Purpose
Determine whether your SaaS business model is fundamentally viable and capital-efficient. Use this to calculate unit economics, assess profitability, manage cash runway, and decide when to scale vs. optimize. Essential for fundraising, board reporting, and making smart investment trade-offs.
This is not a finance reporting tool—it's a framework for PMs to understand whether the business can sustain growth, when to prioritize efficiency over growth, and which investments have positive returns.
Key Concepts
Unit Economics Family
Metrics that measure profitability at the customer level—the foundation of sustainable SaaS.
Gross Margin — Percentage of revenue remaining after direct costs (COGS).
- Why PMs care: A feature that generates $1M revenue at 80% margin is worth far more than $1M at 30% margin. Margin determines which features to prioritize.
- Formula:
(Revenue - COGS) / Revenue × 100
- COGS includes: Hosting, infrastructure, payment processing, customer onboarding costs
- Benchmark: SaaS 70-85% good; <60% concerning
CAC (Customer Acquisition Cost) — Total cost to acquire one customer.
- Why PMs care: Shapes entire go-to-market strategy. Determines which channels are viable and how much you can invest in product-led growth.
- Formula:
Total Sales & Marketing Spend / New Customers Acquired
- Benchmark: Varies by model—Enterprise $10K+ ok; SMB <$500 target
- Include: Marketing spend, sales salaries, tools, commissions
LTV (Lifetime Value) — Total revenue expected from one customer over their lifetime.
- Why PMs care: Tells you what you can afford to spend on acquisition. Higher LTV enables premium channels and longer payback periods.
- Formula (simple):
ARPU × Average Customer Lifetime (months)
- Formula (better):
ARPU × Gross Margin % / Churn Rate
- Formula (advanced): Account for expansion, discount rates, cohort-specific retention
- Benchmark: Must be 3x+ CAC; varies by segment
LTV:CAC Ratio — Efficiency of customer acquisition spending.
- Why PMs care: Is growth sustainable or are you buying revenue at a loss? Determines when to scale vs. optimize.
- Formula:
LTV / CAC
- Benchmark: 3:1 healthy; <1:1 unsustainable; >5:1 might be underinvesting
- Note: This ratio alone doesn't tell the full story—also need payback period
Payback Period — Months to recover CAC from customer revenue.
- Why PMs care: Cash efficiency. Faster payback = reinvest sooner. Slow payback can kill growth even with good LTV:CAC.
- Formula:
CAC / (Monthly ARPU × Gross Margin %)
- Benchmark: <12 months great; 12-18 ok; >24 months concerning
- Critical: Must have cash to sustain payback period
Contribution Margin — Revenue remaining after ALL variable costs (not just COGS).
- Why PMs care: True unit profitability. Includes support, processing fees, variable OpEx.
- Formula:
(Revenue - All Variable Costs) / Revenue × 100
- Variable costs: COGS + support + payment processing + variable customer success
- Benchmark: 60-80% good for SaaS; <40% concerning
Gross Margin Payback — Payback period using actual profit, not revenue.
- Why PMs care: More accurate than simple payback. Shows true cash recovery time.
- Formula:
CAC / (Monthly ARPU × Gross Margin %)
- Benchmark: Typically 1.5-2x longer than simple revenue payback
CAC Payback by Channel — Compare payback across acquisition channels.
- Why PMs care: Not all channels are created equal. Optimize channel mix based on payback efficiency.
- Formula: Calculate CAC and payback separately for each channel
- Use: Allocate budget to faster-payback channels when cash-constrained
Capital Efficiency Family
Metrics that measure how efficiently you use cash to grow the business.
Burn Rate — Cash consumed per month.
- Why PMs care: Determines what you can build and when you need funding. High burn requires aggressive revenue growth.
- Formula (Gross Burn):
Monthly Cash Spent (all expenses)
- Formula (Net Burn):
Monthly Cash Spent - Monthly Revenue
- Benchmark: Net burn <$200K manageable for early stage; >$500K needs clear path to revenue
Runway — Months until cash runs out.
- Why PMs care: Literal survival metric. Dictates timeline for milestones, fundraising, profitability.
- Formula:
Cash Balance / Monthly Net Burn
- Benchmark: 12+ months good; 6-12 manageable; <6 months crisis mode
- Rule: Raise when you have 6-9 months runway, not 3 months
OpEx (Operating Expenses) — Costs to run the business (excluding COGS).
- Why PMs care: Your team's salaries live here. Where "efficiency" cuts happen during downturns.
- Categories: Sales & Marketing (S&M), Research & Development (R&D), General & Administrative (G&A)
- Benchmark: Should grow slower than revenue as you scale (operating leverage)
Net Income (Profit Margin) — Actual profit or loss after all expenses.
- Why PMs care: True bottom line. Are you making money? Can you self-fund growth?
- Formula:
Revenue - All Expenses (COGS + OpEx)
- Benchmark: Early SaaS often negative (growth mode); mature should be 10-20%+ margin
Working Capital Impact — Cash timing differences between revenue recognition and cash collection.
- Why PMs care: Annual contracts paid upfront boost cash. Monthly billing delays cash. Affects runway calculations.
- Example: $1M annual contract paid upfront = $1M cash now, not $83K/month
- Use: Understand cash vs. revenue timing when planning runway
Efficiency Ratios Family
Composite metrics that measure growth vs. profitability trade-offs.
Rule of 40 — Growth rate + profit margin should exceed 40%.
- Why PMs care: Framework for balancing growth vs. efficiency. Guides when to prioritize profitability over growth.
- Formula:
Revenue Growth Rate % + Profit Margin %
- Benchmark: >40 healthy; 25-40 acceptable; <25 concerning
- Example: 60% growth + (-20%) margin = 40 (healthy growth-mode SaaS)
- Example: 20% growth + 25% margin = 45 (healthy mature SaaS)
Magic Number — Sales & marketing efficiency.
- Why PMs care: Is your GTM engine working? Should you scale spend or optimize first?
- Formula:
(Current Quarter Revenue - Previous Quarter Revenue) × 4 / Previous Quarter S&M Spend
- Benchmark: >0.75 efficient; 0.5-0.75 ok; <0.5 fix before scaling
- Note: "× 4" annualizes quarterly revenue change
Operating Leverage — How revenue growth compares to cost growth.
- Why PMs care: Are you scaling efficiently? Revenue should grow faster than costs.
- Measure: Revenue growth rate vs. OpEx growth rate over time
- Good: Revenue growth 50%, OpEx growth 30% (positive leverage)
- Bad: Revenue growth 20%, OpEx growth 40% (negative leverage)
Unit Economics — General term for profitability of each "unit" (customer, seat, transaction).
- Why PMs care: Is the business model fundamentally viable at the unit level?
- Calculate: Revenue per unit - Cost per unit
- Requirement: Positive contribution required; aim for >$0 after all variable costs
Anti-Patterns (What This Is NOT)
- Not vanity metrics: High LTV means nothing if payback takes 4 years and customers churn at 3 years.
- Not static benchmarks: "Good" CAC varies wildly by business model (PLG vs. enterprise sales).
- Not isolated numbers: LTV:CAC ratio without payback period can mislead (great ratio, terrible cash efficiency).
- Not just finance's problem: PMs must own unit economics—every feature decision impacts margins and CAC.
When to Use These Metrics
Use these when:
- Evaluating whether to scale acquisition (LTV:CAC, payback, magic number)
- Deciding feature investments (margin impact, contribution to LTV)
- Planning runway and fundraising (burn rate, runway, Rule of 40)
- Comparing customer segments or channels (unit economics by segment)
- Board/investor reporting (Rule of 40, magic number, LTV:CAC)
- Choosing between growth and profitability (Rule of 40 trade-offs)
Don't use these when:
- Making decisions without revenue context (pair with
saas-revenue-growth-metrics)
- Comparing across wildly different business models without normalization
- Early product discovery (pre-revenue focus on PMF, not unit economics)
- Short-term tactical decisions (use engagement metrics, not LTV)
Application
Step 1: Calculate Unit Economics
Use the templates in template.md to calculate your unit economics metrics.
Gross Margin
Gross Margin = (Revenue - COGS) / Revenue × 100
COGS includes:
- Hosting & infrastructure costs
- Payment processing fees
- Customer onboarding costs
- Direct delivery costs
Example:
- Revenue: $1,000,000
- COGS: $200,000 (hosting $120K, processing $50K, onboarding $30K)
- Gross Margin = ($1M - $200K) / $1M = 80%
Quality checks:
- Is gross margin improving as you scale? (Should benefit from economies of scale)
- Which products/features have highest margins? (Prioritize those)
- Are margins >70%? (SaaS should be high-margin)
CAC (Customer Acquisition Cost)
CAC = Total Sales & Marketing Spend / New Customers Acquired
Include in S&M spend:
- Marketing salaries & tools
- Sales salaries & commissions
- Advertising & paid channels
- SDR/BDR team costs
Example:
- Sales & Marketing Spend: $500,000/month
- New Customers: 100/month
- CAC = $500,000 / 100 = $5,000
Quality checks:
- Is CAC consistent across channels? (Calculate by channel)
- Is CAC increasing or decreasing over time? (Should decrease with scale)
- Does CAC vary by customer segment? (SMB vs. Enterprise)
LTV (Lifetime Value)
LTV (Simple) = ARPU × Average Customer Lifetime (months)
LTV (Better) = ARPU × Gross Margin % / Monthly Churn Rate
LTV (Advanced) = Account for expansion, cohort-specific retention, discount rate
Example (Simple):
- ARPU: $500/month
- Average Lifetime: 36 months
- LTV = $500 × 36 = $18,000
Example (Better):
- ARPU: $500/month
- Gross Margin: 80%
- Monthly Churn: 2%
- LTV = ($500 × 80%) / 2% = $400 / 0.02 = $20,000
Quality checks:
- Is LTV growing over time? (From expansion, improved retention)
- Does LTV vary by cohort? (Are new customers more/less valuable?)
- Does LTV vary by segment? (Enterprise vs. SMB)
LTV:CAC Ratio
LTV:CAC Ratio = LTV / CAC
Example:
- LTV: $20,000
- CAC: $5,000
- LTV:CAC = $20,000 / $5,000 = 4:1
Quality checks:
- Is ratio >3:1? (Minimum for sustainable growth)
- Is ratio >5:1? (Might be underinvesting in growth)
- Is ratio improving or degrading over time?
Interpretation:
- <1:1 = Losing money on every customer (unsustainable)
- 1-3:1 = Marginal economics (optimize before scaling)
- 3-5:1 = Healthy (scale confidently)
- >5:1 = Potentially underinvesting (could grow faster)
Payback Period
Payback Period (months) = CAC / (Monthly ARPU × Gross Margin %)
Example:
- CAC: $5,000
- Monthly ARPU: $500
- Gross Margin: 80%
- Payback = $5,000 / ($500 × 80%) = $5,000 / $400 = 12.5 months
Quality checks:
- Is payback <12 months? (Excellent)
- Is payback <18 months? (Acceptable)
- Do you have cash runway to sustain payback period?
Critical insight: 4:1 LTV:CAC with 36-month payback is a cash trap. 3:1 LTV:CAC with 8-month payback is better for growth.
Contribution Margin
Contribution Margin = (Revenue - All Variable Costs) / Revenue × 100
Variable Costs include:
- COGS
- Support costs (variable component)
- Payment processing
- Variable customer success costs
Example:
- Revenue: $1,000,000
- COGS: $200,000
- Variable Support: $50,000
- Payment Processing: $30,000
- Contribution Margin = ($1M - $280K) / $1M = 72%
Quality checks:
- Is contribution margin >60%? (Good for SaaS)
- Are certain products/segments lower margin? (Consider sunsetting)
- Does margin improve with scale?
Step 2: Calculate Capital Efficiency
Burn Rate
Gross Burn Rate = Total Monthly Cash Spent
Net Burn Rate = Total Monthly Cash Spent - Monthly Revenue
Example:
- Monthly Expenses: $800,000
- Monthly Revenue: $400,000
- Gross Burn: $800,000/month
- Net Burn: $400,000/month
Quality checks:
- Is net burn decreasing over time? (Path to profitability)
- Is burn rate sustainable given runway?
- What's the burn rate relative to revenue? (Burn multiple)
Runway
Runway (months) = Cash Balance / Monthly Net Burn
Example:
- Cash Balance: $6,000,000
- Net Burn: $400,000/month
- Runway = $6M / $400K = 15 months
Quality checks:
- Do you have >12 months runway? (Healthy)
- Do you have <6 months runway? (Crisis—raise now or cut burn)
- Can you reach next milestone before runway ends?
Rule: Start fundraising at 6-9 months runway, not 3 months.
Operating Expenses (OpEx)
OpEx = Sales & Marketing + R&D + General & Administrative
Track as % of Revenue:
S&M as % of Revenue
R&D as % of Revenue
G&A as % of Revenue
Example:
- Revenue: $10M/year
- S&M: $5M (50% of revenue)
- R&D: $3M (30% of revenue)
- G&A: $1M (10% of revenue)
- Total OpEx: $9M (90% of revenue)
Quality checks:
- Are OpEx categories growing slower than revenue? (Operating leverage)
- Is S&M spend efficient? (Check magic number)
- Is G&A <15% of revenue? (Should stay low)
Net Income (Profit Margin)
Net Income = Revenue - COGS - OpEx
Profit Margin % = Net Income / Revenue × 100
Example:
- Revenue: $10M
- COGS: $2M
- OpEx: $9M
- Net Income = $10M - $2M - $9M = -$1M (loss)
- Profit Margin = -10%
Quality checks:
- Is profit margin improving over time? (Path to profitability)
- At current growth rate, when will you break even?
- Are you investing losses in growth? (Acceptable if LTV:CAC is healthy)
Step 3: Calculate Efficiency Ratios
Rule of 40
Rule of 40 = Revenue Growth Rate % + Profit Margin %
Example 1 (Growth Mode):
- Revenue Growth: 80% YoY
- Profit Margin: -30%
- Rule of 40 = 80% + (-30%) = 50 ✅ Healthy
Example 2 (Mature):
- Revenue Growth: 25% YoY
- Profit Margin: 20%
- Rule of 40 = 25% + 20% = 45 ✅ Healthy
Example 3 (Problem):
- Revenue Growth: 30% YoY
- Profit Margin: -35%
- Rule of 40 = 30% + (-35%) = -5 🚨 Unhealthy
Quality checks:
- Is Rule of 40 >40? (Healthy balance)
- Is Rule of 40 >25? (Acceptable)
- Is Rule of 40 <25? (Burning cash without sufficient growth)
Trade-offs:
- Early stage: Maximize growth, accept losses (60% growth, -20% margin = 40)
- Growth stage: Balance (40% growth, 5% margin = 45)
- Mature: Prioritize profitability (20% growth, 25% margin = 45)
Magic Number
Magic Number = (Current Quarter Revenue - Previous Quarter Revenue) × 4 / Previous Quarter S&M Spend
Example:
- Q2 Revenue: $2.5M
- Q1 Revenue: $2.0M
- Q1 S&M Spend: $800K
- Magic Number = ($2.5M - $2.0M) × 4 / $800K = $2M / $800K = 2.5
Quality checks:
- Is magic number >0.75? (Efficient—scale S&M spend)
- Is magic number 0.5-0.75? (Acceptable—optimize before scaling)
- Is magic number <0.5? (Inefficient—fix GTM before spending more)
Interpretation:
- >1.0 = For every $1 in S&M, you get $1+ in new ARR (excellent)
- 0.75-1.0 = Efficient, scale confidently
- 0.5-0.75 = Marginal, optimize before scaling
- <0.5 = Inefficient, fix before investing more
Operating Leverage
Track over time to see if you're scaling efficiently.
Example:
| Quarter |
Revenue |
YoY Growth |
OpEx |
YoY Growth |
Leverage |
| Q1 2024 |
$8M |
- |
$6M |
- |
- |
| Q2 2024 |
$10M |
25% |
$7M |
17% |
Positive ✅ |
| Q3 2024 |
$12M |
20% |
$9M |
29% |
Negative ⚠️ |
Quality checks:
- Is revenue growing faster than OpEx? (Positive leverage)
- Are you scaling OpEx too fast relative to revenue?
- Which OpEx category is growing fastest? (R&D, S&M, G&A)
Step 4: Analyze by Segment and Channel
Unit economics vary dramatically by segment:
| Segment |
CAC |
LTV |
LTV:CAC |
Payback |
Gross Margin |
| SMB |
$500 |
$2,000 |
4:1 |
8 months |
75% |
| Mid-Market |
$5,000 |
$25,000 |
5:1 |
12 months |
80% |
| Enterprise |
$50,000 |
$300,000 |
6:1 |
24 months |
85% |
Quality checks:
- Which segment has best unit economics?
- Which segment has fastest payback? (Prioritize when cash-constrained)
- Which segment has highest LTV? (Invest in retention/expansion)
Examples
See examples/ folder for detailed scenarios. Mini examples below:
Example 1: Healthy Unit Economics
Company: CloudAnalytics (mid-market analytics SaaS)
Unit Economics:
