CAC, LTV, Payback: SaaS Unit Economics VCs Actually Care About

If you’re raising a SaaS round, VCs will ask about CAC, LTV, and payback. Getting these right signals financial maturity; getting them wrong signals otherwise.

Customer Acquisition Cost (CAC)

Formula: (Sales + Marketing spend in period) / (New customers acquired in period)

Honest calculation includes:

• Full S&M salary and commissions.
• Ads and demand gen.
• Events and content.
• Tool stack (Salesforce, HubSpot, Outreach).
• Allocated overhead for S&M.

Common mistakes:

• Only including paid ads (underreports CAC).
• Including post-sale customer success in sales (overreports CAC).

Lifetime Value (LTV)

Formula (simplified): ARPA × Gross Margin / Churn

Where:

• ARPA: Average Revenue Per Account (annual).
• Gross Margin: Typically 75–90% for SaaS.
• Churn: Annual revenue churn rate.

Worked example:

• ARPA: $12,000
• Gross Margin: 80%
• Churn: 10% annually
• LTV = $12,000 × 0.80 / 0.10 = $96,000

LTV:CAC ratio

• Under 1:1: You lose money on every customer.
• 1:1 – 2:1: Marginal.
• 3:1: Healthy early-stage SaaS.
• 4:1+: You should invest more in growth.

CAC Payback Period

Formula: CAC / (ARPA × Gross Margin)

Example:

• CAC: $20,000
• ARPA × Gross Margin = $12,000 × 0.80 = $9,600/year
• Payback = $20,000 / $9,600 ≈ 25 months

Benchmarks:

• Under 12 months: Excellent.
• 12–18 months: Strong.
• 18–24 months: Typical for enterprise SaaS.
• Over 24 months: Requires exceptional retention to be investable.

Net Revenue Retention (NRR)

Formula: (Starting ARR + Expansion − Churn − Downgrade) / Starting ARR

Benchmarks:

• >130%: Exceptional.
• 110–130%: Strong.
• 100–110%: Healthy.
• Under 100%: Worrying — your base is shrinking.

Gross vs Net Dollar Retention

• Gross Dollar Retention (GDR): Retention without expansion. Floor: how much of last year’s ARR you keep.
• Net Dollar Retention (NDR/NRR): Retention with expansion.

Top investors often weight GDR higher than NRR because expansion can mask bad core retention.

Cohort analysis

Cohort analysis shows how a group of customers acquired in the same period behaves over time. VCs look at:

• Revenue retention curves: Upward curves = expansion > churn.
• Logo retention: How many customers remain.
• Net dollar expansion: Average $/customer growth in the cohort.

Red flags

1. Payback over 24 months with under 100% NRR.
2. CAC mostly paid CAC — little organic pipeline.
3. LTV inflated by assumed 1% churn when actual churn is 10%.
4. No cohort data — “just trust us.”

Practical takeaway

1. Founders: Build a cohort analysis early; it’s your primary fundraising weapon.
2. Investors: Recompute CAC and LTV from raw data in due diligence. Trust but verify.
3. Operators: Plot payback against NRR quarterly — it’s the single best health dashboard.

Further reading

• Bessemer’s State of the Cloud: https://www.bvp.com/atlas/state-of-the-cloud-2024