Introduction

The metrics had all been standardized before I arrived, so I took them at face value. Big mistake. I didn’t realize until later that they had been defined by one person at the board level and weren’t truly understood by anyone.

We spent years fighting against front-loaded metrics because redefining them is no small task. Our NDR looked low because we had baked too much upsell into the original ARR. Our CAC didn’t show meaningful improvement since we kept allocating more of the “true cost” to it over time. And our Gross Margin was constantly questioned, as the definition of COGS remained an ongoing debate. But the truth is, these original definitions weren’t wrong and they were consistent with some competitors, but we weren’t prepared for how hard it made future growth.

Unlike GAAP metrics, SaaS metrics aren’t standardized. That leaves you, the finance leader, responsible for defining how you report them with the founders and CEO. It’s a delicate balance:

• Go too conservative, and you shoot yourself in the foot as you come up short when potential investors compare your numbers to companies using more aggressive definitions.

• Go too aggressive, and you set growth expectations too high, making them nearly impossible to sustain.

If you don’t believe me… this is an example of a company with the same baseline numbers, just presented by different SaaS definitions.

Yes. Metrics matter.

This isn’t another exhaustive metrics guide, there are hundreds of those, but rather a way to think strategically about how to choose your metrics. 

I once saw a VC poll asking how portfolio companies define ARR and there were five answer choices. Each got over 10% of the votes. Each could lead to an ARR difference of 30-40%. I still think about that when imagining a VC trying to compare company results…

To help you navigate this, I’ve compiled the most common definitions of each metric, organized by risk level, along with their key pros and cons. Naturally, by the time you reach an IPO, you’ll likely be using the most conservative definitions. But until then, you have the flexibility to choose the approach that best fits your company’s stage and growth strategy.

The Bullets

• Choose each metric carefully to balance backward-looking numbers that make your firm look weak against competitors and forward-looking numbers that bake in unrealistic growth expectations.

• Whether you lean conservative or aggressive, clarity is key; front-loading ARR might dazzle now, but it can mask churn risk and hamper future growth. Make sure everyone agrees on how you define metrics like COGS, CAC, and churn so they remain consistent and meaningful over time.

• Prioritize one or two efficiency metrics that genuinely fit your business stage, and be transparent about any underlying assumptions. As you mature (especially moving toward IPO), tighten up these definitions, gradually shifting to more conservative standards that instill confidence in investors and your team alike.

The specifics

1. ARR. Forward-looking vs. current revenue.

This is the key metric for your organization as it's a major part of your valuation. But most of the time companies will define it differently, making comparisons misleading. Your goal isn’t just accuracy today; it’s long term success.

Here are the most common ARR options starting from most conservative to most aggressive. The names for these ARR types aren't even standard, so please refer to the definition for specifics. Of course, all of these calculations are reported on the “live” amount on the last day of the month to include expansion/churn and exclude any one-time fees.

Normal Pricing:

Usage-Based Pricing:

In theory, these numbers should converge over time as customers start paying the full value of their contracts. The real difference lies in whether you’re front-loading ARR (which benefits sales and new revenue optics) or recognizing price increases over time (which supports customer success and strengthens NDR).

Regardless of the approach, your priority should be driving the company’s success while maintaining consistency in your methodology. Always label the specific ARR type and provide a clear link to its definition to avoid confusion.

Tip: Beyond just selecting a definition, you should always break ARR down by product, cohort, and other key slices to get a full picture of your revenue.

2. CAC. What is the "ongoing cost to acquire a customer?”

The goal of Customer Acquisition Cost (CAC) is to measure how much it costs to acquire a new customer today and, more importantly, to give a sense of the ongoing cost as you scale. CAC directly impacts profitability, cash flow, and nearly every key SaaS metric.

Again, we have ordered things from conservative to aggressive:

While CAC seems straightforward, real-world factors add complexity. One key challenge is determining the right time frame for your calculation. If you’re counting new customers this month, should you match them with last month’s sales and marketing expenses or those from two months ago?

The answer depends on your sales cycle and growth dynamics. It’s tempting to apply a long lag (e.g., “We have a six-month sales cycle, right?”), especially since marketing expenses from three months ago are often lower than those from last month. However, be cautious: if you lag your CAC calculation too far behind (e.g., using T-2 or beyond) and then implement a strategic shift (like restructuring) your CAC might appear artificially high for an extended period. That’s because your current customer acquisition results will be compared against past spending from when your growth targets (and marketing costs) were higher.

Much like ARR, the key is to strike the right balance between representing the potential of the business and staying grounded in the current reality. A too-conservative approach might make your growth seem unsustainable, while an aggressive one could overpromise efficiency that won’t hold up at scale.

Tip: Yes, you could project the improvements into forward looking statements, but honestly, future numbers are discounted heavily at growth startups by investors.

3. COGS. If we didn’t do any development…

COGS directly impacts gross margin, which in turn affects CAC Payback, LTV, and nearly every core SaaS efficiency metric.

Below are the most common COGS calculations, ranging from most aggressive to most conservative in terms of cost inclusion.

In SaaS, hosting costs are typically much lower than implementation or CS expenses. If you only include hosting in your COGS, your gross margin will appear artificially high (often 97–98%), which can be misleading.

It’s better to start factoring in CS and implementation early to give a realistic estimate of scaling costs and prevent gross margin surprises as the company grows.

Tip: This will highly impact your LTV/CAC and CAC payback, so it's critical to understand the most appropriate items to include.

4. Churn. Stay consistent.

Churn is more straightforward than some of the other key SaaS metrics, but the way you define it still matters so we are including it here. The two primary options are revenue churn and customer churn, and each tells a different story about your business.

Pick the churn metric that best reflects your business model and then stick with it. Churn should always mean churn.

Tip: Churn can have a disproportionate impact on key SaaS metrics, especially at low churn rates. Try calculating LTV with a churn of 2% vs. 4%—the difference is massive. Be cautious when modeling assumptions around single-digit churn.

5. Efficiency Metrics: Choose one.

These calculations all depend on the assumptions you’ve made for other key metrics like CAC, ARR, Gross Margin, and Churn. However, you should not track all efficiency metrics. Instead, focus on one or two that best reflect your business model and growth stage.

Some metrics are easier for teams to understand than others, and certain calculations can overcomplicate decision-making rather than provide clarity. Below is a breakdown of the most commonly used efficiency metrics, their benefits, and their risks.

There is no perfect efficiency metric, and each has trade-offs. Your primary goal is to pick one or two metrics that aligns with your business model, stage, and decision-making process and then track them consistently over time. For a more in-depth view, check out Bessemer’s metric article.

Tip: Make sure that you are aware of how conservatively or aggressively you have calculated the underlying metrics to contextualize the number.

In Conclusion

The key to financial metrics isn’t just choosing a definition, it’s balancing conservatism and ambition. Define your metrics too conservatively, and you may undervalue your growth potential, making it harder to attract investors. Go too aggressive, and you risk setting expectations you can’t meet, leading to tough conversations down the road.

As your company matures, gradually shift toward more conservative definitions, especially if an IPO is on the horizon. Investors value consistency and reliability, so aligning with widely accepted financial reporting standards will set you up for long-term success.

Tip: If you would like to benchmark yourself against metrics - Mostly Metrics has a great report on the current state of SaaS metrics. Just remember, due to the various ways of calculating these metrics there can be a wide variation of what ‘best in class’ actually means.