Senior engineering leaders are expected to understand the business. There is a lot of sales, marketing, customer success, and financial jargon that arrives with that responsibility. This is a short glossary of common terms and why they matter.
ARR - Annual Recurring Revenue
Why: ARR tells you how much revenue the company brings in on an annual basis from subscriptions.
How: total subscription income per year, plus recurring revenue from add-ons or upgrades, minus revenue lost from cancellations.
Target: bigger is better.
CAC - Customer Acquisition Cost
Why: CAC shows how much the company spends to sign a new customer.
How: add up sales and marketing spend in a period and divide by the number of customers acquired in that period.
Target: smaller is better.
LTV - Lifetime Value
Why: LTV estimates how much revenue you can expect from a customer while they remain a customer.
How: calculate average purchase price and multiply by the number of times they purchase or renew.
Target: bigger is better.
LTV/CAC Ratio
Why: this compares the lifetime value of a customer to the cost of bringing them onboard. It tells you whether the acquisition strategy is sustainable.
How: LTV divided by CAC.
Target: below 1.0 destroys value. Above 1.0 may create value. A common rule of thumb is that above 3.0 is good.
Net Monthly Recurring Revenue Growth
Why: this measures the month-over-month change in net MRR as new revenue is added, customers churn, and accounts expand or contract.
How: net MRR this month minus net MRR last month, divided by net MRR last month.
ARPA - Average Revenue Per Account
Why: ARPA shows how much each account generates and can help model future income.
How: ARR divided by number of accounts, or MRR divided by number of accounts for a monthly view.
Target: bigger is better.
EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization
Why: EBITDA focuses on operating profitability and cash flow. It is often used as a proxy for operating cash flow.
How: net income plus taxes, interest expense, depreciation, and amortization.
Target: a higher EBITDA margin generally means stronger operating profitability.