Practice SaaS financial vocabulary: ARR, ACV, CAC payback period, gross margin, LTV:CAC ratio, and the Rule of 40 for communicating SaaS business health.
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What does ARR stand for?
ARR (Annual Recurring Revenue) is the normalized annual value of all active subscription contracts — the primary top-line metric for SaaS companies.
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What does ACV stand for?
ACV (Annual Contract Value) is the average annual value of individual customer contracts. It is used to segment deals and measure sales productivity.
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'The Rule of 40' states that a healthy SaaS company's _____ rate plus profit margin should exceed 40%.
The Rule of 40 states that a SaaS company's revenue growth rate + profit margin (EBITDA or free cash flow margin) should sum to at least 40%, balancing growth and profitability.
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'LTV:CAC ratio' measures:
LTV:CAC ratio compares the lifetime value of a customer (revenue × margin × lifespan) to the cost of acquiring them. A ratio of 3:1 or higher is generally considered healthy for SaaS.
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'CAC payback period' measures:
CAC payback period is the months of gross profit from a customer needed to recover the customer acquisition cost. Shorter payback periods (under 12 months) indicate efficient growth.