The One Ratio That Tells You If Your SaaS Business Model Actually Works
Every SaaS founder knows their MRR. Most know their churn. But when I ask about unit economics — specifically LTV to CAC — I usually get a blank look.
This ratio is the single most important number in your business. It tells you whether your business model fundamentally works: does each customer generate more profit than it costs to acquire them?
I'm a fractional CFO working with SaaS startups in the UK, and this is the first thing I calculate with every new client.
LTV: What a customer is actually worth
Customer Lifetime Value isn't just revenue — it's gross profit over the customer's lifetime. Most founders get this wrong by using revenue instead of gross profit, which overstates the number.
The formula: Average Revenue Per Account multiplied by Gross Margin, divided by Monthly Churn Rate.
A quick example: if your average customer pays £500 per month, your gross margin is 80%, and your monthly churn is 2%, your LTV is £20,000. That's the total gross profit that customer will generate before they leave.
The gross margin part is critical. If you're using revenue instead of gross profit, you're ignoring hosting costs, support costs, and infrastructure — and your LTV is a fantasy.
CAC: What it really costs to win a customer
Total sales and marketing spend divided by new customers acquired. Simple formula, but founders consistently undercount the costs. You need to include salaries, commissions, tools, agency fees, and your own time if you're doing founder-led sales.
If you raised money and you're spending it on growth, your CAC is probably higher than you think.
The ratio that matters
LTV divided by CAC. Target: at least 3:1.
Below 3:1 means you're spending too aggressively on acquisition relative to what customers are worth. Below 1:1 means you're losing money on every customer you acquire — you're literally paying more to win them than they'll ever generate in profit.
The other number to watch is CAC payback period — how many months until a customer has paid back their acquisition cost. Under 12 months is strong. Over 24 months is a warning sign, especially if you're burning cash.
Why investors obsess over this
When an investor looks at your financials, they're trying to answer one question: if I put more money in, will the business generate more out? Unit economics give them that answer. A 3:1 LTV to CAC ratio with a 12-month payback tells an investor that every pound spent on growth generates three pounds back within a year. That's a business worth funding.
I wrote a full guide with formulas, benchmarks, and the net revenue retention metric that drives premium valuations: Unit Economics for SaaS: The Numbers That Drive Valuation
Constantin Botnari is a fractional CFO working with SaaS and AI startups in the UK. More at scalewithcfo.com
