Why understanding unit economics is so important
Customer acquisition cost is a direct reflection of the future success of your SaaS business. If you’re too cautious about your CAC, you will likely be missing out on customers and future revenue. Yet, if you spend too freely, you won’t be profitable and will likely end up in the Deadpool.
The challenge is that you want to spend the right amount of CAC to drive new customers to your service without jeopardizing the Lifetime Value (LTV) and revenue from that customer. A great measure to gauge this balancing act is the LTV/CAC ratio, which is sometimes even referred to as the “god metric” of many successful SaaS companies.
To experience Unit Economics hands-on, we created a simplified, interactive model for you below. You can play with the model to understand how Cost-of-Customer-Acquisition, Customer Lifetime in Months, Monthly Recurring Revenues per Customer and Gross Margin relate and how they impact the CAC Payback Period and the LTV/CAC Ratio. You can enter
The model shows you two lines
The customer starts to pay monthly for your subscription service and you eventually break even (where the two lines intersect) and make your money back on the initial CAC investment. This is the Payback Period in Months. From then on is a magical period where you’re rolling in the dough and netting a profit from that customer to optimize your LTV/CAC ratio. Lifetime Value increases until the customer decides to churn and its lifetime ends.
When you change any of the input factors, the model re-calculates the two lines and the viability metrics
Based on the calculated values for Payback Period and the LTV/CAC Ratio, the model give you a red/green-traffic-light-indication of the viability metrics.