Saas Economics Efficiency Metrics

CAC (Customer Acquisition Cost) — Total cost to acquire one customer.

• Why PMs care: Shapes entire go-to-market strategy. Determines which channels are viable and how much you can invest in product-led growth.
• Formula: Total Sales & Marketing Spend / New Customers Acquired
• Benchmark: Varies by model—Enterprise $10K+ ok; SMB <$500 target
• Include: Marketing spend, sales salaries, tools, commissions

LTV (Lifetime Value) — Total revenue expected from one customer over their lifetime.

• Why PMs care: Tells you what you can afford to spend on acquisition. Higher LTV enables premium channels and longer payback periods.
• Formula (simple): ARPU × Average Customer Lifetime (months)
• Formula (better): ARPU × Gross Margin % / Churn Rate
• Formula (advanced): Account for expansion, discount rates, cohort-specific retention
• Benchmark: Must be 3x+ CAC; varies by segment

LTV:CAC Ratio — Efficiency of customer acquisition spending.

• Why PMs care: Is growth sustainable or are you buying revenue at a loss? Determines when to scale vs. optimize.
• Formula: LTV / CAC
• Benchmark: 3:1 healthy; <1:1 unsustainable; >5:1 might be underinvesting
• Note: This ratio alone doesn't tell the full story—also need payback period

Payback Period — Months to recover CAC from customer revenue.

• Why PMs care: Cash efficiency. Faster payback = reinvest sooner. Slow payback can kill growth even with good LTV:CAC.
• Formula: CAC / (Monthly ARPU × Gross Margin %)
• Benchmark: <12 months great; 12-18 ok; >24 months concerning
• Critical: Must have cash to sustain payback period

Contribution Margin — Revenue remaining after ALL variable costs (not just COGS).

• Why PMs care: True unit profitability. Includes support, processing fees, variable OpEx.
• Formula: (Revenue - All Variable Costs) / Revenue × 100
• Variable costs: COGS + support + payment processing + variable customer success
• Benchmark: 60-80% good for SaaS; <40% concerning

Gross Margin Payback — Payback period using actual profit, not revenue.

• Why PMs care: More accurate than simple payback. Shows true cash recovery time.
• Formula: CAC / (Monthly ARPU × Gross Margin %)
• Benchmark: Typically 1.5-2x longer than simple revenue payback

CAC Payback by Channel — Compare payback across acquisition channels.

• Why PMs care: Not all channels are created equal. Optimize channel mix based on payback efficiency.
• Formula: Calculate CAC and payback separately for each channel
• Use: Allocate budget to faster-payback channels when cash-constrained

Capital Efficiency Family

Metrics that measure how efficiently you use cash to grow the business.

Burn Rate — Cash consumed per month.

• Why PMs care: Determines what you can build and when you need funding. High burn requires aggressive revenue growth.
• Formula (Gross Burn): Monthly Cash Spent (all expenses)
• Formula (Net Burn): Monthly Cash Spent - Monthly Revenue
• Benchmark: Net burn <$200K manageable for early stage; >$500K needs clear path to revenue

Runway — Months until cash runs out.

• Why PMs care: Literal survival metric. Dictates timeline for milestones, fundraising, profitability.
• Formula: Cash Balance / Monthly Net Burn
• Benchmark: 12+ months good; 6-12 manageable; <6 months crisis mode
• Rule: Raise when you have 6-9 months runway, not 3 months

OpEx (Operating Expenses) — Costs to run the business (excluding COGS).

• Why PMs care: Your team's salaries live here. Where "efficiency" cuts happen during downturns.
• Categories: Sales & Marketing (S&M), Research & Development (R&D), General & Administrative (G&A)
• Benchmark: Should grow slower than revenue as you scale (operating leverage)

Net Income (Profit Margin) — Actual profit or loss after all expenses.

• Why PMs care: True bottom line. Are you making money? Can you self-fund growth?
• Formula: Revenue - All Expenses (COGS + OpEx)
• Benchmark: Early SaaS often negative (growth mode); mature should be 10-20%+ margin

Working Capital Impact — Cash timing differences between revenue recognition and cash collection.

• Why PMs care: Annual contracts paid upfront boost cash. Monthly billing delays cash. Affects runway calculations.
• Example: $1M annual contract paid upfront = $1M cash now, not $83K/month
• Use: Understand cash vs. revenue timing when planning runway

Efficiency Ratios Family

Composite metrics that measure growth vs. profitability trade-offs.

Rule of 40 — Growth rate + profit margin should exceed 40%.

• Why PMs care: Framework for balancing growth vs. efficiency. Guides when to prioritize profitability over growth.
• Formula: Revenue Growth Rate % + Profit Margin %
• Benchmark: >40 healthy; 25-40 acceptable; <25 concerning
• Example: 60% growth + (-20%) margin = 40 (healthy growth-mode SaaS)
• Example: 20% growth + 25% margin = 45 (healthy mature SaaS)

Magic Number — Sales & marketing efficiency.

• Why PMs care: Is your GTM engine working? Should you scale spend or optimize first?
• Formula: (Current Quarter Revenue - Previous Quarter Revenue) × 4 / Previous Quarter S&M Spend
• Benchmark: >0.75 efficient; 0.5-0.75 ok; <0.5 fix before scaling
• Note: "× 4" annualizes quarterly revenue change

Operating Leverage — How revenue growth compares to cost growth.

• Why PMs care: Are you scaling efficiently? Revenue should grow faster than costs.
• Measure: Revenue growth rate vs. OpEx growth rate over time
• Good: Revenue growth 50%, OpEx growth 30% (positive leverage)
• Bad: Revenue growth 20%, OpEx growth 40% (negative leverage)

Unit Economics — General term for profitability of each "unit" (customer, seat, transaction).

• Why PMs care: Is the business model fundamentally viable at the unit level?
• Calculate: Revenue per unit - Cost per unit
• Requirement: Positive contribution required; aim for >$0 after all variable costs

Anti-Patterns (What This Is NOT)

• Not vanity metrics: High LTV means nothing if payback takes 4 years and customers churn at 3 years.
• Not static benchmarks: "Good" CAC varies wildly by business model (PLG vs. enterprise sales).
• Not isolated numbers: LTV:CAC ratio without payback period can mislead (great ratio, terrible cash efficiency).
• Not just finance's problem: PMs must own unit economics—every feature decision impacts margins and CAC.

When to Use These Metrics

Use these when:

• Evaluating whether to scale acquisition (LTV:CAC, payback, magic number)
• Deciding feature investments (margin impact, contribution to LTV)
• Planning runway and fundraising (burn rate, runway, Rule of 40)
• Comparing customer segments or channels (unit economics by segment)
• Board/investor reporting (Rule of 40, magic number, LTV:CAC)
• Choosing between growth and profitability (Rule of 40 trade-offs)

Don't use these when:

• Making decisions without revenue context (pair with saas-revenue-growth-metrics)
• Comparing across wildly different business models without normalization
• Early product discovery (pre-revenue focus on PMF, not unit economics)
• Short-term tactical decisions (use engagement metrics, not LTV)

Application

Step 1: Calculate Unit Economics

Use the templates in template.md to calculate your unit economics metrics.

Gross Margin

Gross Margin = (Revenue - COGS) / Revenue × 100

COGS includes:
- Hosting & infrastructure costs
- Payment processing fees
- Customer onboarding costs
- Direct delivery costs

Example:

• Revenue: $1,000,000
• COGS: $200,000 (hosting $120K, processing $50K, onboarding $30K)
• Gross Margin = ($1M - $200K) / $1M = 80%

Quality checks:

• Is gross margin improving as you scale? (Should benefit from economies of scale)
• Which products/features have highest margins? (Prioritize those)
• Are margins >70%? (SaaS should be high-margin)

CAC (Customer Acquisition Cost)

CAC = Total Sales & Marketing Spend / New Customers Acquired

Include in S&M spend:
- Marketing salaries & tools
- Sales salaries & commissions
- Advertising & paid channels
- SDR/BDR team costs

Example:

• Sales & Marketing Spend: $500,000/month
• New Customers: 100/month
• CAC = $500,000 / 100 = $5,000

Quality checks:

• Is CAC consistent across channels? (Calculate by channel)
• Is CAC increasing or decreasing over time? (Should decrease with scale)
• Does CAC vary by customer segment? (SMB vs. Enterprise)

LTV (Lifetime Value)

LTV (Simple) = ARPU × Average Customer Lifetime (months)

LTV (Better) = ARPU × Gross Margin % / Monthly Churn Rate

LTV (Advanced) = Account for expansion, cohort-specific retention, discount rate

Example (Simple):

• ARPU: $500/month
• Average Lifetime: 36 months
• LTV = $500 × 36 = $18,000

Example (Better):

• ARPU: $500/month
• Gross Margin: 80%
• Monthly Churn: 2%
• LTV = ($500 × 80%) / 2% = $400 / 0.02 = $20,000

Quality checks:

• Is LTV growing over time? (From expansion, improved retention)
• Does LTV vary by cohort? (Are new customers more/less valuable?)
• Does LTV vary by segment? (Enterprise vs. SMB)

LTV:CAC Ratio

LTV:CAC Ratio = LTV / CAC

Example:

• LTV: $20,000
• CAC: $5,000
• LTV:CAC = $20,000 / $5,000 = 4:1

Quality checks:

• Is ratio >3:1? (Minimum for sustainable growth)
• Is ratio >5:1? (Might be underinvesting in growth)
• Is ratio improving or degrading over time?

Interpretation:

• <1:1 = Losing money on every customer (unsustainable)
• 1-3:1 = Marginal economics (optimize before scaling)
• 3-5:1 = Healthy (scale confidently)
• >5:1 = Potentially underinvesting (could grow faster)

Payback Period

Payback Period (months) = CAC / (Monthly ARPU × Gross Margin %)

Example:

• CAC: $5,000
• Monthly ARPU: $500
• Gross Margin: 80%
• Payback = $5,000 / ($500 × 80%) = $5,000 / $400 = 12.5 months

Quality checks:

• Is payback <12 months? (Excellent)
• Is payback <18 months? (Acceptable)
• Do you have cash runway to sustain payback period?

Critical insight: 4:1 LTV:CAC with 36-month payback is a cash trap. 3:1 LTV:CAC with 8-month payback is better for growth.

Contribution Margin

Contribution Margin = (Revenue - All Variable Costs) / Revenue × 100

Variable Costs include:
- COGS
- Support costs (variable component)
- Payment processing
- Variable customer success costs

Example:

• Revenue: $1,000,000
• COGS: $200,000
• Variable Support: $50,000
• Payment Processing: $30,000
• Contribution Margin = ($1M - $280K) / $1M = 72%

Quality checks:

• Is contribution margin >60%? (Good for SaaS)
• Are certain products/segments lower margin? (Consider sunsetting)
• Does margin improve with scale?

Step 2: Calculate Capital Efficiency

Burn Rate

Gross Burn Rate = Total Monthly Cash Spent
Net Burn Rate = Total Monthly Cash Spent - Monthly Revenue

Example:

• Monthly Expenses: $800,000
• Monthly Revenue: $400,000
• Gross Burn: $800,000/month
• Net Burn: $400,000/month

Quality checks:

• Is net burn decreasing over time? (Path to profitability)
• Is burn rate sustainable given runway?
• What's the burn rate relative to revenue? (Burn multiple)

Runway

Runway (months) = Cash Balance / Monthly Net Burn

Example:

• Cash Balance: $6,000,000
• Net Burn: $400,000/month
• Runway = $6M / $400K = 15 months

Quality checks:

• Do you have >12 months runway? (Healthy)
• Do you have <6 months runway? (Crisis—raise now or cut burn)
• Can you reach next milestone before runway ends?

Rule: Start fundraising at 6-9 months runway, not 3 months.

Operating Expenses (OpEx)

OpEx = Sales & Marketing + R&D + General & Administrative

Track as % of Revenue:
S&M as % of Revenue
R&D as % of Revenue
G&A as % of Revenue

Example:

• Revenue: $10M/year
• S&M: $5M (50% of revenue)
• R&D: $3M (30% of revenue)
• G&A: $1M (10% of revenue)
• Total OpEx: $9M (90% of revenue)

Quality checks:

• Are OpEx categories growing slower than revenue? (Operating leverage)
• Is S&M spend efficient? (Check magic number)
• Is G&A <15% of revenue? (Should stay low)

Net Income (Profit Margin)

Net Income = Revenue - COGS - OpEx
Profit Margin % = Net Income / Revenue × 100

Example:

• Revenue: $10M
• COGS: $2M
• OpEx: $9M
• Net Income = $10M - $2M - $9M = -$1M (loss)
• Profit Margin = -10%

Quality checks:

• Is profit margin improving over time? (Path to profitability)
• At current growth rate, when will you break even?
• Are you investing losses in growth? (Acceptable if LTV:CAC is healthy)

Step 3: Calculate Efficiency Ratios

Rule of 40

Rule of 40 = Revenue Growth Rate % + Profit Margin %

Example 1 (Growth Mode):

• Revenue Growth: 80% YoY
• Profit Margin: -30%
• Rule of 40 = 80% + (-30%) = 50 ✅ Healthy

Example 2 (Mature):

• Revenue Growth: 25% YoY
• Profit Margin: 20%
• Rule of 40 = 25% + 20% = 45 ✅ Healthy

Example 3 (Problem):

• Revenue Growth: 30% YoY
• Profit Margin: -35%
• Rule of 40 = 30% + (-35%) = -5 🚨 Unhealthy

Quality checks:

• Is Rule of 40 >40? (Healthy balance)
• Is Rule of 40 >25? (Acceptable)
• Is Rule of 40 <25? (Burning cash without sufficient growth)

Trade-offs:

• Early stage: Maximize growth, accept losses (60% growth, -20% margin = 40)
• Growth stage: Balance (40% growth, 5% margin = 45)
• Mature: Prioritize profitability (20% growth, 25% margin = 45)

Magic Number

Magic Number = (Current Quarter Revenue - Previous Quarter Revenue) × 4 / Previous Quarter S&M Spend

Example:

• Q2 Revenue: $2.5M
• Q1 Revenue: $2.0M
• Q1 S&M Spend: $800K
• Magic Number = ($2.5M - $2.0M) × 4 / $800K = $2M / $800K = 2.5

Quality checks:

• Is magic number >0.75? (Efficient—scale S&M spend)
• Is magic number 0.5-0.75? (Acceptable—optimize before scaling)
• Is magic number <0.5? (Inefficient—fix GTM before spending more)

Interpretation:

• >1.0 = For every $1 in S&M, you get $1+ in new ARR (excellent)
• 0.75-1.0 = Efficient, scale confidently
• 0.5-0.75 = Marginal, optimize before scaling
• <0.5 = Inefficient, fix before investing more

Operating Leverage

Track over time to see if you're scaling efficiently.

Example:

Quality checks:

• Is revenue growing faster than OpEx? (Positive leverage)
• Are you scaling OpEx too fast relative to revenue?
• Which OpEx category is growing fastest? (R&D, S&M, G&A)

Step 4: Analyze by Segment and Channel

Unit economics vary dramatically by segment:

Quality checks:

• Which segment has best unit economics?
• Which segment has fastest payback? (Prioritize when cash-constrained)
• Which segment has highest LTV? (Invest in retention/expansion)

Examples

See examples/ folder for detailed scenarios. Mini examples below:

Example 1: Healthy Unit Economics

Company: CloudAnalytics (mid-market analytics SaaS)

Unit Economics:

• CAC: $8,000
• LTV: $40,000
• LTV:CAC: 5:1 ✅
• Payback Period: 10 months ✅
• Gross Margin: 82% ✅

Capital Efficiency:

• Monthly Net Burn: $300K
• Runway: 18 months ✅
• Rule of 40: 55 (40% growth + 15% margin) ✅
• Magic Number: 0.9 ✅

Analysis:

• Strong unit economics (5:1 LTV:CAC, 10-month payback)
• Efficient GTM (0.9 magic number)
• Healthy balance (Rule of 40 = 55)
• Sufficient runway (18 months)

Action: Scale acquisition aggressively. Economics support growth.

Example 2: Good LTV:CAC, Bad Payback (Cash Trap)

Company: EnterpriseCRM (enterprise sales motion)

Unit Economics:

• CAC: $80,000
• LTV: $400,000
• LTV:CAC: 5:1 ✅ (looks great!)
• Payback Period: 36 months 🚨 (terrible!)
• Gross Margin: 85%

Capital Efficiency:

• Monthly Net Burn: $2M
• Runway: 9 months 🚨
• Average Customer Lifetime: 48 months
• Average Contract: $100K/year

Analysis:

• ⚠️ Great LTV:CAC ratio (5:1) masks cash problem
• 🚨 36-month payback with 9-month runway = cash trap
• 🚨 Takes 3 years to recover CAC, but only 9 months of cash
• ⚠️ Customers stay 4 years, so economics work IF you have cash

Problem: You'll run out of cash before recovering acquisition costs.

Actions:

1. Negotiate upfront annual payments (reduce payback to 12 months)
2. Raise capital to extend runway (need 36+ months to sustain growth)
3. Reduce CAC (shorten sales cycle, improve conversion)
4. Target smaller deals with faster payback (mid-market vs. enterprise)

Example 3: Scaling Too Fast (Negative Operating Leverage)

Company: SocialScheduler (SMB social media tool)

Quarter-over-Quarter Trend:

Analysis:

• 🚨 OpEx growing FASTER than revenue (50% vs. 23-30%)
• 🚨 Losses accelerating ($800K → $1.8M in 2 quarters)
• 🚨 Negative operating leverage (should be positive)
• ⚠️ Scaling S&M and R&D without corresponding revenue growth

Problem: Burning cash faster while revenue growth is slowing.

Actions:

1. Freeze headcount until revenue catches up
2. Cut inefficient S&M spend (magic number likely <0.5)
3. Focus on improving unit economics before scaling
4. Aim for OpEx growth <revenue growth

Common Pitfalls

Pitfall 1: Celebrating High LTV Without Checking Payback

Symptom: "Our LTV:CAC is 6:1, amazing!"

Consequence: 6:1 ratio with 48-month payback is a cash trap. You'll run out of money before recovering CAC.

Fix: Always pair LTV:CAC with payback period. 3:1 with 10-month payback beats 6:1 with 36-month payback.

Pitfall 2: Ignoring Gross Margin When Calculating LTV

Symptom: "LTV = $100/month × 36 months = $3,600"

Consequence: You're using revenue, not profit. Actual LTV after 30% COGS = $2,520, not $3,600.

Fix: Always include gross margin in LTV calculations. LTV = ARPU × Margin % / Churn Rate.

Pitfall 3: Scaling S&M with Low Magic Number

Symptom: "We need to grow faster—let's double S&M spend!" (Magic Number = 0.3)

Consequence: You're pouring gas on a broken engine. Doubling spend will just accelerate cash burn without proportional revenue growth.

Fix: Only scale S&M when magic number >0.75. If <0.5, fix GTM efficiency first.

Pitfall 4: Using Simplistic LTV Formulas

Symptom: "LTV = ARPU × Lifetime" (ignoring expansion, discount rates, cohort variance)

Consequence: Overstating LTV for decision-making. Reality: expansion boosts LTV; discounting reduces it; cohorts vary.

Fix: Use sophisticated LTV models for big decisions. Simple LTV ok for directional guidance only.

Pitfall 5: Forgetting Time Value of Money

Symptom: "$10K revenue today = $10K revenue in 5 years"

Consequence: Overstating LTV for long-payback businesses. $10K in 5 years is worth ~$7.8K today (at 5% discount rate).

Fix: Discount future cash flows for LTV periods >24 months. Use NPV (net present value).

Pitfall 6: Comparing CAC Across Different Payback Periods

Symptom: "Channel A has $5K CAC, Channel B has $8K CAC—Channel A is better!"

Consequence: If Channel A has 24-month payback and Channel B has 8-month payback, Channel B is actually better (faster cash recovery).

Fix: Compare CAC + payback together, not CAC in isolation.

Pitfall 7: Celebrating Rule of 40 >40 with Negative Cash Flow

Symptom: "Rule of 40 = 50, we're crushing it!" (60% growth, -10% margin, burning $5M/month)

Consequence: Rule of 40 doesn't account for absolute burn. You might have great balance but only 3 months runway.

Fix: Pair Rule of 40 with burn rate and runway. Balance matters, but survival matters more.

Pitfall 8: Ignoring Segment-Specific Unit Economics

Symptom: "Blended CAC is $2K, blended LTV is $10K, we're good!"

Consequence: SMB segment might have $500 CAC / $2K LTV (great), while Enterprise has $20K CAC / $15K LTV (terrible). Blended metrics hide the problem.

Fix: Calculate unit economics by segment. Optimize each independently.

Pitfall 9: Confusing Gross Margin with Contribution Margin

Symptom: "Gross margin is 80%, our margins are great!"

Consequence: After variable support costs (10%) and payment processing (3%), contribution margin might be 67%—not 80%.

Fix: Track both gross margin (COGS only) AND contribution margin (all variable costs). Use contribution margin for unit economics.

Pitfall 10: Forgetting Working Capital Timing

Symptom: "We have 12 months runway based on burn rate" (but all contracts are paid monthly)

Consequence: Annual contracts paid upfront boost cash temporarily. Monthly contracts delay cash collection. Runway is longer/shorter than burn rate suggests.

Fix: Account for working capital when calculating runway. Cash-based runway ≠ revenue-based runway.

References

Related Skills

• saas-revenue-growth-metrics — Revenue, retention, and growth metrics that feed into LTV
• finance-metrics-quickref — Fast lookup for all metrics
• feature-investment-advisor — Uses margin and contribution calculations for feature ROI
• acquisition-channel-advisor — Uses CAC, LTV, payback for channel evaluation
• business-health-diagnostic — Uses efficiency metrics for health checks

External Frameworks

• David Skok (Matrix Partners): "SaaS Metrics" blog — Definitive guide to CAC, LTV, payback
• Bessemer Venture Partners: "SaaS Metrics 2.0" — Rule of 40, magic number benchmarks
• Ben Murray: The SaaS CFO — Advanced unit economics modeling
• Jason Lemkin (SaaStr): SaaS benchmarking research
• Brad Feld: Venture Deals — Understanding investor perspective on unit economics

Provenance

• Adapted from research/finance/Finance for Product Managers.md
• Consolidated from research/finance/Finance_QuickRef.md
• Common mistakes from research/finance/Finance_Metrics_Additions_Reference.md