~2 min read
Unit economics are the per-customer building blocks of SaaS profitability. Two companies with identical ARR can have wildly different long-term trajectories depending on their CAC payback period, LTV, and gross margin. Understanding unit economics tells you whether faster growth makes you richer or just accelerates the burn.
The key metrics explained
CAC payback period — how many months of gross profit it takes to recover the cost of acquiring one customer. Below 12 months is excellent for self-serve; below 18 months is acceptable for enterprise. Above 24 months means you need to raise capital to grow.
LTV (Customer Lifetime Value) — total gross profit from a customer over their entire relationship with you. Calculated as MRR × gross margin % × average lifetime in months.
LTV:CAC ratio — the return on every dollar spent acquiring a customer. The VC benchmark is 3:1 or higher. Below 1:1 means you're destroying value with every new customer.
Magic Number — measures the efficiency of your go-to-market spend. Calculated as net new ARR divided by prior quarter S&M (Sales & Marketing) spend. Above 0.75 is good; above 1.0 is great.
Unit economics benchmarks
| Metric | Poor | Good | Excellent |
|---|---|---|---|
| CAC Payback | > 24 months | 12–18 months | < 12 months |
| LTV:CAC | < 1× | 2–3× | > 3× |
| Gross Margin | < 60% | 65–75% | > 80% |
| Magic Number | < 0.5 | 0.5–1.0 | > 1.0 |
Why unit economics matter more than ARR growth
ARR growth is vanity if unit economics are broken. A business growing 100% YoY with a CAC payback of 36 months will run out of cash before the cohorts become profitable. Investors and acquirers both underwrite businesses based on unit economics — your growth rate only matters if the underlying economics are sound.
Frequently asked questions
What does this calculator do? Calculate CAC payback period, LTV:CAC ratio, gross margin, and magic number to evaluate your SaaS business health.