In the software as a service (SaaS) industry, there are many SaaS acronyms to know. You don’t want to look uninformed in a meeting by asking for a basic definition. Use this article as a resource to understand the key SaaS acronyms that define the software and cloud computing industries.
SaaS Acronyms: Business Models
These terms describe entire categories of technology products. As such, you may have a lot of debate about these terms in your office. Some concepts like annual recurring revenue are relatively straightforward. In contrast, customer acquisition cost (CAC) is more challenging to measure because there are so many different tactics and strategies to attract potential customers
1 The SaaS Acronym That Started It All: Software As A Service (SaaS)
Software As A Service is a business model that describes how software is distributed to the customer. It is usually defined in contrast to on premise (“on prem”) software. In on premise software, a customer would purchase a copy of the software product and install a copy directly onto their hardware. From a consumer perspective, on premise software meant you had to install software from a CD, DVD or a download.
In contrast, Software As A Service (SaaS) products usually do not require any kind of installation. A large percentage of SaaS products run from a web browser instead. In the enterprise software world, Salesforce is one of the best known SaaS companies. Older companies like Oracle and Microsoft also offer enterprise software products in a SaaS model as well.
From a revenue perspective, SaaS products are typically sold based on an ongoing subscription rather than a one-time license fee. By using a recurring monthly or annual billing fee, customers spend more money on SaaS products over time. That is way SaaS companies are concerned with reducing churn.
2 Infrastructure As A Service (IaaS)
As a consumer, you probably use SaaS products through your web browser daily or weekly. Infrastructure as a Service (IaaS) is a bit different. It is more commonly purchased by companies to help them increase performance gains or cost savings in their technology department. If you are outside of the development team, you probably don’t need to worry much about IaaS.
Infrastructure does not let an end user accomplish anything on their own. Instead, infrastructure supports your accomplishment of other goals. For example, a road through the countryside does not create value on its own. It is only valuable when people use the road to travel.
Some of the most popular Infrastructure As A Service services include Microsoft Azure and Google Compute Engine.
3 Storage As A Service (STaaS)
Have you used Dropbox? That is one of the most popular examples of storage as a service. In a sense, storage as a service is best seen as a subset of infrastructure. Instead of buying and installing your own hard drives and data centers, you buy digital storage capacity as required.
In addition to Dropbox and similar services, Amazon’s S3 (Simple Storage Service) has become one of the most popular options for storage. Pricing for storage as a service products varies depending on multiple factors including access (i.e. do you want 24/7 instant access?), security (i.e. what level of security do you need) and other factors.
4 Platform As A Service (PaaS)
Related to infrastructure as s service, Platform As a Service is more complex. Let’s say that you want to build a photo optimization software app that cleans up poor lighting conditions in photos. Editing photos at scale requires significant resources. Therefore, you might buy computing capacity from a Platform As a Service to run your applications. Generally speaking, Platform As A Service (PaaS) would only be purchased by companies or those seeking capacity to run products.
Financial Performance SaaS Acronyms
Your finance department can produce these measures and metrics along with others like average cost.
5 Annual Contract Value (ACV)
This acronym is used to describe the financial value of a paying customer over a year inclusive of all revenue. For a company that offers a simple $100 per month monthly recurring revenue model, annual contract value would be $1200. In other cases, ACV may be higher. For example, if you sell professional services align with software, include those services as well.
For enterprise software grade software products, ACV can reach into the six figure range. To find out more, read my other article about these highly successful companies – SaaS Churn Metrics: Insights From 16 Companies with ACV Over $100,000.
Related terms: Total Contract Value
6 Monthly Recurring Revenue (MRR)
Widely measured in the SaaS industry, this measure summarizes how much revenue you bring in each month from subscription software licenses. If your company generates other types of revenue (e.g. training products or professional services), such revenue is typically excluded from MRR. If your company uses an annual payment plan, then you will probably use annual recurring revenue (ARR) instead.
Some SaaS provides include usage charges (e.g. you pay additional fees based on minutes used). In those cases, analyze these figures separately. Usage charges tend to vary considerably while traditional recurring subscription revenue is relatively fixed.
7 Customer Lifetime Value (CLV)
While measuring revenue on a monthly basis has value, there are other ways to look at revenue. With CLV, you estimate the approximate revenue that a customer will generate over their time period as a customer. For instance, if you generate $1,000 in monthly subscription revenue per customer and customers typically stay with you for a year, then your customer lifetime value would be $12,000.
Based on a $12,000 customer lifetime value, you make better decisions about marketing costs and what SaaS marketing channels to use.
8 Average Revenue Per User (ARPU)
I first encountered this term in the cell phone industry. For example, take Rogers, one of Canada’s largest cellular phone providers. According to a report on Q4 2019 results: “Rogers’ Average Revenue Per User (ARPU) for the quarter, which assesses the company’s operating performance, was reported at $55.26, a 65-cent decrease year-over-year.”
This measure also applies to the SaaS industry. It is helpful to look at revenue at a user level because it provides a health check on the business. For example, if the sales team keeps offering large per user discounts to secure larger customers, ARPU may decline for a period of time. On its own, a declining ARPU is a yellow flag. You will need to understand why it is falling and whether there are good reasons to accept that fall. For example, if you negotiate a lower deal that gives you a lower ARPU and get to add 5 of the Fortune 500 as case studies to your pricing page, it may be an acceptable trade off.
Sales and Marketing SaaS Acronyms
The marketing team needs to know these figures to measure their effectiveness and increase net profit over time. The sales team also needs to know certain metrics to evaluate whether or not they are making progress. If your service model emphasizes professional services revenue, I suggest tracking and reporting those revenue items separately.
9 Customer Acquisition Cost (CAC)
How effective is your company at connecting with potential customers? To answer that question, you need to understand marketing costs in detail.
Customer acquisition cost describes the total cost you incur to acquire a new customer. For a self serve SaaS product where customers buy right away, CAC may be little more than paid digital advertising costs. For a more complex product sales cycle, include other costs such as the cost of the sales team and the marketing team. You may also need to factor in sales cycle factors. If customers take an average of three months to make a purchase, your customer acquisition cost calculation will need to take this timeframe into account.
Failing to calculate CAC accurately is a major problem. It can lead you to make wasteful decisions like creating unreasonable sales quotas. Pressuring the sales team or marketing team to chase after impossible goals based on a flawed CAC doesn’t make any sense.
If you add marketing channels like direct mail, make sure you include tracking codes (e.g. include a potential client for a free consultation). This type of tracking makes it easier to determine whether a given direct mail campaign has produced a sales qualified lead or not.
Note that CAC and CLV are related SaaS marketing metrics. As a general rule of thumb, you want to a CAC lower than your CLV. For example, if you incur $1,000 in expenses to acquire a customer with a $12,000 customer lifetime value, your SaaS business is doing very well indeed! Assuming you have a repeatable sales process, you are going to have no problem getting more venture capital.
For more guidance on calculating CAC, read Calculate & Reduce Customer Acquisition Cost (CAC) for SaaS.
10 Return on Advertising Spend (ROAS)
SaaS companies that use online advertising effectively tend to get excited about ROAS. Spend $1 and get $3 in revenue? Who wouldn’t like that? ROAS is not always relevant for every SaaS company. It is most relevant to self-serve SaaS products that can be bought online by credit card. If your sales process involves a demo and multiple meetings, calculating ROAS effectively will be more challenging.
You might decide that online advertising is not your preferred focus. Don’t worry. You have plenty of other options available. Find out about your options for SaaS Marketing Channels.
11 Click Through Rate (CTR)
This marketing metric has different meanings depending on your context and the platforms you use. Platforms like Facebook, LinkedIn and Google Ads display a variety of data including CTR. First, you will need impressions (e.g. 1,000 impressions) which means the number of people who see your advertisement. You will also see the number of people who clicked your ad (e.g. 50 clicks. In this example click through rate would be 5%.
12 Customer Retention Cost (CRC)
Like customer acquisition cost, customer retention cost has different definitions. Ultimately, you are aiming to strike a balance between two factors. First, providing the required customer success and service support to help paying subscribers get value. Second, keeping an eye on profitability. Your business process to optimize customer retention cost will have several elements.
- the cost of your customer success department
- the cost of account managers to oversee customers
- the cost to resolve tickets when customers raise questions or complaints
- the cost of gifts and customer recognition programs
In general, it is a smart move to spend more time and effort to retain existing customers whenever possible. When you successful retain customers, reaching your scalability goals becomes much easier. If you have a fixed contract term, spread your customer retention efforts throughout the customer life cycle. If customers see that you only lavish attention on them a few weeks before the contract term expires, the effort is less likely to make a good impression.
What To Do Next With Your Understanding of SaaS Acronyms
A basic understanding of SaaS acronyms is table stakes to have meaningful conversations in the SaaS industry. Your next step is to make efforts to improve your marketing results by improving your SaaS conversion rate.