Every year, ICONIQ publishes our cornerstone research to help define what it takes to build enduring software companies – pairing proprietary data with the real-world insights of operators and founders. However, the different terms and metrics used to describe software key performance indicators can be confusing and not well-documented. We often get questions from both new and established founders and finance teams on the best ways to calculate a certain metric.
We are excited to share this glossary of common software terms and metrics as a companion tool to our Topline Growth & Operational Efficiency report. This is not intended to be a definitive guide to software accounting. Rather, we hope to share some best practices and common approaches we often see companies use to most cleanly define and track these metrics on an ongoing basis. We also believe this is a topic that will only benefit from increased knowledge sharing and welcome any additional considerations or best practices you may have.
Select considerations and views are included below, with more detail included in the full report.
The ARR Funnel
Because of the recurring nature of software businesses, it can be challenging to distill a company’s real-time performance. An ARR waterfall is one of the fundamental building blocks of financial planning, allowing us to understand where a company is at the beginning of a period, the puts and takes of ARR in that period, and where you landed at the end of the period. We believe one of the best ways to measure the health of your business is to look at what happened with new customers (new logo ARR), your install base (expansion, churn rate), and the sum of all the above (net new ARR) on both a quarterly and annual basis. This same funnel can also be built for contracted annual recurring revenue (CARR), which takes into account signed, but not live, contracts.
Software Revenue Recognition
There are different ways to measure revenue for a software business, which differ based on the contract length and terms. Understanding and tracking these different metrics allow companies to more confidently predict monthly revenues and also identify any concerning trends (e.g., a significant lag between bookings and revenue).
Categorizing Spend: Where should customer success be allocated?
Software companies categorize spend across operating expenses, including both people and non-people related operating spend across S&M, G&A, and R&D teams, and cost of revenue (COR or COGS) expenses, including costs associated with delivering a product and servicing customers.
Where certain line items of spend are allocated will be dependent on each company’s business model. It may make sense for a company that has a customer success team focused more on implementation and customer support to allocate costs related to this team as COGS, whereas for other companies where customer success handles renewals and expansions, costs related to this team may roll up to sales & marketing operating expenses. While there is not a straightforward answer for where to allocate CS employees and costs between COGS and OpEx, below is a framework we often see SaaS companies use to make this decision:
Evaluating Success in the Age of AI
The way we measure success in software has changed, especially in the age of AI. Traditional metrics like revenue and user growth still matter, but they no longer tell the full story. Today, product engagement and business outcomes are emerging as two of the most important signals of value, particularly for AI-native and AI-enabled products.
As these tools become deeply embedded in users’ day-to-day workflows, consistent and meaningful engagement reflects more than just adoption. It indicates that the product is delivering real impact. Metrics like power user ratio and trial-to-paid conversion help assess not just usage but product stickiness, showing how deeply the product is integrated into a user’s routine. On the outcomes side, tracking tangible results such as cost savings, operational efficiency, or better decision-making helps validate the ROI for customers.
Together, engagement and business outcomes are leading indicators of long-term growth, retention, and expansion, especially in an AI-driven world where value must be both visible and measurable.
Published:
September 3, 2025
