The small software glossary: 42 terms you'll meet building a product

Every field has its own vocabulary, and building a small software product drags you through several at once: finance, payments, tax, hosting, databases, email. This glossary explains the terms you'll actually meet, in the order you'll probably meet them, with a worked example where a number helps.

Money and pricing

MRR (monthly recurring revenue). What your subscriptions bring in each month. 100 customers at $20 a month is $2,000 MRR. Yearly plans count as one-twelfth per month: a $200 yearly plan adds $16.67 to MRR.

ARR (annual recurring revenue). MRR × 12. Mostly used once a product is larger; $2,000 MRR is $24,000 ARR.

Churn. The share of customers who cancel in a period. If 5 of 100 cancel this month, monthly churn is 5%. At 5% a month, a typical customer stays about 20 months.

Net revenue retention. Revenue this month from last month's customers, divided by last month's revenue. Above 100% means upgrades outweigh cancellations.

ARPU (average revenue per user). MRR divided by paying customers. Useful once you have more than one price.

Gross margin. Revenue minus the costs of delivering the product (hosting, database, email, card fees), as a share of revenue. A $20 product with 100 customers and a $167 bill keeps about 92%. See costs at 0, 100 and 1,000 customers.

Annual plan discount. The saving for paying yearly. "Two months free" means paying for 10 months and getting 12, a 16.7% discount. See Monthly vs yearly.

Lifetime deal. A one-time payment for permanent access. Brings cash now, costs forever.

Payments and tax

Payment processor. The service that charges cards for you and pays you, minus a fee per transaction.

Transaction fee. The processor's cut of each payment, usually a percentage plus a fixed amount, such as 2.9% + 30¢ on US cards^[1]. On $20 that's $0.88. See card fees.

Billing fee. An extra percentage some processors charge for managing subscriptions, such as 0.7% of billing volume^[1].

Merchant of record (MoR). A company that legally sells your product on your behalf and handles sales tax and VAT, for a higher fee per sale. See Selling abroad.

Refund. Returning a payment to the customer. On a common processor, the original processing fees aren't returned^[2], so a refunded $20 still costs you about $0.88.

Dispute (chargeback). When a customer asks their bank to reverse a payment instead of asking you. Costs a fee per dispute, $15 on a common processor^[1], on top of the lost payment.

Webhook. A message one service sends to your server when something happens, such as "payment succeeded". Your product uses it to grant or remove access. See building with an AI assistant.

VAT. Value-added tax, charged in the EU, UK and many other countries, often based on where the customer lives for digital services.

Sales tax nexus. The connection to a US state that obliges you to collect its sales tax, which can be triggered by sales volume alone.

Reverse charge. For many business-to-business sales across borders, the buyer accounts for VAT instead of the seller.

Hosting and infrastructure

Hosting. Where your product's code runs and its pages are served from. See the hosting comparison.

Deploy. Publishing a new version of your product. On some hosts, each production deploy uses part of a monthly allowance; on Netlify, 15 credits each^[6].

Credits. A single unit some hosts use to measure all usage (deploys, bandwidth, compute, requests) against one allowance.

Bandwidth / egress. Data sent from a service to your users. Usually the expensive part for file-heavy products: beyond an included amount, one common database charges $0.09 per GB^[3]. See four products, four bills.

CDN. A network of servers around the world that keeps copies of your pages and files close to users, so they load faster.

Serverless function. A small piece of server code that runs on demand instead of on a server you manage.

Cold start. The short delay when a function or database wakes up after being idle.

Scale to zero. When a service shuts down compute while unused, saving money at the cost of a cold start. One database does this after five minutes idle and wakes in a few hundred milliseconds^[4].

Environment variable. A setting stored outside your code, such as an API key, so secrets never live in your repository.

Preview deployment. A temporary copy of your site for a change, so you can check it before it goes live.

Rollback. Going back to the last working version after a bad deploy. Know how before launch day.

Data and users

MAU (monthly active users). Users who did anything in a month. Many services price on it.

MRU (monthly retained users). Users who come back at least a day after signing up. One login service counts this instead of MAU^[5], so one-time visitors don't count.

Row-level security. Database rules that decide which rows each signed-in user can read or change. The main defence against one customer seeing another's data.

Paused project. A free database that stops after a period with no activity, a week on one common option^[3], until you restore it. See Free plans, mapped.

Backup. A copy of your data you can restore. Paid database plans often include daily backups; free plans may not.

Point-in-time recovery. Restoring a database to any moment within a window, not just to last night's backup. Usually a paid add-on.

Email

Transactional email. Emails triggered by a user action: sign-in links, receipts, notifications. Different from marketing email, and more important to deliver.

Daily sending limit. The maximum emails a plan sends per day, 100 on a common free plan^[8]. See Free tiers that break on launch day.

SPF. A DNS record listing which services may send email for your domain.

DKIM. A signature added to each email, checked against a public key in your DNS.

DMARC. A DNS policy telling inboxes what to do when SPF and DKIM checks fail, and where to send reports. See Why your emails land in spam.

Spam complaint rate. The share of recipients who mark your email as spam. Gmail asks senders to stay below 0.1% and never reach 0.3%^[7]: three complaints per 1,000 emails.

Sending subdomain. A subdomain such as mail.yourproduct.com used only for product email, keeping its reputation separate from your own inbox.

Missing a term?

If you met a word while building that isn't here, tell us and we'll add it.