SaaS Unit Economics

Unit economics answer one question: does each customer generate more revenue than they cost? If the answer is no, growth actually makes things worse. You're spending more to acquire customers who don't pay back their acquisition cost before they churn.

LTV: what a customer is worth

Customer lifetime value (LTV) estimates the total revenue a customer generates over their entire subscription. The simplest formula: LTV = ARPU / Monthly Churn Rate. A $49/month customer with 5% monthly churn has an LTV of $980.

LTV is where churn hurts most directly. Cutting monthly churn from 5% to 4% increases LTV by 25%. That's a $245 improvement per customer without changing price or product. It's why reducing churn, particularly involuntary churn from failed payments, is one of the most capital-efficient investments a SaaS business can make.

CAC: what a customer costs

Customer acquisition cost (CAC) is your total sales and marketing spend divided by new customers acquired in the same period. If you spent $50,000 on marketing and sales last month and signed 50 customers, your CAC is $1,000.

Average SaaS CAC runs around $702 according to industry benchmarks, but the range is enormous. Self-serve products with organic acquisition might see $50-200. Enterprise sales-led products can exceed $10,000. Here's the thing: the number only matters in relation to LTV.

LTV:CAC ratio

This is the headline metric. A healthy SaaS business targets at least 3:1. That means each customer generates three times what they cost to acquire. Below 1:1 and you're literally losing money on every customer. Between 1:1 and 3:1, the business works but the margins are thin. Above 5:1 might mean you're underinvesting in growth.

In our experience, most SaaS businesses first discover this ratio is broken when they try to raise funding.

The ratio improves two ways: increase LTV (reduce churn, increase ARPU) or decrease CAC (improve conversion rates, build organic channels). Recovering failed payments through dunning increases LTV directly by extending customer lifetimes, often by several months per recovered customer.

CAC payback period

Payback period measures how many months it takes for a customer to generate enough gross margin to recoup their acquisition cost. Payback = CAC / (ARPU × Gross Margin %).

Under 12 months is strong for most SaaS businesses. 12-18 months is acceptable. Above 18 months starts straining cash flow, especially for bootstrapped companies that can't fund long payback cycles with venture capital. A $1,000 CAC with $100/month ARPU and 80% gross margin gives you a 12.5-month payback.

SaaS quick ratio

The quick ratio measures growth efficiency: (new MRR + expansion MRR) divided by (churned MRR + contraction MRR). Above 4 is the benchmark for healthy growth. It tells you whether your growth is sustainable or just outrunning losses temporarily. Shrinking the denominator, by recovering churned revenue, often moves this metric faster than growing the numerator.