn rate sounds small but
   means losing 31% of customers annually. Always annualize churn when
   communicating to stakeholders, and always separate logo churn (customer count)
   from revenue churn (dollar amount) - they tell different stories.

3. **Cohort over aggregate** - Aggregate metrics hide trends. A stable overall
   churn rate can mask worsening retention in recent cohorts offset by strong
   early cohorts. Always build cohort views before drawing conclusions about
   retention or expansion.

4. **Unit economics must be fully loaded** - CAC must include all sales and
   marketing spend (salaries, tools, ads, content, events), not just ad spend.
   LTV must use gross margin, not revenue. Partial calculations give false
   confidence.

5. **Board metrics need context, not just numbers** - A number without a trend,
   benchmark, or explanation is noise. Every board metric should show: current
   value, period-over-period change, trailing trend (3-6 months), and a one-line
   narrative explaining why.

---

## Core concepts

**MRR waterfall** is the movement model that explains how MRR changes month to
month. Starting MRR + New MRR + Expansion MRR - Contraction MRR - Churned MRR =
Ending MRR. This waterfall is the single most important operational view because
it isolates growth drivers from retention issues.

**Revenue retention** comes in two flavors. Gross Revenue Retention (GRR) measures
dollar retention excluding expansion - it can never exceed 100% and shows the
floor of your revenue base. Net Revenue Retention (NRR) includes expansion and
can exceed 100%, meaning existing customers grow faster than others leave. NRR
above 120% is considered elite for B2B SaaS.

**Unit economics** connect acquisition cost to customer value. CAC (Customer
Acquisition Cost) is total sales + marketing spend divided by new customers
acquired. LTV (Lifetime Value) is ARPA times gross margin divided by revenue
churn rate. The LTV:CAC ratio indicates efficiency - below 3:1 means
unprofitable acquisition, above 5:1 may signal underinvestment in growth. CAC
Payback Period (months to recover CAC from gross profit) is often more
actionable than LTV:CAC because it avoids long-horizon LTV assumptions.

**Cohort analysis** groups customers by their signup month (or quarter) and tracks
a metric (retention, revenue, usage) over time relative to their start date.
The cohort table has signup periods as rows, months-since-signup as columns, and
the tracked metric as cell values. Reading down a column shows whether newer
cohorts perform better or worse than older ones.

---

## Common tasks

### Calculate MRR and ARR

MRR = sum of all active subscriptions normalized to monthly amounts. Annual
contracts must be divided by 12. Exclude one-time charges, usage overages, and
professional services.

**Formula:**
```
MRR = SUM(monthly_subscription_values for all active customers)
ARR = MRR * 12
```

**MRR waterfall breakdown:**
```
New MRR         = MRR from customers acquired this month
Expansion MRR   = MRR increase from existing customers (upgrades, seat adds)
Contraction MRR = MRR decrease from existing customers (downgrades)
Churned MRR     = MRR lost from customers who cancelled
Net New MRR     = New + Expansion - Contraction - Churned
Ending MRR      = Starting MRR + Net New MRR
```

> Always reconcile: Starting MRR + Net New MRR must equal Ending MRR. If it
> doesn't, there's a data issue (usually mid-month plan changes or proration).

### Calculate churn rates

Separate logo churn (customers lost) from revenue churn (dollars lost).

**Logo churn rate:**
```
Monthly Logo Churn = Customers lost this month / Customers at start of month
Annual Logo Churn  = 1 - (1 - Monthly Logo Churn)^12
```

**Gross revenue churn rate:**
```
Monthly Revenue Churn = (Contraction MRR + Churned MRR) / Starting MRR
```

**Net revenue churn rate (can be negative if expansion exceeds churn):**
```
Net Revenue Churn = (Contraction + Churned - Expansion) / Starting MRR
```

> Never use ending-period denominators for churn. Use start-of-period or
> average-period customer/revenue counts. Ending-period denominators
> systematically understate churn because they exclude the customers who left.

### Calculate LTV and CAC

**Customer Acquisition Cost:**
```
CAC = Total Sales & Marketing Spend / New Customers Acquired
     (over the same period, typically monthly or quarterly)
```

Include in S&M spend: salaries, commissions, ad spend, content production,
tools, events, agency fees. Exclude product costs and general overhead.

From mkurman/zorai, MIT.

More from mkurman/zorai