SaaS Terms 101:  50 Important Concepts You Should Know.

AARRR, CAC, GTM. Are you scratching your head when it comes to understanding SaaS terms? The world of SaaS is full of terminology that can be confusing, so to help you out, here are 50 key SaaS terms and concepts you need to know.

Obviously, this is not an exhaustive list of SaaS terms, or the article would go on forever. But if you know these 50 terms, you know the most important concepts.

So let's start this journey of demystifying SaaS terms together.

ARR is one of the most important SaaS metrics to measure the financial performance. It represents the predictable and recurring revenue that a company expects to generate from its subscription-based products over a one-year period. Contrary to ARR, SaaS businesses often use MRR (Monthly Recurring Revenue) to measure success.

ARPPU refers to the average revenue generated by each individual customer who pays for a particular SaaS product or service. To calculate ARPPU, the total revenue generated from paying users is divided by the total number of paying users during a specific period.

This metric focuses exclusively on customers who have purchased or subscribed to the SaaS offering, excluding non-paying users or those on free trial accounts.

An API refers to a set of rules and protocols that allows different software applications to interact and communicate with each other. It serves as a bridge between different systems, enabling them to exchange data and functionality.

A SaaS API typically exposes a set of endpoints or methods developers can use to perform various operations, such as retrieving data, creating or updating records, managing user accounts, or triggering specific actions within the SaaS platform.

In the context of SaaS, the billing cycle represents the time interval or duration at which customers are invoiced and expected to pay for a particular software. The billing cycle typically starts when a customer subscribes to a SaaS product or service.

It can be monthly, quarterly, semi-annually, or annually, depending on the pricing structure and agreement between the SaaS provider and the customer.

SaaS bootstrapping refers to the process of building and growing a Software-as-a-Service (SaaS) business without relying on external funding or investment. In other words, it involves starting a SaaS company with limited financial resources and gradually growing it using revenue generated from the business itself.

The key benefit is that the SaaS company maintains control over its destiny and avoids diluting ownership by taking on external investors.

CAC represents the total amount of money a company spends to acquire each new customer for its SaaS product or service. The CAC is calculated by summing up all the expenses related to customer acquisition, such as marketing campaigns, advertising, sales team salaries, commissions, and any other costs directly associated with acquiring new customers.

This total is then divided by the number of customers acquired during a specific time period to determine the average cost of acquiring each customer.

The term "churn rate" measures the rate at which customers or subscribers discontinue using a SaaS product over a specific period. To calculate the churn rate, you divide the number of customers who have churned during a specific period by the total number of customers at the beginning of that period. The result is expressed as a percentage.

For example, if a SaaS company starts with 1,000 customers and loses 50 customers in a month, the churn rate for that month would be 5% (50 churned customers divided by 1,000 total customers).

CLTV is a metric that represents the total revenue a business can expect to generate from a customer over the course of their entire relationship. CLTV is calculated by taking the average value of a customer's purchases and multiplying it by the expected length of the customer's relationship with the company.

SaaS conversion rate is a metric used to measure the effectiveness of converting potential customers into paying subscribers. It provides insights into the success of a SaaS company's sales funnel in terms of acquiring and retaining customers.

A higher conversion rate suggests that a larger proportion of potential customers are convinced to subscribe to the SaaS offering. To boost your conversion rate, check out this article "10 A/B Tests to Boost Your SaaS Conversion Rate" and unlock the secrets to achieving high conversion rates.

Cohort analysis means examining and understanding the behavior and performance of a specific group of customers over a particular timeframe. The group, denoted as a cohort, usually comprises customers with similar characteristics or who share a common attribute, such as enrolling for a service during a specific month or using a particular feature.

The primary objective of cohort analysis in SaaS is to gain insights into customer behavior, engagement, and retention patterns within different cohorts. For example, if you have done changes to your product recently, it can be interesting to see how these changes have affected different cohorts over time.

The SaaS term "customer feedback loop" refers to the continuous process of collecting, analyzing, and incorporating customer feedback into developing and improving a SaaS product or service. It is a systematic approach that gathers customer input, interprets feedback, and takes appropriate actions to enhance the product or service.

Learn how to collect customer feedback the right way.

Customer journey mapping is the process of visually representing the various touchpoints and interactions a customer goes through when using a SaaS product or service. It involves mapping out the entire lifecycle of a customer's experience, starting from their initial awareness and consideration of the product all the way through the purchase, onboarding, and ongoing usage stages.

To learn more on customer journey mapping, check out this ultimate guide to customer journeys.

Customer retention rate is a SaaS metric that shows the percentage of customers who continue using a particular software or service over a specific period of time. It’s an important metric as it directly influences a SaaS company's overall revenue and growth potential, as loyal customers tend to generate recurring revenue and may also advocate for the product, leading to new customer acquisitions.

Customer satisfaction can be understood as the overall measure of how well a SaaS solution meets the needs and expectations of its customers. It reflects the extent to which the software delivers value, functionality, and a positive user experience to its users.

Customer satisfaction in SaaS goes beyond simply providing a functional software product. It encompasses various aspects of the customer's interaction with the SaaS provider, including the initial onboarding process, ongoing support and communication, and the overall quality of the service provided.

Customer segmentation helps SaaS companies understand different customer groups' diverse needs and preferences. It allows them to create targeted messaging and personalized experiences that resonate with specific segments.

Customer success is a business approach focused on maximizing the value and satisfaction customers derive from using a SaaS product. It entails actively partnering with customers throughout their entire journey, from onboarding and implementation to adoption, usage, and beyond, with the ultimate goal of driving customer retention, expansion, and advocacy.

So, rather than merely selling a product and moving on, the emphasis is placed on building strong, long-term relationships with customers, proactively guiding them to achieve their desired outcomes.

Feature adoption rate refers to the rate at which users or customers of a product embrace and begin using a specific feature that has been introduced. The feature adoption rate provides insights into how quickly users engage with the introduced feature, which is crucial for evaluating its success and assessing its impact on user satisfaction and overall product performance.

The term "Freemium" is derived from a blend of "free" and "premium." It’s essentially a marketing strategy that aims to attract a large user base by offering a free software version. The idea is that users will find value in the free version and eventually upgrade to the paid version for additional features, functionality, or a higher level of service.

The term "Free trial conversion rate" refers to the percentage of users who sign up for a free product trial and subsequently convert into paying customers. The conversion rate is calculated by dividing the number of users who convert into paying customers by the total number of users who initiated the free trial.

Go To Market encompasses the strategic planning and execution of a company's various activities to bring its SaaS product to market and acquire customers successfully. GTM involves coordinating sales, marketing, and distribution efforts to maximize product visibility, generate leads, and convert those leads into paying customers.

You can download my go-to-market strategy worksheet and apply it to your SaaS company.

Growth hacking refers to a marketing and business strategy focusing on rapid and scalable growth for a company, typically a startup or a small business. It involves using data-driven techniques to acquire and retain customers, increase user engagement, and drive business growth.

Here’s one of the most popular frameworks, called the AARRR framework, commonly used in growth hacking.

Horizontal SaaS refers to a cloud-based software solution targeting a broad range of industries or functional areas rather than being specific to a particular niche or vertical. Horizontal SaaS applications are typically built with flexibility in mind, allowing customization and adaptation to the specific needs of different businesses.

The purpose of SaaS in-app messaging is to facilitate real-time communication and collaboration between users within the software itself. Instead of relying on external messaging platforms or tools, users can interact with each other directly within the application, eliminating the need to switch between different interfaces or applications.

At its core, inbound marketing is about providing relevant information to individuals actively seeking solutions to their problems or information about a particular topic. Instead of interrupting potential customers with intrusive advertisements or cold-calling, inbound marketing aims to establish a genuine connection by offering helpful and educational content. This strategy involves various tactics and channels, such as content creation, search engine optimization, social media marketing, email marketing, and more.

To learn more, see this Marketing Channel Bundle to get traction for your SaaS startup.

Lead generation is the process of identifying and attracting potential customers or "leads" with the ultimate goal of converting them into paying customers. Lead generation often involves capturing information about potential customers who are interested in a company's products or services.

This information typically includes contact details like names, email addresses, phone numbers, and sometimes additional data such as demographic information or specific preferences.

Lead scoring in SaaS refers to the process of evaluating and assigning a numerical value or score to potential leads based on their level of interest, engagement, and likelihood of converting into paying customers.

The scoring system helps identify the most promising leads, enabling businesses to focus their efforts on those with the highest probability of conversion, thus optimizing the lead management process and improving overall sales effectiveness.

MRR is a metric commonly used in the SaaS industry to measure the predictable revenue generated by a subscription-based business model. To calculate MRR, you sum up the monthly revenue generated from all active customer subscriptions during a specific period. This includes the subscription fees paid by both new and existing customers. MRR does not take into account any one-time or non-recurring charges.

MAU provides insights into the level of adoption and customer activity within the SaaS platform. It helps SaaS providers gauge the size of their user base, track user growth or churn, and evaluate user engagement and satisfaction.

MAU specifically focuses on active users who have performed meaningful actions within the product, such as logging in, using features, or generating usage data. It provides a more accurate representation of the product's actual usage and customer engagement.

MVP refers to a basic version of a SaaS application or software developed with the minimum set of features and functionalities required to meet the initial needs of early users or customers. An MVP aims to quickly validate a product idea, gather feedback, and learn from user interactions to iterate and improve the product based on real-world usage and market demand.

NPS is a metric to assess customer satisfaction and loyalty. It measures the likelihood of customers recommending a particular SaaS product to others. The NPS is determined through a survey that asks customers to rate their likelihood of recommending the product on a scale of 0 to 10. Based on their responses, customers are classified into 3 categories: Promoters (score 9-10), Passives (score 7-8), and Detractors (score 0-6). The NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters.

This SaaS term refers to the amount of support tickets a company receives while onboarding new users, customers, or employees. Support tickets are formal requests or inquiries made by users that require assistance or resolution from the support team. So, the number of onboarding support tickets per day indicates the volume of such requests that the support team needs to handle within a 24-hour period.

PaaS refers to a cloud computing model in which a third-party provider delivers a platform for developing, running, and managing applications over the Internet. PaaS offers a complete environment that includes infrastructure, operating systems, development tools, and runtime systems, enabling developers to focus on building and deploying applications without worrying about underlying infrastructure and technical details.

The term "product adoption" refers to the extent to which a product or innovation is accepted and used by its intended users. It indicates how users adopt and embrace the product's features, functionality, and benefits. Successful product adoption involves capturing the target market's attention, convincing potential users of the value proposition, and ultimately facilitating their transition from non-users to active and loyal customers.

A product roadmap is a strategic plan that outlines the development and enhancement of a SaaS product over a specific period of time. It serves as a visual guide to communicating the product vision, key milestones, and planned features to stakeholders and team members.

Product-led growth is a Go-To-Market strategy that focuses on leveraging the product itself to drive customer acquisition, retention, and expansion. Instead of relying heavily on traditional sales and marketing efforts, the SaaS company puts its product at the forefront of its growth strategy.

Key elements of a product-led growth strategy include providing a free or trial version of the product, offering a low barrier to entry for users to get started, and enabling self-service onboarding and adoption.

Product-market fit is a concept that describes the alignment between a product or service and its target market. It signifies the degree to which a product satisfies the needs of a specific market segment. When a product has achieved product-market fit, it has found a sweet spot in the market where it solves the problems of a specific group of customers.

The SaaS renewal rate refers to the percentage of customers who renew their subscriptions to a SaaS product at the end of a defined subscription period. The renewal rate is calculated by dividing the number of customers who renew their subscriptions by the total number of customers whose subscriptions are up for renewal. The result is expressed as a percentage.

Sales enablement refers to the strategic approach of equipping sales teams with the resources, tools, information, and training they need to engage effectively with prospects and close deals. The primary goal of sales enablement is to enhance the productivity and performance of sales representatives, ultimately driving revenue growth for the organization.

Sales-led growth refers to a business growth strategy where the sales team is the primary driver of expansion and revenue generation. In this approach, the sales team drives the company's growth by actively prospecting, acquiring new customers, and closing deals. In a sales-led growth model, the sales team is typically given autonomy to identify and pursue potential customers, develop sales strategies, and meet revenue targets.

Scalability refers to the ability of a SaaS application to handle increased workloads and growing user demands without sacrificing performance or experiencing a significant degradation in service quality. It involves the capability of the SaaS system to efficiently and effectively scale up or down its resources to accommodate varying usage levels.

Self-service refers to a model where users can independently access and manage the software application without requiring extensive assistance from the provider's support team or technical personnel. By offering self-service functionality, SaaS providers enable users to take greater control of their software experience, improving efficiency, and reducing time-to-value.

The "SaaS subscription model" is a business approach in which software is provided as a service, and customers pay a recurring fee to access and use the software over a specific period. In this model, the software is hosted on the provider's servers and delivered to users via the Internet. Instead of purchasing the software outright, customers subscribe to it, usually monthly or annually.

Time-to-Value refers to the amount of time it takes for a customer to derive tangible business value from the SaaS solution they have implemented. It measures the speed and efficiency with which a SaaS product delivers its intended benefits to the customer.

SaaS upselling involves the practice of encouraging customers who have already subscribed to a SaaS product to upgrade or purchase additional features, plans, or services offered by the same provider. This approach maximizes revenue by enticing existing customers to expand their usage or adopt higher-tier offerings.

UAT is a software testing phase that focuses on determining whether an application meets the requirements of its intended users. During UAT, individuals or a group of end users, often referred to as "UAT testers", perform various tests on the software to evaluate its usability, functionality, and overall user satisfaction. The goal is to validate that the software performs as expected in a real-world environment.

The term "SaaS UX" describes the way users interact with an application. It encompasses the overall design, functionality, and usability of the product, focusing on creating a positive and intuitive experience for the end users. SaaS UX involves carefully considering factors such as user interface design, navigation, responsiveness, visual aesthetics, and overall user satisfaction.

The process of introducing and guiding users through the initial stages of using a SaaS application is called user onboarding. It involves facilitating a smooth and a seamless experience for new users as they navigate the platform and familiarize themselves with its features.

User onboarding aims to provide a positive introduction to the SaaS product, helping users understand its value, and learn how to use it effectively. Check out this free user onboarding checklist.

A SaaS user story is a narrative description that captures a specific user's interaction or experience with a SaaS application. It serves as a tool to understand user needs, define product features, and guide development efforts. User stories typically focus on the user's goals, the value they expect to gain from the software, and the tasks they need to perform within the application.

Usage-based pricing refers to a pricing model where customers are charged based on the level of usage of a product. Instead of paying a fixed or flat fee, customers are billed according to their actual usage, which is typically measured and tracked by the provider. Usage-based pricing offers flexibility and cost-effectiveness, as customers only pay for what they use.

To learn more about pricing, check out this free SaaS pricing cheatsheet.

Vertical SaaS solutions are developed to cater to the specific needs of a particular industry or vertical market. The advantage of vertical SaaS lies in its deep understanding of industry-specific needs, which allows for more customized and targeted solutions.

I hope this guide has provided you with the clarity you were seeking in the realm of SaaS terminology. By demystifying 50 key SaaS terms in an organized manner, I aimed to equip you with the knowledge you need to confidently navigate the world of SaaS.

To learn how to build your own SaaS business successfully, feel free to check out my SaaS Bundle. It's packed with proven frameworks and worksheets that'll help you navigate the world of SaaS. Whether you're a newbie founder or a SaaS pro looking to level up, this bundle has got you covered.

Keep exploring, keep learning, and never hesitate to reach out to me if you have any further questions. Happy SaaS-ing!