The revenue model for a SaaS company is primarily subscription revenues that are received monthly from their enterprise customers. This revenue stream is referred to as recurring revenue. The monthly recurring revenue, or MRR and month over month growth are both key metrics that a SaaS company and VC investors monitor closely. Some other key metrics are churn, which measures the loss of a paying customer or contract, and new customer count, which reflects the number of customers that have just signed up for the service.

The first step in setting up a forecast model for a B2B SaaS company is the revenue forecast. There are three key areas in a revenue forecast of subscription or recurring revenues, which are new customer accounts, churn and MRR, or monthly recurring revenue. These three comprise the core SaaS waterfall metrics that investors often refer to when evaluating a potential investment in a SaaS-based company.

Let's first review each of these components. MRR or monthly recurring revenues is the key metric that measures the amount of recurring revenues from the current base of executed customer contracts that have a minimum duration of one year.

The A a R or annual recurring revenues is calculated simply by multiplying the MRR by 12 or by summing the MRR of 12 consecutive months. In a forecast model to calculate the MRR for a particular month, a SaaS company will start with the MRR from the end of the previous month. To this, the company will hope to add new customers by agreeing new contracts with those new customers. Revenues for the month coming from these new customer contracts are called new MRR. To forecast the new MRR for a company, you'll have to forecast the new customer account and the subscription price. In addition, in each month, a SaaS company will lose customers and associated contract revenues from customers canceling their contracts, either through normal attrition or increased competition. The churn, also referred to as lost MRR, is the amount of monthly recurring revenues lost in that month. The monthly churn rates equals the number of customers lost in the current month, divided by the total number of customers at the end of the prior month. If the churn rate is 1%, then 1% of the company's existing customers at the start of the month will be lost by the end of the month. Customer retention is critical to the success of a SaaS company. A high churn rate means that the company must spend extra money replacing lost customers. Over a long period of time a high churn rate is unsustainable and impacts profitability and the overall valuation of the business. And a company that has a sustained low level of churn suggests to a VC investor that this company has demonstrated that they are better at retaining their customers and therefore may have a longer customer lifetime value. For later stage SaaS companies with multiple SaaS products and larger sales teams, there are additional customer contract situations. In addition to new MRR and lost MRR, which are categorized as expansion, MRR and contraction, MRR expansion. MRR is growth that comes from existing customers during the month. For example, increasing user counts in their contract, increased pricing or product upgrades. This will increase revenues for the company, but won't increase the number of customers expansion. MRR is calculated as the prior month. MRR multiplied by the expansion MRR rate contraction. MRR would be the opposite, where a customer retains the contract for the length of the contract, but at a lower MRR resulting from a reduced number of users, reduced products, or price reduction, reducing revenue for the company. The contraction MRR is calculated as the prior month. MRR multiplied by the contraction MRR rate.