SaaS Unit Economics: CAC, LTV, and CAC Payback
Unit economics tell you whether your SaaS business model is fundamentally sound. Before scaling, you need to know exactly how much it costs to acquire a customer and how much value they return over their lifetime.
Customer Acquisition Cost (CAC)
CAC is the total cost to acquire one new customer, including all sales and marketing spend. The standard formula divides total sales and marketing spend in a period by the number of new customers acquired in that same period.
CAC = Total Sales + Marketing Spend / Number of New Customers
What to include in CAC: salaries of sales and marketing staff (including management time), paid advertising, content and SEO costs, event costs, sales tools and CRM, and commissions. Many companies undercount CAC by excluding salaries, which distorts the true unit economics.
Fully-loaded CAC
Includes all direct and allocated costs. The most accurate but hardest to compute.
Blended CAC
Total spend / total new customers. Blends organic and paid channels.
Paid CAC
Paid channel spend only / paid channel customers. Useful for channel-specific analysis.
Customer Lifetime Value (LTV)
LTV is the total gross profit you expect to generate from a customer over their entire relationship with your company. The most common SaaS formula:
LTV = (ARPU x Gross Margin) / Monthly Churn Rate
This assumes a constant monthly churn rate and flat ARPU. In practice, cohort-based LTV analysis (tracking the actual revenue from a specific cohort over time) is more accurate but requires longer time series data.
LTV sensitivity example (ARPU $200/mo, 75% gross margin)
| Monthly Churn | Avg Lifetime | LTV |
|---|---|---|
| 0.5% | 200 months | $30,000 |
| 1% | 100 months | $15,000 |
| 2% | 50 months | $7,500 |
| 3% | 33 months | $5,000 |
| 5% | 20 months | $3,000 |
LTV:CAC Ratio and CAC Payback Period
LTV:CAC Ratio
Divides LTV by CAC to show the return on acquisition investment. A 3x ratio means you earn three dollars in lifetime gross profit for every dollar spent acquiring a customer.
CAC Payback Period
The number of months to recover CAC from gross profit. Calculated as: CAC / (ARPU x Gross Margin).