Welcome to Nauta’s must-know guide to metrics, terminology, and benchmarks tailor-made for B2B Tech start-ups.
Revenue & Profitability
This section will cover the following:
- Revenue vs Net Revenue
- Bookings vs Billing vs Revenue
- MRR, ARR, CARR
- COGS, Gross Margin, OpEx, and EBITDA
Revenue vs Net Revenue
Revenue (also known as Gross revenue) refers to the amount accrued by a business due to providing their goods and/or services to customers.
- It belongs on the Profit and Loss statement, not the Cash Flow statement.
- It is calculated on an annual accrual basis, not a cash basis.
- It excludes any amounts received due to VAT.
- Commonly used metric for determining whether you have a product-market fit i.e., the ability to generate sales.
Net Revenue is a more detailed metric that breaks down revenue somewhat by accounting for returns and allowances.
- The actual money you receive from generating sales during a period.
- Often used as a metric for determining commissions.
- The metric that is used if you want to calculate operating income or gross profit.
Having a similar net revenue to your gross revenue indicates to investors that you have a product that the market likes enough to not return, and to purchase at a non-discounted price.
Accrued Revenue refers to the amount of revenue that should be recognised for a given period. Usually, this is used to offset any major short-term costs associated with a period by attributing revenue to the period where the cost for the provision of revenue was incurred.
Bookings vs Billing vs Revenue
Bookings refers to the total value of all new contracts signed in a period. It is usually best to standardize this figure annually so that easier comparisons can be made in cases where contracts are longer than a year.
Billings are the amount that you have invoiced, due for payment in an explicit manner agreed upon by the customer. Billings may turn out to not equal the full booking if anything unexpected occurs.
Revenue in this case is the amount of money that can be recognized according to standard accounting policy e.g., IFRS/GAAP.
Quality of Revenue
Not all revenue is created equally!
Revenue that comes from selling products/services may be recurring in cases where contracts recur by default. This is our favourite type here at Nauta.
In other cases, it may be repeatable in nature such as weekly shops, top ups etc. Or alternatively, it may be a one-off such as a setup fee.
There are many potential arrangements but generally, the quality and value of revenue decreases as the revenue loses characteristics of ARR i.e., recurring revenue.
MRR, ARR, and CARR
Monthly Recurring Revenue (MRR) refers to all recurring revenue accrued in a given month. It must be recurring by default until explicitly cancelled. No fixed term or trials.
- Typically recorded on the last day of the month.
- Multiplying your most recent MRR by 12 gives your ARR.
- Typically, interchangeable due to this easy 12x conversion.
- Whether you use ARR or MRR typically depends on your business, and whether you deal in larger longer-term contracts, or shorter ones.
- Additionally, early-stage investors prefer to talk in terms of MRR for smaller companies (< €3M ARR).
- A €1M yearly revenue company will likely receive a lower valuation than a company with €1M in ARR.
ARR vs CARR
(Contracted) Annual Recurring Revenue
CARR includes revenue expected from signed contracts that have yet to start their contract term or begin product usage.
- Once the contract period begins, this revenue becomes ARR instead of CARR.
- A client may refuse to pay once their contract begins, so beware of counting your chickens before they hatch since legal action is typically not very pragmatic.
- Percentage of Completion (PoC) revenue is not recurring.
Cost of Goods Sold (COGS)
The direct costs incurred with the delivery of a service or production of goods. These are the costs that scale directly with your revenue.
Many people incorrectly assume that COGS are close to zero for software companies since the marginal cost of adding one extra user is zero. This is not true. In fact, most software companies have COGS in the range of 20-35% of their revenue.
At Nauta, we like to think of COGS as, “any costs to maintain and deliver the product & service for existing clients, but nothing more”. In other words, costs that allow revenue to grow or shrink from upsell, downsell, and churn alone without new clients being added nor further product development.
For example:
- Passthrough costs to external providers that scale directly with revenue
- Payment processing fees
- Hosting and cloud computing costs
- Onboarding costs
- Customer success (but ensure you don’t include the members here who are devoted to expansion)
- Customer support
At Nauta, we DO NOT include sales commissions. Although some people may argue they should be calculated as a % of new sales, we categorise them as a sales and marketing expense in OpEx as they are a cost incurred in adding clients, not retaining them.
Gross Margin
Gross Margin is the share of revenue left after subtracting your COGS.
Your average SaaS business will have a gross margin of 70-80% after factoring in the COGS above. A gross margin below 70% in a SaaS business could be a cause for concern, and above 85% a cause for interest. In other types of software business, these benchmarks might not necessarily apply but a gross margin below 60% will often be a cause for concern. Higher gross margin suggests a very scalable product, although doesn’t guarantee it. (More on GM% benchmarks here)
It should be noted that in the early stages, gross margins can vary heavily and may not be representative of future business.
Operating Expenses (OpEx)
OpEx includes all other business expenses required in the main operating activities of the business after subtracting COGS. This excludes non-core operational costs such as financing or capital expenditures.
Although sometimes referred to as SG&A, we prefer OpEx since the former implies that R&D is excluded.
OpEx can be broken down into the following categories:
- Sales and Marketing (S&M) e.g., salaries, paid marketing, sales commissions, etc.
- Research and Development (R&D) e.g., product and engineering salaries
- General and Administrative (G&A) e.g., office, HR, management, finance, legal, and accounting costs
The split between these three categories depends entirely on the start-up, with Deep Tech requiring more R&D, for example. Typically, R&D will represent 60% of OpEx for a pre-Series A stage start-up.
EBITDA
Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) is a measure of a business’ profitability from an operating perspective only since interest, tax, depreciation, and amortisation are not operating expenditures.
EBITDA is not the same as operating cash burn, but is somewhat linked, and sometimes used interchangeably. The difference is that EBITDA reflects a theoretical profitability from operations whereas operating cash burn is a measure of cash used in operations.
Cash Metrics
This section will cover the following:
- Burn & Runway
- Contribution Margin & Cash Flow Margin
Burn & Runway
Net Burn is the cash used by the business each period. Typically, you can expect to have a net burn of 30-50% of your last funding rounds each year. Thus, each funding round gives you roughly 2-3 years of runway.
- A late-stage seed start-up with MRR of £40K that successfully raises a £3M round should not be burning more than £1M-1.5M per year, or ~125K per month. Burning less is obviously not a bad thing.
Gross Burn is used for assessing pre-revenue start-ups or where revenue stability/growth is very uncertain.
You should also distinguish between Operating Net Burn (which includes cash flows related to operations) and Net Burn (which also includes cash flows related to investment and financing activities).
Runway is the amount of time the business can continue operating before running out of cash. A quick and simple way of calculating this is:
However, the Actual Runway is calculated with a cashflow forecast that factors in cashflow dynamics and expected changes. This often relies on assumptions about the future so if your forecast assumes “low certainty” revenue growth, for example, then maybe you shouldn’t rely on it. Generally, you should assume modest to no revenue growth.
Note that EBITDA is NOT the same as Net Burn even though it is often used as a proxy since start-ups build financial models on P&L basis rather than cashflow and because net burn is also harder to calculate and more volatile month to month. At Nauta, we demand that cash flow be properly calculated since cash is the holy lifeblood of start-ups.
Contribution Margin & Cash Flow Margin
Contribution Margin is equivalent to revenue from a customer minus the variable costs associated with that customer. These costs include selling, admin, and any operational costs linked to them.
This is a useful metric for determining how much of each sale contributes to covering fixed costs, and ultimately, to the profit of the business.
Gross Profit is the amount after subtracting COGS from revenue whereas Contribution is the amount after subtracting just the variable costs from revenue.
Contribution margin is used less frequently than GM in software start-ups. However, it is still an important metric to estimate how much net contribution margins – i.e., actual free cash flow from operations – can generate in the future.
Cashflow Margin shows how effectively a company can convert its sales into cash.
Growth Metrics
This section will cover the following:
- MRR Accounting
- YoY Growth
- MoM Growth
MRR Accounting
MRR (monthly recurring revenue) changes or categories can be categorised into the following:
- New – MRR added from new clients.
- Cancellations/Churn – MRR lost from cancelled clients.
- Contraction – MRR lost from contracts moving to a reduced value due to lower price, downgrade, downsell, or other.
- Expansion – MRR gained from contracts moving to a higher value due to higher price, upgrades, cross-sell, or other.
- Reactivation – MRR gained from contracts recommenced with churned customers.
Note that this equation should be exhaustive although some companies might use “other” to reflect currency and/or other effects.
YoY Growth
Year-on-Year growth is historically the most reliable predictor of raising a funding round and valuations at IPO. Furthermore, to justify the risks and high valuations given to companies, start-ups MUST grow rapidly for 5+ continuous years.
Roughly speaking, those start-ups that seek to gain "unicorn" valuations demand a highly difficult and sometimes counterproductive growth routes. Some experts have referred to the T2D3 guideline for start-up growth which essentially requires you to triple in annual recurring revenue for two consecutive years, followed by a doubling for the next three years.
However, this sort of growth trajectory is getting harder and harder to replicate in recent years due to structural changes in the ecosystem which is why we, at Nauta, tend to consider companies that growth at more than 100% YoY to be capital efficient.
SaaS is typically a "winner take all" game so its crucial to grab as much market share as quickly as possible to ensure you conquer your space. As long as you can convince investors that this growth will eventually lead to profitability, you can gain some significantly higher valuations than you might otherwise expect.
MoM Growth
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Hitting 100% YoY implies you are growing an average of 6% MoM, while 200% requires 9.5% MoM growth.
For enterprise sales, the growth is usually "lumpy", with some quiet months with zero sales, and then 30% growth in others. Therefore, QoQ (Quarter-on-Quarter) or YoY is usually more useful than MoM as a metric.
Customer Metrics
This section will cover the following:
- Logo & Revenue Retention
- Logo & Revenue Churn
- Customer Lifetime & Retention Cohorts
- Annual Contract Value
- TCV & ARPA
Overview
There are a lot of ways to measure churn/retention and here we seek to clarify the terminology.
The three most important and widely used metrics are Gross Revenue Retention (GRR%), Net Revenue Retention (NRR%) and Logo retention (%). The other metrics (gross churn, net churn, logo churn) are opposite to the above (i.e., Gross Revenue Churn % = 100% - Gross Revenue Retention %).
Retention
Gross Revenue Retention (GRR%, aka Gross Dollar Retention or GDR%)
Gross Revenue Retention (GRR%) is the percentage of a company’s revenue retained from existing customers, after the impact of all negative changes e.g., cancellations and account contractions (price decreases and downgrades). For benchmarks on GRR% see below.
It may also be helpful to have a view of the impact of cancellations on revenue alone, which would be referred to as Revenue Cancellations (%).
Important: Remember to be specific when communicating Revenue Churn and Retention. Not only whether you mean Gross or Net, but also what time periods you’re considering, e.g. monthly, yearly, quarterly, etc.
Net Revenue Retention (NRR% aka Net Dollar Retention)
Net Revenue Retention (NRR) is the impact arising from churn (contraction and cancellations), expansion, and reactivation after a given period (usually 12 months). I.e., if you had added no new customers, how would your revenue have changed over the period.
NRR >100% means that cancellations and contractions are more than the offset from expansions and reactivation. NRR <100% means net churn over the period whereas NRR >100% means net growth over the period.
Benchmarks for NRR vary significantly. Typically, annual NRR <95% is poor, NRR of 95%-100% is okay, and NRR between 100%-110% is good. NRR >110% is great and NRR > 130% is world-class! (Note, the benchmarks are a moving target and what was considered good in 2021 is much harder to attain in 2024)
The below graphs show upper and lower quartiles, as well as average/median, for both NRR% and GRR% across different ARR cohorts. For more on this, check out Bessemer’s resource here, or download OpenView’s Report here.
GRR% / NRR% benchmarks by ARR for cloud companies
GRR/NRR benchmarks by ARR for SaaS companies
Logo Retention
Logo retention is the proportion of customers retained over a period.
Generally, when selling to large enterprises 90% annual logo retention or above is considered acceptable, whereas, when selling to SMBs retention might be as low as 70-80% per year. Similarly, there’s a lot of variability by sector; some segments have very high retention characteristics (e.g., payroll or accounting software) while others are much lower. A business can be viable or even thrive with high churn rates (if the acquisition cost is very low and profitability of the first engagement is very high), but generally in software, an annual retention of below 70% is concerning. You should understand what the benchmarks are for your sector and research them thoroughly.
Churn
Churn is the proportion of customers or revenue lost during a period. However, there are several different types of churn, so beware when people mention “churn” or “revenue churn” without specifying what they’re talking about (gross vs net vs cancellations, revenue vs logo, annual vs monthly, etc.). It is impossible to know for certain what they mean.
Logo Churn (also called Customer Churn) is the proportion of customers lost during a period and is the opposite of Logo retention. The churn rate can be calculated as:
Gross Revenue Churn (usually MRR Churn) includes all negative impacting revenue movements i.e., the proportion of revenue lost during a period from cancellations and downgrades. This is the opposite of GRR%, above, such that 5% Gross Revenue Churn means 95% GRR% (100%-5% = 95%). Sometimes people don’t include downgrades, however, this is incorrect. (For more on MRR accounting, see the Growth Metrics tab above).
People will sometimes talk about “Revenue Churn” which can be very confusing without specifying whether its gross or net, or whether downgrades are included. In these situations, its best to clarify.
Gross Revenue Churn benchmarks: as a rule of thumb, 2-3% monthly is high for mid-market or enterprise, but sometimes acceptable for SME sales. >3% monthly gross MRR churn is usually problematic, and <2% is good.
Net Revenue Churn (usually MRR Churn) is the proportion by which revenue shrinks (or grows) due to the combined effects of cancellations, contractions (downgrades), expansions (upsell), and reactivations.
Net Revenue Churn can also be calculated as the opposite of Net Revenue Retention (Net Revenue Churn = 100% – NRR%).
Note that gross revenue and logo churn are always expressed as positive numbers, whereas net churn can be negative (if more revenue is gained from expansions than customer/revenue is lost). Negative net churn is good.
Net Revenue Churn benchmarks: as a rule of thumb, 1-2% monthly is high for mid-market or enterprise, but sometimes acceptable for SME sales. >2% monthly is usually problematic and <1% is good but ideally, <0% (net negative) is preferred.
Remember: 2% monthly logo churn equates to 21.5% annual logo churn. Replacing 20% of your customer base each year whilst still growing is easier when you’re very small, but very hard if you’re a large company.
A note on monthly vs annual retention/churn
The best way to calculate and portray any of these churn metrics depends on the business’ size and the nature of their contracts. For businesses with annual contracts, churn and retention figures should be calculated on an annual basis, for example:
For businesses with monthly contracts, the figures should probably be calculated on a monthly basis, however, if the churn varies month-to-month as is usually the case for smaller businesses or those with large contracts, the average of the last 3 months (L3M) or 6 months (L6M) may be appropriate.
Key Takeaway: Context matters, use the churn metric that best reflects the "honest" performance of your business. This does not mean cherry picking the metric that paints the most positive view of your business, but reflecting what is an accurate view.
Technical point on calculating NRR & Net Churn
In theory, the two formulae below should have the same output:
Whilst the second formula works for monthly calculations on monthly datasets (monthly net churn), it may not work for annual calculations on monthly datasets as the customers acquired during the year may expand or contract in the same year and affect the calculation. Instead, we should use the first formula to calculate NRR% on an annual basis if using monthly datasets.
Customer Lifetime & Retention Cohorts
Customer Lifetime is the average lifetime of a customer and is used to calculate customer lifetime value (CLTV).
The right way to calculate the customer lifetime is using historic data on all customer lifetimes. However, this isn’t always possible in the early stages of a company. As such, it can be approximated as the inverse of logo churn. However, since we already know that churn rates are not constant, lifetimes calculated using this technique are not very reliable sources of information.
Retention Cohorts (e.g., 60% logo retention after 6 months or 12 months) can be used to understand more nuanced cases, for example, if there’s a very high logo churn after 1 month but then very high retention thereafter. Then, the total % logo churn may look very high while the growth rate is very high, but the long term logo churn rate will be much lower for the business.
For further reading on cohort analyses, click here.
Customer Lifetime Value (CLTV/LTV) is the present value of the future net profit from the customer over the duration of the relationship, i.e., the total value we extract on average from a customer over their lifetime.
Whilst its tempting to calculate LTV without considering gross margin or using the lowest churn figures to calculate average customer lifetime. It’s important to take a “gross margin cut” to better understand contribution to profitability, and not just the revenue from each customer.
Technically, you should also factor in the time value of money by including “/(1+discount rate)” in your calculation, however, this can overcomplicate things so we tend to ignore it.
When calculating LTV, it often makes sense to cap the average lifetime of the customers to 3 years (or even 5 years if the business sells 3-year contracts, but never more than 10 years). This is because, despite what early customer numbers show, its rare that businesses have an average lifetime longer than this and because it helps prevent misleading large outputs that can warp LTV:CAC calculations (see further down for more info on CAC).
Theres no good or bad LTV, except in the context of the cost to acquire a customer (see LTV:CAC ratio in the Efficiency Metrics section).
Annual Contract Value (ACV)
Annual Contract Value, when referring to a single contract, is used in Sales to compare contracts that may have different lengths. In SaaS, it should be equivalent to the contract’s ARR. Generally, when people say ACV, they mean Annual Contract Value.
But be careful because there are two other terms with the same acronym. Average Contract Value, and Average Customer Value so be careful. If all customers have just one contract, then these numbers are interchangeable. If possible, its easier to consider everything on a customer basis with data on a customer-by-customer level. Otherwise, you should clarify.
Usually, when referring to a single contract, ACV means Annual Contract Value, and when referring to multiple contracts, ACV means Average Contract Value.
What makes a good ACV (as in average contract value)?
ACV can range hugely from one company to the next.
The important thing is that the ACV justifies the sales effort required. For a 2-3 month sales cycle an ACV of £1K means that the business is almost certainly not sustainable.
The below diagram outlines what efforts are justified depending on the different contract sizes. This is a handy equivalent to the LTV:CAC calculation when you don’t have much time or lack quality data to make more complex comprehensive calculations.
TCV and ARPA
Total Contract Value (TCV) is used to give the total contract value, regardless of the contract term (e.g., £200K for 2-year contract = £100K ARR, £200K TCV)
Average Revenue per Account (ARPA) can be used as a less ambiguous equivalent to ACV (as in average customer value). ARPU and ARPPU (average revenue per user/paying user) are rarely used at Nauta since we deal predominantly with B2B.
ARPA and ARPC (per customer) are interchangeable unless there are multiple accounts for each customer in which case ARPA would vary from ARPC, as might be the case when dealing with enterprise sales.
Efficiency Metrics
This section covers the following:
- CAC & CAC Payback
- CAC & LTV:CAC
- Cash Efficiency Score & Burn Multiple
- SaaS Magic Number & Quick Ratio
- Rule of 40
- ARR/Employee
Customer Acquisition Cost (CAC)
The simple formula for calculating CAC is as follows, though it should be taken with a grain of salt as it can be misleading and/or incomplete depending on circumstance.
For a more comprehensive explanation of CAC calculation, click here.
We always consider "fully-loaded" CAC i.e., all S&M spend including headcount costs, rather than just the marketing spend per customer acquired. For example, if £100K is spent on Google Ads and produced 200 customers then the CAC (unloaded) might be £100K/200 = £500. But, if the marketing team also requires one FTE to manage the campaigns then the fully-loaded spend was more than £100K and the CAC would be >£500.
For early stage companies this varies significantly, particularly as headcount begins to build, new channels are tested, and marketing strategies are refined. It almost always makes sense to take the average of the last 3, 6, or 12 months. You should always use the period that is most similar to your sales cycle so that it fairly represents your business. Trying to manipulate this figure otherwise would be viewed as disingenuous.
CAC Payback
CAC Payback period tells us the number of months or years for the contribution margin of a customer to pay back the spend that was made to acquire them in the first place. CAC payback gives an indication of the cashflow efficiency of customer acquisition.
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Typically, a CAC payback of <12 months is good (particularly with annual contracts paid upfront) and above 15 months is less desirable, particularly if retention is not very high. Enterprise contracts may have a CAC payback of up to 24 months (usually due to longer contract lengths and LTVs). Read more about CAC payback benchmarks here.
The CAC payback in cash terms (also known as the Cash Cycle) is also important since cash is the most important thing at the end of the day. For example, annual contracts paid upfront with a CAC payback <12 months are cash flow positive from day zero.
Contracts paid annually in advance with CAC paybacks between 12-24 months return the CAC in cash terms with their second payment after 12 months, but there is some risk of churn.
CAC & LTV:CAC
LTV:CAC or LTV/CAC ratio is a commonly used metric for understanding capital efficiency and unit economic profitability in SaaS. It tells you the total profitability of each customer over their lifetime after considering COGS and acquisition spend.
Rules of thumb for LTV:CAC are subject to many circumstantial conditions e.g., cost of capital, payment terms, gross margin, churn, and CAC. Usually, an LTV:CAC ratio >3 is considered good, while <3 is bad. At Nauta we look for LTV:CAC >> 3. For a mature business ~7 is considered very good. More on LTV:CAC benchmarks here.
At Nauta, we always calculate our own view of LTV:CAC as the number can be heavily influenced by cherry picking the months for which CAC is lowest, not using fully loaded CAC, calculating LTV without the gross margin cut, or with a gross margin cut that doesn’t include all COGS (as previously mentioned).
LTV:CAC ratio and CAC payback must be considered together and with context. One tells us about the overall profitability while the other tells us the speed with which cashflow is returned. A company with LTV:CAC of 7 but a CAC payback of two years would have profitable customers but require time and cash to see the return.
LTV:CAC is a simple proxy of Customer Net Present Value (CNPV) and it might end up being easier to calculate CNPV directly. For the reasons mentioned above with respect to capacity for manipulation, many of us at Nauta do not like the LTV:CAC ratio.
Cash Efficiency Score & Burn Multiple
Cash Efficiency Score gives a view of the efficiency in the use of cash to generate growth (Net New ARR) in a defined period, or a company’s entire life. A high score means high cash efficiency of growth.
Burn Multiple is the inverse of the efficiency score and represents the inefficiency of growth. A high score means high burn to achieve growth.
The cash efficiency score was the original metric used to measure cash efficiency. However, due to small decimal changes leading to significant variances in efficiency, it became common practice to use the inverse instead - the Burn Multiple - since its more useful for discerning between good and bad performance than the former.
SaaS Magic Number & Quick Ratio
SaaS Magic Number (or Acquisition Efficiency Ratio) measures the efficiency of the revenue acquisition activities in SaaS. It focuses on sales and marketing required to acquire new revenue (vs net new revenue as in the previous two metrics). Customer success spend should be included if it is key to gaining that revenue (e.g., onboarding, integrations, etc.).
For more on sales efficiency, click here.
Quick Ratio is not commonly used at Nauta, but worth being aware of. It is a measure of growth relative to churn. There is no hard and fast rule for what is considered "good", but generally >1 is desirable, and >2 is very strong.
Rule of 40 and ARR/employee
The rule of 40 (R40) is an industry rule of thumb to balance growth and profitability since it considers whether low profitability or losses in a company are justified by its rate of growth. The name derives from the benchmark where >40% is deemed good performance.
Valuations of public companies are somewhat correlated with Rule of 40 and this metric is very important when selling a company. More on the rule of 40 here, and here.
ARR/Employee is an easy to calculate metric that gives an indication of whether the team size is efficient. It is frequently calculated when selling a company. It should be >$100K at steady state and >$150K to "add points" (world class would be >in $300K)
See the following graph for ARR/Employee benchmarks courtesy of OpenView Partners (2023 Report).
