Unit economics for SaaS: metrics that matter
Unit economics determine whether your business can scale profitably. According to Bessemer's State of the Cloud, companies with strong unit economics trade at 2x the valuation multiples of peers. Understanding and optimizing LTV, CAC, and related metrics is essential for sustainable growth.
Why unit economics matter
According to OpenView's Expansion Benchmarks, startups with LTV/CAC above 3x grow 50% faster than those below while maintaining profitability.
Core SaaS metrics
CAC
Customer Acquisition Cost: total sales and marketing spend per new customer
LTV
Lifetime Value: total revenue from a customer over their lifetime
LTV/CAC
Ratio determining unit profitability. Target: 3x+
Payback Period
Months to recover CAC. Target: <12 months
NRR
Net Revenue Retention: expansion minus churn. Target: >100%
Gross Margin
Revenue minus COGS. Target: >70%
The Magic Number: LTV/CAC tells you whether you have a viable business model. Below 1x means you're losing money on each customer. 3x+ is the benchmark for healthy SaaS businesses.
Calculating CAC
Marketing Spend
Paid ads, content, events, tools, agency fees.
Sales Costs
Salaries, commissions, tools, travel.
Overhead Allocation
Portion of G&A supporting sales/marketing.
Typical CAC by Segment ($)
Calculating LTV
ARPU
Average Revenue Per User per month
Gross Margin
Multiply by gross margin %
Customer Lifetime
1 / monthly churn rate = lifetime in months
Expansion
Add expected expansion revenue
Typical LTV Composition
LTV/CAC benchmarks
LTV/CAC Ratio Interpretation
| Feature | LTV/CAC < 1x | LTV/CAC 1-3x | LTV/CAC 3-5x | LTV/CAC > 5x |
|---|---|---|---|---|
| Sustainable Growth | ✗ | ✓ | ✓ | ✓ |
| Profitable Unit Economics | ✗ | ✗ | ✓ | ✓ |
| Investor Confidence | ✗ | ✗ | ✓ | ✓ |
| Can Invest in Growth | ✗ | ✗ | ✓ | ✓ |
| Risk of Over-Investing | ✗ | ✗ | ✗ | ✓ |
| Market Opportunity | ✗ | ✓ | ✓ | ✗ |
LTV/CAC Too High?: Paradoxically, LTV/CAC above 5x might mean you're under-investing in growth. You may be leaving market share on the table by not spending more on acquisition.
CAC payback period
CAC Payback Visualization
Net Revenue Retention
Starting MRR
MRR from cohort at start of period.
Expansion
Upsells, cross-sells, seat additions.
Contraction
Downgrades, seat reductions.
Churn
Lost customers.
NRR Benchmarks (%)
Improving unit economics
Reduce CAC
Improve conversion rates, optimize channels, product-led growth
Increase ARPU
Better packaging, usage-based pricing, enterprise tier
Reduce Churn
Better onboarding, customer success, product stickiness
Drive Expansion
Upsell paths, seat growth, platform expansion
Improve Margins
Reduce COGS, automate support, optimize infrastructure
Segment-level analysis
Unit Economics by Customer Segment
| Feature | SMB | Mid-Market | Enterprise |
|---|---|---|---|
| High LTV | ✗ | ✓ | ✓ |
| Low CAC | ✓ | ✗ | ✗ |
| Fast Payback | ✓ | ✓ | ✗ |
| High NRR | ✗ | ✓ | ✓ |
| Scalable | ✓ | ✓ | ✗ |
| Profitable | ✓ | ✓ | ✓ |
Cohort analysis
Retention by Cohort Over Time
FAQ
Q: How often should we calculate unit economics? A: Monthly for operational metrics (CAC, churn). Quarterly for strategic metrics (LTV). Annual cohort analysis. The key is consistency and trend tracking.
Q: What if our LTV/CAC varies significantly by segment? A: This is normal and important to understand. Calculate segment-level economics. You may need to double down on profitable segments or improve unit economics in others.
Q: Should we include all costs in CAC? A: Yes—fully-loaded CAC is most honest. Include salaries, tools, overhead. Some companies report "blended" CAC (all costs) and "paid" CAC (marketing spend only).
Q: How do we forecast LTV for a young company? A: Start with conservative assumptions: industry-average churn, current ARPU. Update as you get more data. LTV calculations become more reliable with 12+ months of customer data.
Sources and further reading
- Bessemer State of the Cloud
- OpenView Expansion Benchmarks
- ChartMogul SaaS Metrics
- SaaS Metrics 2.0 by David Skok
- KeyBanc SaaS Survey
Optimize Your Unit Economics: Strong unit economics are essential for sustainable growth and fundraising. Our team helps SaaS companies model, measure, and improve their core metrics. Contact us to discuss your unit economics strategy.
Want to improve your SaaS metrics? Connect with our growth advisors to develop a tailored optimization plan.
