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SaaS Definitions
Unit Economics (New Customers)
Unit Economics (New Customers)
Unit Economics (New Customers)
Metric
Notes
Context and Analysis
Critical?
1
Customer Lifetime Value (CLTV)
CLTV is a measure of the lifetime value of a customer. It’s a critical component of a unit economics analysis, which looks at the long-term viability of your business. It should be viewed as the numerator in the CLTV to CAC Ratio (explained below).
CLTV is calculated as:
ARPA * Gross Margin % / % MRR Churn Rate
The most granular way to calculate CLTV is on a contribution margin basis, which fully accounts for all of the costs associated with adding a customer. This is a custom analysis that is unique for each customer.
As a standalone metric, CLTV is not particularly useful. Instead, think about it in relation to how much it costs to acquire a customer (in the CLTV to CAC Ratio). CLTV is not a static number and needs to be remeasured and calculated regularly. It is best shown trending over time.
Yes
2
Customer Acquisition Cost (CAC)
CAC is a measure of the cost of acquiring a new customer. This is a dynamic number that changes over time.
CAC is calculated as:
(Sales and Marketing for new Customer Acquisition) / # of Customers added
CAC is most useful as part of the CLTV to CAC Ratio (explained below).
CAC can be a confusing metric to calculate. The most critical part of calculating CAC is to make the calculation consistent across time. That includes consistently carving out any sales and marketing efforts that are not related to new customer acquisition (i.e. Customer Success costs sitting in Sales).
Yes
3
CLTV to CAC Ratio
CLTV to CAC Ratio is the most critical unit economics calculation. This ratio shows the return on each new customer investment. If this ratio is misaligned, companies will experience excess cash burn, excess churn, etc.
One of the tenets of subscription businesses is to have a CLTV to CAC Ratio between 3x and 5x.
If the ratio is less than 3x, you should explore the drivers of underperformance, and you may need to cut down on sales and marketing costs. A company that has multiples under 3x for a sustained period of time will likely face significant cash and funding problems.
Ratios greater than 5x suggest that you can spend more in sales and marketing to grow faster. However, it is extremely rare to maintain a multiple over 5x over time, and using sustained wild forward multiples (10x, 20x, 100x) in forecasts suggests a modeling and calculation problem.
Yes
4
Months to Recover CAC
CAC / (ARPA * Gross Margin %)
Yes
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