SaaS Growth Engine

Why SaaS Metrics Matter More Than Revenue

In the world of Software as a Service (SaaS), top-line revenue is a vanity metric. You can have $1M in ARR (Annual Recurring Revenue) and still be weeks away from bankruptcy if your unit economics are broken.

Investors and smart founders look at the health of the Compounding Engine. This tool breaks down the four horsemen of SaaS valuation: LTV, CAC, Churn, and Payback Period.

1. Customer Acquisition Cost (CAC)

This is the total cost of sales and marketing efforts required to acquire a customer.

Formula: Total Sales & Marketing Spend / Number of New Customers Acquired

The Trap: Many founders underestimate CAC by ignoring salaries or tool costs. If you spend $5,000 on ads and $5,000 on a sales rep to get 10 customers, your CAC is $1,000, not $500.

2. Lifetime Value (LTV)

LTV is the predicted net profit attributed to the entire future relationship with a customer.

If your ARPU is $100, your margin is 80%, and your churn is 5%, your LTV is ($100 * 0.80) / 0.05 = $1,600.

The Golden Ratio: LTV:CAC

This is the single most important number in your dashboard. It tells you for every $1 you put into the "Growth Machine," how many dollars pop out the other side.

• Less than 1:1: You are losing money on every customer. Stop marketing immediately and fix your product.
• 3:1: The industry benchmark. You have a healthy business.
• 5:1 or higher: You are growing too slowly. Pour more fuel on the fire!

Understanding Churn: The Silent Killer

Churn is the percentage of customers who cancel their subscription in a given period.

It might not seem like a big deal if 5% of your customers leave this month. But churn compounds. A 5% monthly churn rate means you lose roughly 46% of your customer base every year.

Actionable Strategy: The easiest way to increase LTV is not to charge more, but to keep customers longer. Reducing churn from 5% to 2.5% literally doubles your LTV.

The Payback Period

This metric answers the question: "How long does it take to earn back the money we spent getting this customer?"

For bootstrapped startups, you want this to be as short as possible (ideally < 6 months) so you can reinvest that cash into getting more users. Venture-backed startups can afford longer payback periods (12-18 months) because they have capital to burn.

Conclusion

Building a SaaS company without tracking these metrics is like flying a plane blindfolded. Use this calculator to sanity-check your business model, prepare for investor meetings, or simply sleep better at night knowing your unit economics are sound.