Like with any successful business, the deeper you dive into the world of SaaS, the more concepts you uncover as you journey towards growing your enterprise. While some of these terms are straightforward, like Annually Recurring Revenue (ARR), others cover complex thought models reaching into a litany of different factors. Save time and impress your colleagues by using the proper terminology to describe your ideas, starting with learning the language of SaaS. Here are the first twelve acronyms you need to know:
1. SaaS, or Software As A Service
When working in the world of SaaS, we must understand what SaaS really means. Distinguished from the traditional model of selling software wherein a customer purchases a CD, DVD, or download and uses software on their personal device, most Software As A Service business models rely on the cloud. Whereas in the traditional paradigm customers use the computing power and storage capacity of their personal device to run a software system, SaaS products typically do not require any kind of installation.
Most SaaS programs run on a web browser and rely on the computing power of remote servers based all over the world. Some well-known SaaS products include Salesforce, Dropbox, Google Workspace, Adobe Creative Cloud, and some Microsoft programs.
Typically, SaaS business models do not have a high up-front cost, unlike the high initial prices in the original way of vending software. With SaaS, users pay a recurring subscription rather than a one-time license fee. This can accumulate more revenue over time than an initial up-front cost for businesses, and also has the benefit of allowing customers to try the software at a low rate before continuing to pay for the service.
>>MORE: What Is the Rule of 40 and How Is It Calculated? (SaaS)
2. IaaS, or Infrastructure As A Service
While SaaS offers software computing to customers, IaaS offers a framework for businesses to boost performance gains or increase savings in their technology department. An important distinction might be that while SaaS offers specific, tangible value through its service, IaaS does not accomplish anything on its own—only as part of a network can it support a business’ accomplishment of other goals.
Some well-known IaaS services include Microsoft Azure, Google Compute Engine, Amazon Web Services (AWS), and Rackspace.
>>MORE: Testing of SaaS: Definition, Methods, Problems, and Resources
3. STaaS, or Storage As A Service
Distinct from SaaS and IaaS, Storage As A Service offers digital storage space as the need arises, rather than vending hard drives or data centers. STaaS is sometimes lumped in as a subset of IaaS, and its pricing can vary based on security level, accessibility (round-the-clock instant access?) and other factors.
Examples of popular STaaS businesses include Dropbox and Amazon’s S3 (Simple Storage Service).
>>MORE: How to Create an Effective SaaS Platform
4. PaaS, or Platform As A Service
PaaS businesses offer software creators a development platform that liberates them from worrying about logistics like storage and infrastructure. In short, PaaS offers computing resources for businesses interested in running their products through a streamlined platform.
OpenShift and the Google App Engine are two recognized PaaS systems.
>>MORE: Essential Definitions of SaaS Abbreviations
5. MRR, or Monthly Recurring Revenue
Perhaps one of the most used terms in the SaaS industry, Monthly Recurring Revenue sets to measure how much money a business pulls in every month from subscription software licenses. Other revenue generated such as professional services or training products is typically excluded from MRR; likewise, uses charges, such as fees based on minutes of software use, are typically analyzed separately from MRR. These tend to vary significantly whereas most MRR is relatively predictable income.
It is important to note that if a company uses an annual payment plan, they will most likely rely on ARR (or Annually Recurring Revenue) instead.
>>MORE: What SaaS Integration Is & Why Businesses Need to Care
6. ACV, or Annual Contract Value
ACV or Annual Contract Value is generally based off Monthly Recurring Revenue in addition to all other forms of revenue from a customer over the course of a year. For example, a client who signs on for a simple $10 per month MRR would translate to a $120 Annual Contract Value for the business. Additional fees included in a customer’s ACV might include professional services associated with a business’ software.
>>MORE: Analytics, live chat, monitoring, and other SaaS tools
7. ARPU, or Average Revenue Per User
Average Revenue Per User measures a company’s operating performance and acts as a sort of health check for budgeting and revenue. For example, if a company continually offers sizeable per user discounts in order to acquire more customers, they will want to look at the ARPU as it relates to the rest of their budget.
If a company’s ARPU declines over time with little long-term gain, the company may want to reassess its finances; but if they lower the cost of their deal and gain Fortune 500 clients, it may be a worthwhile trade off.
>>MORE: Differences, Examples, and How to Choose Between SaaS, PaaS, and IaaS
8. CLV, or Customer Lifetime Value
In the framework of SaaS, Customer Lifetime Value is the measure of the estimated revenue for a single customer over the length of their business with a company. For example, if a business charges $10 in a monthly subscription and their average customer sticks around for two years, the CLV for the business is $240.
Understanding this number within the backdrop of a budget helps companies to make decisions about marketing costs and outlets, and also paints a clearer picture of the overall rhythm of business.
>>MORE: Tips, Insights, and Best Practices for SaaS Sales
9. CAC, or Customer Acquisition Cost
Related to CLV, Customer Acquisition Cost, or CAC, is the total cost a company incurs in order to convert a new customer. This concept is not quite as simple as it sounds, however; if a company fails to correctly calculate their CAC, they can easily end up making wasteful decisions and end up pressuring their sales team to chase after false numbers. Accurately understanding a CAC means a company knows how to best connect with potential customers.
For example, for a software service that customers typically pay for right away, perhaps only minimal digital advertising will be required. However, for a more complex sales cycle, a company will want to include other costs in the CAC such as the cost of sales and marketing teams; and if the average customer takes one month to make a purchase, your CAC is best understood in this context.
As a general rule, a business wants to have a CAC which is lower than its CLV. For example, if a company incurs $1 in expenses to acquire a CLV of $12, this is considered an achievement. If companies are able to repeat this with other customers, they will run a successful SaaS business.
>>MORE: Tips, Insights, and Best Practices for SaaS Sales
10. ROAS, or Return On Advertising Spend
This term is the name for the sum of revenue a company acquires after spending on advertising. If a company spends $100 on advertising and acquires $500 worth of business, their marketing plan has been successful.
ROAS is most applicable to online SaaS ventures which can easily be purchased by credit card. For a sales process that is more involved, like one that requires multiple meetings and demonstrations, accurately calculating ROAS might prove a little more challenging.
>>MORE: SaaS Quick Ratio: What It Is, Why It Matters, and How to Calculate It
11. CRC, or Customer Retention Cost
Like the CAC, Customer Retention Cost is an umbrella term for a concept spanning several different factors. A successful business will strike a balance between profitability as well as incurred costs stemming from customer services and support.
A company’s CRC must factor in costs ranging in nuance from:
- managerial staff dedicated to customer service
- customer support staff in the customer success department
- gifts and forms of costumer recognition
- resolved customer complaints
Generally, it takes less company resources to retain a happy customer than to gain a brand new one. Beyond that, successfully retaining customers helps to make business scalability trend in the right direction. Remember that customer recognition should not be reserved exclusively at the end of a contract term, otherwise it lands a little hollow—share the love throughout the entirety of the customer lifecycle!
>>MORE: Definition, significance, and calculations for SaaS gross margin
12. CTR, or Click Through Rate
This marketing metric is a simple way to measure advertising efficacy. For online advertisements, platforms like Google Ads, LinkedIn, and Facebook display an array of data, including CTR. First, the number of people who see your advertisement is measured; this is called “impressions.” The CTR measures the amount of folks who click through to a business’ content. For example, if an online advertisement as 100 impressions and 5 clicks, it has a CTR of 5%.
>>MORE: Trends & Benefits For Healthcare SaaS Industry
Conclusion
Learning the language of SaaS is the first step towards communicating powerful ideas. By breaking apart complex concepts into measurable terms, a business is more likely to succeed at eking the most efficiency out of their dollar, increasing the efficacy of their marketing, and maximizing their success with their customers.
Ultimately, learning these 12 terms is the first step towards perfecting what they stand for; all pioneers in the SaaS field are sure to know them by heart!