SaaS Economics

The Pitch That Made Me Build This

A founder friend of mine pitched me his SaaS startup. "We're growing really fast," he said. "500 customers now, growing 20% month over month." I asked about unit economics. He said he didn't track them yet, but with that growth rate, the money would come. Six months later his runway was gone and he was begging investors for a bridge round at a down valuation.

Growing fast while burning cash isn't a strategy—it's a trap. The metrics that matter are the ones that tell you whether the business actually makes sense. I built this calculator because I wanted to understand my own SaaS metrics and couldn't find a simple tool that wasn't buried in a spreadsheet.

Unit Economics: What They Actually Tell You

Unit economics answer one question: does this business make money per customer? Not eventually, not at scale, but right now, with the customers you have today. If your unit economics are broken, no amount of growth will fix them. You'll just be burning more cash faster.

The core metrics are LTV (Lifetime Value), CAC (Customer Acquisition Cost), payback period, and the Rule of 40. These aren't just investor metrics—they're the signals that tell you if you're building something real or just a money-burning machine with good marketing.

LTV: How Much Each Customer Is Worth

Lifetime Value is the total revenue you can expect from a customer over the life of their subscription. It's not just MRR—it's how long they stick around and how much margin you keep after hosting and support costs.

Example: $10K MRR per customer, 70% margin, 5% monthly churn = $140K LTV. That customer is worth $140K over their lifetime.

LTV:CAC Ratio: Are You Growing Stupid or Smart

CAC is what you spend to get a customer—marketing, sales, overhead. LTV:CAC tells you how long until that acquisition cost pays back. The ratio matters more than the absolute numbers.

A 3:1 ratio means for every dollar you spend acquiring a customer, you get $3 back over that customer's lifetime. That's a good business. Below 1:1 and you're literally paying customers to use your product.

Payback Period: When You Break Even

How many months until the profit from a customer covers your acquisition cost? Short payback means you can reinvest quickly. Long payback means you're waiting forever to see returns on your acquisition spending.

Under 12 months is generally healthy. Over 18 months and you're tying up a lot of capital in customer acquisition before seeing returns.

Rule of 40: Growth Plus Profit Balance

The Rule of 40 is a rough proxy for overall business health. Take your growth rate and add your profit margin (or subtract your loss rate if you're not profitable yet). If the sum is over 40%, you're doing well. If it's negative or very low, something's broken.

A company growing 100% with 20% profit margins scores 120. A company growing 30% with 25% profit margins scores 55. Both healthy. A company growing 30% and losing 20% scores 10—concerning.

Improving Your Economics

Boost LTV:Raise prices if your churn isn't excessive. Add features that increase retention. Reduce churn through better onboarding and customer success.

Cut CAC: Optimize marketing channels rather than just spending more. Improve landing page conversion rates. Use referrals and organic growth instead of expensive paid acquisition.

Speed payback:Require larger initial contracts or annual subscriptions. Improve onboarding so customers reach their "aha moment" faster and start getting value sooner.

Balance growth and retention: Investing only in new customer acquisition while ignoring existing customers is a trap. A strong customer success function often has better ROI than aggressive growth spending.

Common Mistakes I See

Using annual instead of monthly churn.Annual churn of 30% sounds low. Monthly churn of 3% sounds high. They're roughly equivalent—always use monthly for LTV calculations.

Ignoring margin. A $100K ACV deal with 20% margin is worth half as much as a $60K deal with 70% margin. Revenue without margin is vanity.

Counting all revenue as LTV. If customers pay $1000/month but you spend $300/month serving them, LTV should be based on the $700 margin, not the $1000 revenue.

When to Use Each Metric

For day-to-day operations: LTV:CAC and payback period. These tell you what to optimize right now.

For fundraising or acquisition discussions: Rule of 40. Investors and acquirers use this as a summary metric.

For long-term planning: LTV. This tells you how much you can afford to spend on acquisition while still making money.