Have you ever read a text that included words like EBITDA or COGS and felt lost?
You are not alone. It seems that business people love to use confusing acronyms. CAC, LTV, NRR, GRR, CapEx, NPS…
Engineers might succeed in their careers without understanding any of it, but engineering managers don’t have this privilege. If you truly want to have influence, convince stakeholders, and impact the business, you need to learn to speak the business language.
Today, I’m going to cover the 20 most common terms with simple and engineering-oriented explanations.
1. Burn Rate
The amount of money a company ‘loses’ each month. A company that spends $250,000 each month and has a revenue of $50,000 a month has a burn rate of $200,000. If it has $1,000,000 in the bank, it has five months before it runs out of cash (and you and your people lose their jobs).
2. Default Alive/Default Dead
This term comes from Paul Graham’s article:
Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left? Or to put it more dramatically, by default do they live or die?
A startup might have a high burnrate, but if it has healthy growth (and good margins, which will be covered in a moment) - it might reach a break-even point before it runs out of cash.
3. COGS (Cost of Goods Sold)
The direct costs of delivering your service/product. Those are the costs that will increase with additional customers.
These include things like cloud costs (compute and storage), third-party software licenses, operations costs (if your product requires some labor), customer support and customer success salaries, and so on.
It’s important to note that not all cloud costs are considered COGS. For example, if you have a running k8s cluster, maybe the current resources will be enough to serve 10x customers, so the compute costs of the VMs won’t be part of the COGS.
On the other hand, your network traffic and storage will probably increase at the same percentage as your user growth, so it’s COGS.
4. Gross Margin
The percentage of revenue remaining after subtracting COGS. It shows how efficient you are at delivering your services. A higher gross margin means a company is making more money from each dollar of revenue.
Gross margin is calculated by subtracting COGS from revenue and dividing that figure by the total revenue. So if you have a $1,000,000 revenue, and your COGS is $500,000, you have a 50% gross margin.
For some companies, the gross margin can be in the 20s or 30s. For example Uber (33%), which needs to pay salaries for its drivers, or Tesla (18%), which has many expenses related to creating the car.
This means that for every 100$ Uber makes in revenue, it ‘keeps’ 33$ after direct expenses, and Tesla keeps 18$.
For classic SaaS companies like Figma or Miro, the gross margins are much higher, in the 80s and even 90s (Figma is at ~90%).
For some companies, like OpenAI, it can even be negative - it costs them more to provide you service than you pay for the subscription.
5. OpEx (Operating Expenses)
The ongoing costs needed to run your company on a day-to-day basis, such as:
Engineering salaries
Rent and utilities
Marketing.
These are not directly related to the production of goods or services. Theoretically, if you close all the offices and fire 80% of non-production employees, your company will continue to function (will probably be called “The Twitter Experiment” in the upcoming years…).
6. Net Margin
The percentage of revenue remaining after all expenses - both COGS and OpEx - are deducted from total revenue. It shows the overall profitability of the company after covering all operational and production costs.
A higher net margin indicates that the company is effectively managing its expenses and turning a larger portion of revenue into profit.
Let’s go back to the Figma example. Your COGS is low, and your gross margin is 90%. But maybe you spent $1,000,000,000 on marketing… That’s where Net Margin comes in - it shows whether you are actually a profitable and healthy business.
A small break to share an example of how I used those terms in my career.
My last team worked on internal products, so it was difficult to measure our impact. I was frustrated with the initiatives the PM led and believed we needed a different direction.
Then, I realized our team directly impacts the company’s gross margin: for every $1 customers pay, we spend 50 cents on operations (mainly drone pilots), giving us a 50% margin. The more we improve our tools, the more fields each drone pilot can fly each day, lowering our costs and increasing our margins. Our company had a goal of reaching a margin of 60%.
This understanding helped me prioritize work focused on lowering costs. For example, with plans to grow X4 in two years, we couldn’t hire 4X more support engineers. Solving small problems now became critical to keeping - and increasing - our margins.
By understanding gross margin and how our team impacted it, I was able to speak the same language as the PMs and make a more compelling case for my own initiatives.
Now we are going to cover 2 complex terms - don’t lose me here, numbers 9-20 are much simpler! :)
7. CapEx (Capital Expenditures)
This one is a bit more complex: CapEx refers to investments in physical assets (such as buying servers, cars, buildings). These are one-time expenses intended to improve or expand the business over time. Unlike COGS and OpEx, which are treated as expenses, CapEx is an asset, and is depreciated over time.
Let’s see what this means:
You can’t get back the money you spent on COGS and OpEx, it’s pure expense. But imagine you buy a car - it’s an asset you now own. After 2 years you can sell it, and get some money back. Each year though, the price of the car falls. That fall is called depreciation, and it is calculated as part of the OpEx of each year.
8. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
The most complex one (I promise!):
EBITDA tries to measure the ‘pure’ profitability of a company, by not calculating expenses that can vary across companies or industries, like interest payments, taxes, and depreciation.
Why do we need this strange metric?
Comparison: EBITDA allows for more straightforward comparisons between companies in the same industry, especially when companies have different tax rates, different loans and interest payments, or different depreciation schedules.
Profitability Analysis: It helps understand how efficiently a company is running its core business operations, without the effects of non-operating costs or accounting choices.
So if a company is ‘EBITDA-profitable’, it means that it is in a healthy situation, but not necessarily profitable yet.
9. ARR (Annual Recurring Revenue)
The total predictable revenue a company expects to make in a year from customers who are paying for subscriptions (or ongoing services). For example, if you have 100 customers each paying $1,000 per year, your ARR is $100,000. It's a way for companies to estimate how much income they will get from these customers over the next year.
10. TAM (Total Addressable Market)
TAM estimates how much revenue a company could earn if it captured every potential customer. For example, if your SaaS product targets a $1 billion market, TAM shows the total opportunity.
This is especially important when you need to raise money from VCs.
11. CAC (Customer Acquisition Cost)
CAC is the cost of acquiring one customer. If your company spends $50,000 on a marketing channel and gains 500 customers, the CAC is $100 per customer. Companies can throw millions of dollars into Google ads and ‘buy’ customers, which will results in a very high CAC.
12. LTV (Lifetime Value)
LTV predicts the total revenue a customer generates over their relationship with your company. If your product costs $100/month, and an average customer stays 14 months, your LTV is $1,400.
A classic initial goal is to have LTV>CAC. So if you need to spend $1,300 to get that customer, but they earn you $1,400 - you are in a good position to try scaling that.
For a more mature business, a common goal is a LTV:CAC ratio of 3:1 or better. Remember, you need some money for your COGS and OpEx. Generally, 4:1 or higher indicates a great business model. (Although if it’s too high, it might mean you could be growing faster and are not investing enough in marketing).
13. MoM (Month-over-Month Growth)
MoM tracks monthly changes in metrics like revenue or users. A 10% MoM growth means revenue increased by 10% compared to the previous month. YoY means the same by years.
14. Retention
What percentage of your customers are staying with you, YoY or MoM. The numbers are very different between industries and types of products (B2B / B2C), and it’s worth knowing the benchmark for your company.
15. Churn
The opposite of retention. If 5% of users leave you every month, you have a retention of 95% and a churn of 5%.
16. NPS (Net Promoter Score)
Used to measure customer loyalty and satisfaction by assessing how likely customers are to recommend a company, product, or service to others.
It is calculated based on responses to a single question: “On a scale of 0 to 10, how likely are you to recommend us to a friend or colleague?”
Customers are categorized as Promoters (9-10), Passives (7-8), and Detractors (0-6). The NPS score is then calculated by subtracting the percentage of Detractors from the percentage of Promoters. A higher NPS indicates stronger customer loyalty and satisfaction.
So if 40% of the customers surveyed answered 9-10, 30% 7-8, and 30% 0-6, your NPS is 10%. Above 0 counts as good, while above 30% is excellent.
17. AARRR Framework
AARRR tracks five stages of the customer journey:
Acquisition - getting new customers
Activation - helping the customers reach the ‘aha’ moment
Retention - making the customers stay
Revenue - monetizing the customers
Referral - help customer bring their friends
As an engineering manager, it’s important to know what the company is currently focused on. If your retention is very low, maybe you should work more on features that show the value to customers. But if your activation is low - you should probably fix the onboarding first.
18. NRR (Net Revenue Retention)
Measures revenue growth from existing customers, factoring in upsells and churn. A 120% NRR means customers spent 20% more this year than the previous one. NRR over 100% means your company is growing even without bringing in new customers, which is a great situation to be in (probably means you found product-market-fit).
19. GRR (Gross Revenue Retention)
Measures how much revenue you keep from existing customers, without upsells. Let’s say you have 10 customers, each paying you $1000 a year. 9 of them left you, but 1 signed a contract for $20k. In this case, your NRR will be 200% (you grow from $10K to $20k).
Your GRR will be only 10%. It counts only the ARR you were able to retain, so it can never be over 100%.
20. Moat
A moat is a competitive advantage that protects a company from competitors, such as unique features or a strong brand. In the age of AI, understanding what is the moat of your company (and how to increase it) is crucial.
Final words
This is by no means a comprehensive list! You didn’t talk about funnels, cohorts, valuations, dilution and cap tables, and many other business terms.
My goal was to show you how easy it is to learn those terms and share a couple of cases where it was useful in my career.
I really suggest writing down terms you were ‘avoiding’, and asking ChatGPT to give you simple explanations for them. You can never know when a deep business understanding might come in handy!
What I enjoyed reading this week
The trouble with "good enough" by . Why most people think they reached the ‘diminishing returns’ point too soon.
Engineer to CEO in 3 years: These key lessons got me there by and , sharing a crazy and inspiring story (lots to learn from it!).
Everything you need to know about negotiating tech offers by from . I’ve read a lot about negotiations, but this one is truly golden.
Why building a “simpler” product is simply a bad idea by . A thought provoking one.
