How to Answer “Which SaaS metrics matter most and how do you interpret them (NRR, CAC, LTV, churn)?” in Venture Capital Interviews

Start by stating the lens you use to how to interpret SaaS metrics: Is revenue durable, and can the company scale acquisition efficiently? That immediately makes your answer more VC-relevant than reciting formulas.

Then set an order of operations:

• Retention/expansion first: Net Revenue Retention and churn tell you whether the product creates ongoing value and whether growth is “real” vs leaky.
• Cost to grow next: CAC (and payback) tells you what it costs to add ARR and whether growth is getting harder.
• Value over time last: LTV ties retention and gross margin into a long-run unit economics view.

Add one smart clarifier without derailing: “Are these metrics segmented by customer type and shown by cohort vintage?” That signals diligence instincts and avoids over-interpreting blended numbers.

Define Net Revenue Retention (NRR) as: revenue from a starting cohort after expansions − contractions − churn, divided by starting revenue over a period. Then immediately interpret it in tandem with two companion measures:

• Gross Revenue Retention (GRR): isolates leakage (downsells + churn), helping you see if NRR is masking problems.
• Churn: clarify logo churn (customer count) vs revenue churn (ARR), and whether churn is gross or net.

How to interpret:

• High NRR is generally a strong signal of expansion and pricing power, but you want to know if it’s broad-based or driven by a few large accounts.
• Weak GRR with strong NRR can indicate a “leaky bucket” where expansion covers losses—riskier if expansion is concentrated.
• Look for cohort curves: improving retention in newer cohorts suggests product/onboarding/ICP refinement; deterioration can indicate competitive pressure or mis-selling.

Close this step with a VC-style takeaway: retention metrics are the cleanest early indicator of product-market fit and durability.

Define Customer Acquisition Cost (CAC) carefully: sales & marketing costs attributable to acquiring customers divided by new customers or new ARR in the period. Then show you know the common traps: period mismatch (spend now, ARR later), whether costs are fully loaded (incl. commissions/tools), and whether you’re looking at blended vs segment CAC.

Interpret CAC through:

• CAC payback period: CAC divided by the monthly gross profit from new ARR (using gross margin or contribution margin). This is the cash-efficiency bridge between CAC and runway.
• Sales efficiency trend: are you getting less incremental ARR per incremental spend as the company scales?
• Segmentation: enterprise CAC can be higher but still attractive if GRR/NRR are strong and payback is acceptable.

If CAC is rising, don’t just label it “bad.” Diagnose likely drivers: moving upmarket, channel saturation, competitive bid-up, or longer sales cycles—and tie it back to whether retention/expansion is strong enough to support it.

Define Lifetime Value (LTV) as the lifetime gross profit generated by a customer. If you reference a shortcut (e.g., LTV ≈ ARPA × gross margin ÷ churn), add the correct caveat: it’s only reasonable when churn is stable and the revenue profile is not heavily front- or back-loaded.

Interpretation points that matter in interviews:

• LTV should use gross margin, not revenue. If gross margin is low or support/infra costs scale with usage, “LTV” can be overstated.
• The churn input must match the business: logo churn for customer counts, gross revenue churn for dollars lost, and net churn/NRR dynamics for expansion-led models.
• Prefer cohort-based gross profit contribution over time where possible, especially for usage-based or ramping contracts.

Then connect it to underwriting: evaluate LTV/CAC alongside payback. A high LTV/CAC that requires very long payback can still be unattractive if the company is cash-constrained or growth slows.

End with a single integrated “story” rather than four mini-stories:

• NRR + GRR + churn tell you if the product retains and expands (durability).
• CAC + payback tell you if the go-to-market motion scales efficiently (repeatability).
• LTV (on gross profit) tells you whether the long-run unit economics justify the acquisition engine (profit potential).

Include quick red flags (choose 2–4): NRR driven by a handful of customers, GRR deterioration hidden by expansion, CAC calculated on incomplete S&M or mis-timed periods, LTV built on revenue not margin, churn masked by annual prepay or short history.

Close with what you’d validate in diligence: cohort retention and expansion by segment, customer concentration, fully loaded CAC and ramp assumptions, and unit economics by ICP/channel. This lands the answer at an associate level: decision-oriented and testable.