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.
What Is CAC Payback Period and Why It Matters for SaaS
CAC payback period measures how many months of gross profit it takes to recover your customer acquisition cost. Here's how to calculate it and why VCs care.
CAC payback period is one of the most important metrics for early-stage SaaS companies.
It answers a simple question: how long does it take to earn back what you spent acquiring
a customer?
Example: If you spend $1,200 to acquire a customer who pays $99/month at 75% gross margin:
Monthly gross profit = $99 × 0.75 = $74.25
Payback period = $1,200 ÷ $74.25 = 16.2 months
Benchmarks by go-to-market motion
GTM Motion
Excellent
Good
Concerning
Self-serve / PLG
< 6 months
6–12 months
> 12 months
Inside sales
< 12 months
12–18 months
> 24 months
Field / enterprise
< 18 months
18–24 months
> 30 months
Why investors focus on CAC payback
A business with 18-month payback that grows 100% YoY needs to fund 18 months of CAC
for every new customer — that's significant working capital. Companies with sub-12-month
payback can grow faster without external capital, since each cohort "pays for itself"
within the year.
Use the Unit Economics Calculator to calculate
your current payback period and model the impact of changing CAC or MRR.
LTV:CAC Ratio — SaaS Benchmark and How to Improve It
The LTV:CAC ratio measures the return on your customer acquisition spend. Learn the 3:1 benchmark, how to calculate it, and 5 ways to improve yours.
The LTV:CAC ratio tells you how much lifetime value you generate for every dollar you
spend acquiring a customer. It's the single most-cited unit economics metric in SaaS
investor presentations.
The formula
LTV = MRR per customer × gross margin % × average customer lifetime (months)
LTV:CAC = LTV ÷ CAC
The 3:1 benchmark
A 3:1 LTV:CAC ratio means you generate $3 in lifetime gross profit for every $1 spent
on acquisition. This is the standard VC benchmark. Below 1:1 means you're destroying
value; between 1:1 and 3:1 is profitable but has room to improve; above 3:1 is healthy.
The SaaS Magic Number: How to Calculate and Interpret GTM Efficiency
The SaaS magic number measures go-to-market efficiency. Learn how to calculate it, what 0.75 means, and when to scale sales spend.
The SaaS Magic Number is a shorthand for go-to-market efficiency. It tells you how much
net new ARR you generate for each dollar spent on sales and marketing in the prior period.
The formula
Magic Number = Net new ARR (this quarter) ÷ S&M spend (prior quarter)
The prior-quarter lag accounts for the ramp time between spending on sales and seeing
the resulting ARR. Use quarterly figures to smooth out monthly noise.
Interpretation
Magic Number
Interpretation
Action
> 1.0
Exceptional — invest aggressively
Scale S&M spend immediately
0.75–1.0
Healthy — optimize and grow
Increase spend while monitoring
0.5–0.75
Acceptable
Fix conversion funnel before scaling
< 0.5
Inefficient
Diagnose before spending more
Limitations
The magic number doesn't distinguish between customer acquisition and expansion revenue.
Use it alongside CAC payback and LTV:CAC for a complete picture. Also note it's
insensitive to gross margin — a company with 50% gross margin looks identical to one
with 85% in the magic number.
Use the Unit Economics Calculator to calculate
your magic number alongside other key unit economics metrics.
Tools our audience uses alongside this calculator.
BaremetricsSaaS Analytics
Subscription analytics that tracks LTV, CAC, payback period, and all your unit economics automatically from Stripe, Paddle, or Braintree. One-click dashboard.