What unit economics are
Unit economics measure profitability and cash efficiency at the level of a unit (usually a customer or account). For SaaS, the core unit stack is CAC (cost to acquire), LTV (value over lifetime), and payback (time to recover CAC from gross profit).
Use gross profit, not revenue
A common mistake is to compute LTV using revenue but compare it to a fully-loaded CAC. For cleaner unit economics, compute LTV on gross profit (revenue * gross margin) and label CAC definitions clearly.
Core formulas
- CAC = acquisition spend / new customers acquired.
- Monthly gross profit per customer ~ ARPA * gross margin.
- Payback (months) = CAC / (ARPA * gross margin).
- Lifetime (months) ~ 1 / monthly churn (rough shortcut).
- LTV (gross profit) ~ (ARPA * gross margin) / monthly churn.
- LTV:CAC = LTV / CAC.
How to model it (step-by-step)
- Pick a segment (channel, plan, geo) and a consistent time unit (monthly is common).
- Measure ARPA and gross margin for that segment.
- Measure churn for that segment (logo churn or revenue churn; label it).
- Measure CAC with a clear definition (paid-only vs fully-loaded).
- Compute payback and LTV, then compare to your cash constraints.
Common pitfalls
- Unit mismatch: using annual churn with monthly ARPA (or vice versa).
- Blended averages hiding segment problems (SMB vs enterprise).
- Optimizing LTV:CAC without checking payback (ratio can look good with very long payback).
- Treating churn as constant over time (cohort curves are more accurate).
How to improve unit economics
- Reduce CAC: improve conversion rate, sales efficiency, and channel mix.
- Increase ARPA: pricing, packaging, expansion, and better lead quality.
- Improve gross margin: reduce COGS and variable costs.
- Reduce churn: onboarding/activation, reliability, customer success, and renewal execution.