Software and SaaS

• ARR (annual recurring revenue)

  The yearly value of all active subscriptions today; MRR is the monthly version. It is the size of the recurring business, not the revenue already booked. Glossary: ARR (annual recurring revenue)

• Net revenue retention (NRR)

  Revenue this year from last year's customers divided by what they paid last year, after upsell, downgrades and churn. Above 100 percent means existing customers grow on their own. Glossary: Net revenue retention (NRR)

  Typical: median about 101 percent for private B2B SaaS in 2025; companies above 110 percent grew faster than the median[8]

• Gross revenue retention (GRR)

  The same as NRR but without upsell, so it can never pass 100 percent. It shows how much revenue leaks away.

  Typical: median about 91 percent; about 95 percent where contracts are above USD 250,000 a year[8]

• Churn

  Customers (logo churn) or revenue (revenue churn) lost in a period. Losing one big customer can matter more than losing many small ones. Glossary: Churn

  Typical: often about 5 to 10 percent of revenue a year for business software: a median gross revenue retention of 91 percent means about 9 percent is lost; Salesforce reported revenue attrition of about 8 percent[8]

• Gross margin

  Revenue minus the cost of delivering the service, divided by revenue. It falls when hosting or AI costs grow faster than prices. Glossary: Gross margin

  Typical: about 70 to 80 percent; median subscription gross margin about 81 percent in one 2025 survey[9]

• CAC (customer acquisition cost) and new CAC ratio

  Sales and marketing spend to win new customers. The new CAC ratio is that spend divided by the new ARR it brings in. Glossary: CAC (customer acquisition cost) and new CAC ratio

  Typical: median about USD 2.00 of sales and marketing per USD 1.00 of new customer ARR in 2024[9]

• CAC payback

  Months of gross profit from a new customer needed to repay what it cost to win them. Glossary: CAC payback

  Typical: about 12 months is often called good, but it depends heavily on contract size, so compare with firms that sell at a similar price; in one 2025 survey, contracts above USD 250,000 a year paid back faster than mid-sized ones[9]

• Rule of 40

  Revenue growth rate plus profit margin (often free cash flow margin). A score of 40 or more is seen as a healthy balance of growth and profit. Glossary: Rule of 40

  Typical: only about one third of software companies reach it, and fewer stay there[3]

1. 1How does ARR move from the start to the end of the year: new customers, expansion, and churn and downgrades?
2. 2What are net and gross revenue retention, by customer size and by the year customers joined (cohort)?
3. 3Who are the customers (small firms, mid-sized, enterprise) and how do we sell to each: online, sales team or partners?
4. 4What is gross margin, and how do hosting and AI costs move as usage grows?
5. 5How long does it take to pay back the cost of winning a customer?

1. 1

   Step 1: Cloud infrastructure (renting computers and storage)

   Medium margin

   Cloud providers such as Amazon Web Services, Microsoft Azure and Google Cloud

   Most SaaS firms rent rather than own servers. This layer is covered in the data centres, cloud and AI infrastructure brief.

2. 2

   Step 2: AI models (a new input since 2023)

   Margin varies

   Model makers such as OpenAI, Google and Mistral (France), or open models run in-house

   Paid per use, so AI features add a cost that rises with customer usage.

3. 3

   Step 3: Build the product (research and development)

   Fat margin

   The software company's engineers and product teams

   Mostly a fixed cost; once built, the same code serves every customer.

4. 4

   Step 4: Sell (go-to-market)

   Medium margin

   The vendor's sales teams, self-serve websites, resellers and cloud marketplaces

   Often the biggest cost line in a growing SaaS company.

5. 5

   Step 5: Implement and integrate

   Thin margin

   IT services firms and consultancies such as Accenture, TCS and Infosys, or the vendor itself

   People-heavy project work, priced by the day or by the project.

6. 6

   Step 6: Support, customer success and renewal

   Fat margin

   The software company

   Keeping and growing existing customers is where most of the lifetime profit is made.

Most profit sits with software owners that customers find hard to leave (systems of record such as accounting, HR and customer data), because switching costs let them renew and raise prices. Cloud providers earn a steady toll underneath. Implementation partners earn thinner, people-based margins.