Unit Economics
Unit economics measure the direct revenue and costs associated with a single customer or unit of your business. The core components are Customer Acquisition Cost (CAC), Customer Lifetime Value (LTV), and CAC payback period. Together, they tell you whether each customer you acquire is worth more than it costs to get them.
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Through billing automation that improved unit economics at BatchService
Why Unit Economics Matters for SaaS Companies
Unit economics are the foundation of every fundraising conversation past Seed stage. If your LTV-to-CAC ratio is below 3:1, investors see a business that cannot scale profitably. If your payback period exceeds 18 months, you need significant capital to fund growth — money goes out the door today and does not come back for over a year. For Seed to Series B companies, healthy unit economics are what separate 'we are growing' from 'we are growing profitably.'
Formula
CAC = Total Sales & Marketing Spend / New Customers Acquired. LTV = ARPA x Gross Margin / Churn Rate. Payback = CAC / (ARPA x Gross Margin).
Benchmark
Healthy LTV:CAC ratio: 3:1 or higher. Payback period: under 12 months. CAC recovery within first year of contract.
Tools for Measurement
An Operator's Take
The most common mistake I see at Series A companies is calculating CAC using only paid marketing spend. Your real CAC includes sales salaries, sales tools, onboarding costs, and the portion of customer success time spent on new account setup. At one engagement, a founder told me their CAC was $2,400. When we loaded in full costs, it was $7,800. Their LTV:CAC ratio went from a healthy 5:1 to a concerning 1.5:1. That completely changed the conversation about whether to pour more money into acquisition or fix retention first. The answer was retention — they were spending to acquire customers they could not keep.
Common Mistakes
What I see go wrong at Seed to Series B companies.
Calculating CAC using only paid ad spend. Real CAC includes sales team salaries, sales tools (CRM, outreach software), onboarding team costs, and free trial support resources.
Using gross revenue instead of gross margin in LTV calculations. If your gross margin is 70%, your actual LTV is 30% lower than what you calculated with revenue alone.
Not distinguishing between blended CAC and channel-specific CAC. Your organic CAC might be $500 while paid CAC is $5,000. Blending them hides which channels actually work.
Treating LTV as a static number. LTV changes as your churn rate, expansion revenue, and pricing evolve. Recalculate quarterly at minimum.
What to Do This Week
Concrete steps you can take right now.
Calculate your fully-loaded CAC by including all sales, marketing, and onboarding costs from the last quarter. Compare to what you have been reporting.
Use the Unit Economics Health Check tool to benchmark your metrics against industry standards.
Segment your unit economics by acquisition channel. Find which channels produce customers with the best LTV:CAC ratio, not just the lowest CAC.
If your payback period is over 12 months, audit your pricing against the value delivered. Most early-stage companies are underpriced.
Related Resources
Related Terms
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Further Reading
Frequently Asked Questions
What are good unit economics for SaaS?
Healthy SaaS unit economics include an LTV:CAC ratio of at least 3:1, a CAC payback period under 12 months, and gross margins above 70%. For Seed to Series B companies, these benchmarks indicate the business model can scale profitably. Below these thresholds, you are likely spending more to acquire customers than they are worth over their lifetime.
How do you calculate CAC for a SaaS company?
Divide your total sales and marketing costs (including salaries, tools, ads, content, events, and onboarding) by the number of new customers acquired in the same period. Most companies undercount CAC by only including ad spend. Fully-loaded CAC is typically 2-3x higher than marketing-only CAC.
Why are unit economics important for fundraising?
Investors use unit economics to determine whether your business can scale profitably. A strong LTV:CAC ratio means each dollar spent on growth generates predictable returns. A short payback period means you need less capital to fund growth. Without healthy unit economics, raising at favorable terms becomes very difficult past Seed stage.
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