How to Use the Unit Economics Calculator
Our unit economics calculator helps you understand whether your SaaS business is acquiring customers profitably. Enter your revenue and cost data to instantly see your LTV:CAC ratio, payback period, and net revenue retention. Here's how to get accurate results from the calculator.
Enter ARPU (Average Revenue Per User)
Input your monthly recurring revenue divided by active customers. This is your average monthly revenue per subscription. Include all recurring fees—base subscription, add-ons, and usage-based charges. The default $100 represents a typical SMB SaaS pricing.
Set Gross Margin Percentage
Enter the percentage of revenue remaining after direct costs. For SaaS, subtract hosting costs, payment processing fees (2-3%), and direct support costs. Most SaaS companies run 70-85% gross margin. B2B enterprise skews higher (80%+); consumer/freemium skews lower (60-70%).
Configure Churn and Expansion Rates
Monthly churn is the percentage of customers who cancel each month. SMB SaaS typically sees 3-5% monthly churn; enterprise should be under 1%. Expansion rate captures upsells and seat additions from existing customers—2-5% is typical for B2B.
Add Customer Acquisition Cost (CAC)
Total sales and marketing spend over a period divided by new customers acquired. Include ad spend, sales salaries, marketing tools, and agency fees. For freemium models, include the cost to convert free users. The default $500 represents a typical inbound SaaS CAC.
After entering your data, click "Agree & Calculate" to see your results. The calculator displays five key metrics: LTV (Lifetime Value), LTV:CAC ratio, CAC payback period, Net Revenue Retention (NRR), and Magic Number. Each metric is color-coded—green indicates healthy, yellow needs attention, and red signals a problem requiring immediate action.
The results include a chart showing how your customer value accumulates over time relative to your acquisition cost. You can export the analysis as a PNG image for investor decks or team presentations. All calculations happen in your browser—your financial data never touches our servers.
Why Unit Economics Matter
Unit economics determine whether you're building a sustainable business or subsidizing customer acquisition with investor money. A SaaS company growing 100% year-over-year looks impressive—until you discover they're paying $5,000 to acquire customers worth $2,000 over their lifetime. They're not building a business; they're buying revenue at a loss.
During the 2020-2021 zero-interest-rate era, many startups ignored unit economics. Growth at any cost was the strategy. VC funding was cheap, and the assumption was that profitability would come "later" through scale. That era ended in 2022 when interest rates rose and investors suddenly demanded proof of sustainable business models. Companies with poor unit economics faced down rounds, layoffs, or shutdown.
The Investor Perspective
VCs evaluate unit economics before committing capital. The standard benchmarks: LTV:CAC ratio of 3:1 or better means you generate $3 in value for every $1 spent on acquisition. CAC payback under 12 months means your marketing spend is recovered within a year. Anything worse, and VCs question whether scaling the business will ever produce profits.
The math is straightforward. If CAC is $1,000 and LTV is $1,500, the LTV:CAC ratio is 1.5:1. At first glance, each customer generates profit. But consider the time value of money. If payback takes 24 months, you're financing customer acquisition for two years. Factor in operational costs, and that customer might be break-even or worse. A business can grow revenue and still run out of cash because the unit economics don't support the growth rate.
💡 Key Insight: Most startups fail not because they can't acquire customers, but because they can't acquire customers profitably. Knowing your unit economics before scaling prevents the expensive lesson of growing yourself into bankruptcy.
For bootstrapped founders, unit economics matter even more. Without VC capital to subsidize unprofitable acquisition, every customer must pay back their CAC quickly enough to fund the next customer's acquisition. Positive unit economics create a self-funding growth loop; negative unit economics create a cash drain that eventually kills the company.
How Growth Stage Affects Unit Economics
Early-stage companies typically have worse unit economics than mature companies. CAC is high because brand awareness is low, conversion funnels are unoptimized, and sales processes are inefficient. Churn is high because the product has rough edges and the ideal customer profile isn't well-defined. LTV is often lower because pricing hasn't been validated and expansion revenue products haven't been built.
This is normal and expected. The question investors ask is: what's the trajectory? Are unit economics improving quarter over quarter? A company with 2:1 LTV:CAC that's improving toward 3:1 is healthier than a company stuck at 2.5:1. Show you understand the levers—reducing churn through better onboarding, increasing expansion through new features, reducing CAC through content marketing—and demonstrate progress.
When Unit Economics Justify Unprofitable Growth
Sometimes spending ahead of revenue is strategically correct. If your LTV:CAC is 4:1 but payback is 18 months, you have excellent unit economics but a cash flow timing problem. Raising capital to accelerate customer acquisition makes sense—you're not subsidizing loss-making customers; you're financing working capital against future profits.
The key distinction: losing money because customers don't generate enough value (bad) versus losing money because value materializes over time (potentially fine). Our calculator helps you understand which situation you're in. Strong unit economics give you permission to invest aggressively in growth; weak unit economics mean you should optimize before scaling.
Core Metrics Explained
LTV (Lifetime Value)
Total gross profit from a customer over their entire relationship. Formula: (ARPU × Gross Margin) / Monthly Churn Rate. Higher ARPU or lower churn increases LTV.
CAC (Customer Acquisition Cost)
Total cost to acquire one customer. Includes marketing spend, sales salaries, tools, and overhead allocated per new customer. Lower CAC improves all downstream metrics.
LTV:CAC ratio is the "Holy Grail" of SaaS metrics. It answers the fundamental question: are you creating more value than you consume? A 3:1 ratio is the baseline for healthy SaaS—you generate $3 in lifetime value for every $1 spent on acquisition. Below 3:1и you're in dangerous territory. Above 5:1 might indicate you're under-investing in growth.
CAC payback period measures how quickly you recover acquisition costs. Calculated as CAC divided by monthly gross profit per customer. Under 12 months is considered healthy—the faster you recover CAC, the faster you can reinvest in acquiring more customers. Over 24 months, your growth is unsustainable without external funding.
Net Revenue Retention (NRR) reveals your true growth engine. NRR above 100% means revenue from existing customers grows even after accounting for churn. This happens when expansion revenue (upsells, cross-sells, seat additions) exceeds lost revenue from cancellations. NRR above 120% is elite territory—meaning your existing customer base generates significant growth without any new customer acquisition.
The Magic Number measures sales efficiency. It's the ratio of new annual revenue to the sales and marketing spend that generated it. A magic number above 0.75 indicates efficient growth; above 1.0 suggests you should invest more aggressively in customer acquisition. Below 0.5 means your go-to-market motion needs optimization before scaling.
These metrics work together as a system. Improving one often affects others. Reducing churn increases both LTV and NRR. Raising prices increases ARPU and LTV but might increase CAC if sales cycles lengthen. The best SaaS companies optimize the entire system, not individual metrics in isolation. A 10% improvement in churn combined with 10% improvement in CAC and 10% improvement in ARPU compounds to dramatic overall improvement.
Start with your worst metric. If LTV:CAC is 2:1 because CAC is too high, focus on customer acquisition efficiency. If payback is 24 months despite good LTV:CAC, you have a pricing or billing frequency problem—annual prepaid contracts solve working capital issues even if they don't change LTV:CAC. Our calculator helps you identify which lever will have the biggest impact.
The Formulas Behind the Calculator
The LTV formula divides monthly gross profit by churn rate to estimate total value. If you earn $80 monthly gross profit per customer and 5% churn monthly, LTV equals $80 / 0.05 = $1,600. This assumes steady-state behavior—actual cohort analysis may reveal different patterns.
NRR compounds monthly retention over 12 months. With 5% churn and 2% expansion, monthly retention is 97% (100% - 5% + 2%). Compounded over 12 months: 0.97^12 = 0.69 or 69% NRR. This would indicate serious problems. But with 2% churn and 5% expansion, retention is 103%—compounding to 142% NRR, meaning your existing customer base grows 42% annually without new sales.
The difference between these scenarios is often just pricing and product strategy. Moving upmarket to lower-churn enterprise customers, adding expansion revenue through usage-based pricing, or implementing seat-based pricing that naturally grows with customer success—these changes can transform unit economics from unsustainable to excellent.
Common Mistakes in Unit Economics Analysis
1. Ignoring Fully-Loaded CAC
Many founders calculate CAC using only direct ad spend. True CAC includes sales salaries, marketing tools subscriptions, agency fees, content production costs, and even overhead allocation. If a $100k/year salesperson closes 50 customers, that's $2,000 CAC per customer from salary alone—before ad spend. Understating CAC creates false confidence in unit economics.
2. Using Blended Instead of Cohort Metrics
Blended churn across all customers hides important patterns. Customers acquired last month behave differently than customers retained two years. Early-stage companies often have artificially low churn because their customer base is young. As cohorts mature, true churn emerges. Track metrics by acquisition cohort to identify trends before they impact overall numbers.
3. Mixing Revenue and Cash Flow Timing
LTV calculations assume revenue equals cash. But annual contracts paid monthly, deferred revenue recognition, and delayed collections mean cash flow differs from revenue. A 12-month payback period can still cause cash flow problems if customers pay monthly while CAC was incurred upfront. Model cash flow alongside unit economics to avoid surprises.
The working capital gap catches many founders off guard. You spend $500 to acquire a customer today. That customer pays $100/month. Even with 80% gross margin, you receive $80/month toward recovering that $500. Full recovery takes 6+ months—during which you've acquired more customers, each creating similar gaps. Fast growth with poor cash management creates profitable companies that still run out of money.
4. Forgetting Customer Success Costs
High-touch customer success improves retention but reduces gross margin. If reducing churn from 5% to 3% costs $20/customer/month in CSM time, that's $240/year off LTV while extending average lifetime 10 months. The math might work—but only if you include those costs. Many companies claim 80% gross margin while their customer success team is categorized as G&A, overstating true profitability.
5. Assuming Unit Economics Remain Constant
Your best customers probably came first. Early adopters have higher engagement and lower churn. As you exhaust the early adopter market and move to mainstream customers, churn often increases and expansion decreases. CAC rises as you saturate low-hanging-fruit channels. A company with 3:1 LTV:CAC in year one might find themselves at 2:1 in year three as the customer mix shifts.
Track unit economics by acquisition cohort and channel. If Google Ads customers have 4:1 LTV:CAC while LinkedIn customers have 1.5:1, blended metrics hide the problem. Some channels should be scaled, others cut. Our calculator gives you the formulas; cohort tracking tells you where to apply them for maximum insight.
Frequently Asked Questions
What is a good LTV:CAC ratio for SaaS?▼
The benchmark is 3:1 or higher. This means you generate $3 in lifetime value for every $1 spent on acquisition. Ratios below 3:1 indicate you're paying too much to acquire customers or not extracting enough value. Above 5:1 might mean you're under-investing in growth—you could accelerate acquisition and still maintain healthy economics. Many successful SaaS companies target 4:1 as the sweet spot. For early-stage startups, 2:1 is often acceptable if there's a clear path to 3:1 through improving retention or increasing prices as the product matures.
How do I calculate CAC for a freemium product?▼
For freemium, CAC includes the cost to acquire free users AND convert them to paid. Calculate total marketing spend plus cost of serving free users (infrastructure, support) divided by new paying customers. This blended CAC is often higher than direct sales because free users consume resources without generating revenue. Track conversion rate from free to paid separately to identify optimization opportunities. The industry average conversion for freemium is 2-5% which significantly impacts your effective CAC calculation.
What is "negative churn" and why does it matter?▼
Negative churn occurs when expansion revenue from existing customers exceeds revenue lost to cancellations. If you lose $5,000 to churn but gain $8,000 from upsells, your "net churn" is -3%. This means your existing customer base grows without any new customer acquisition—a powerful growth driver. Companies with negative churn can reduce customer acquisition spending and still grow revenue, dramatically improving capital efficiency.
How does pricing strategy affect unit economics?▼
Pricing is the most powerful lever for improving unit economics. Moving upmarket to higher-ARPU customers simultaneously increases LTV and typically decreases churn (enterprise customers are stickier). Usage-based pricing creates natural expansion revenue as customers grow. Seat-based pricing scales with customer success. Even a 10% price increase with no additional churn immediately improves all unit economics metrics.
Should I optimize for lower CAC or higher LTV?▼
Both matter, but LTV improvements are typically more sustainable. CAC optimization often hits diminishing returns—you can only cut costs so far before quality suffers. LTV improvements through better retention, expansion revenue, and higher ARPU compound over time and apply to all customers, not just new acquisition. Focus on LTV first, then optimize CAC. The best companies do both: exceptional product driving low churn while efficient marketing drives low CAC.
Ready to Analyze Your Unit Economics?
Use our free calculator to see your LTV:CAC ratio, payback period, and net revenue retention instantly. Make data-driven decisions about your customer acquisition strategy.
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