SaaS Unit Economics Calculator

What is a good LTV:CAC ratio for a SaaS company?

The widely cited benchmark is 3:1 — for every dollar spent acquiring a customer, the business should generate three dollars in lifetime gross profit. Below 1:1 means you're destroying value with every new customer; above 3:1 is considered healthy; 5:1 and above typically signals either very strong unit economics or, in some cases, underinvestment in growth.

A few important caveats:

The ratio is meaningless without the payback period. A 10:1 LTV:CAC ratio is not impressive if the payback period is 8 years, because the capital is tied up for a long time and the lifetime assumptions become speculative. A 3:1 ratio with an 18-month payback is a much stronger business than a 10:1 ratio with a 7-year payback.

Stage matters. Early-stage companies often have high LTV:CAC ratios because CAC is low (founders doing sales, word-of-mouth growth) before the business scales its go-to-market. Series B+ companies building out sales teams typically see LTV:CAC compress toward 3–5× as they deploy more capital into acquisition.

Gross margin is inside the LTV. LTV should always be calculated using gross profit, not revenue. A company with 40% gross margins and a 5:1 LTV:CAC is not equivalent to one with 80% margins and a 5:1 ratio — the high-margin business is generating significantly more durable value per customer.

The 3:1 benchmark comes from SaaS capital efficiency analysis popularized by Bessemer and others. It's a starting point, not a ceiling — what matters is the trend over time and whether the ratio is improving as the business scales.

What is Net Revenue Retention (NRR) and why do investors care more about it than churn rate?

Net Revenue Retention (NRR), sometimes called Net Dollar Retention (NDR), measures how much revenue a cohort of existing customers generates over time — including expansions, upgrades, and upsells, minus downgrades and cancellations, but excluding any new customers added after the measurement start date.

An NRR of 100% means existing customers are generating the same revenue as they were 12 months ago. An NRR above 100% means existing customers are generating more revenue — the business grows even with zero new customer acquisition. An NRR below 100% means the existing base is shrinking and the company must constantly win new customers just to maintain flat revenue.

Churn rate only measures what you lose. NRR measures the net change in your existing revenue base — it captures both losses (cancellations, downgrades) and gains (upsells, expansions) simultaneously. A company with 5% monthly churn but 8% monthly expansion MRR has negative net churn, meaning its existing customers are collectively paying more over time.

For investors, NRR above 120% is a signal of a fundamentally different type of business — one where growth compounds from the existing base without proportional increases in sales spending. The threshold benchmarks most commonly cited:

• Below 100%: the existing base is shrinking — a headwind that new customer growth must overcome
• 100–110%: healthy, typical for SMB-focused SaaS with higher natural churn
• 110–120%: strong, indicates meaningful expansion revenue
• 120%+: exceptional, typical of best-in-class enterprise software

What is the Magic Number and how do I calculate it?

The Magic Number is a measure of go-to-market efficiency — specifically, how much gross profit growth you're generating for each dollar spent on sales and marketing.

The formula: Magic Number = (Net New ARR × Gross Margin) ÷ Prior Period S&M Spend. In practice, most people calculate it quarterly, using the prior-quarter S&M lag to account for the fact that sales investments take time to generate revenue.

How to interpret it:

• Below 0.5: GTM efficiency is poor — the business is spending significantly more than it's generating in gross profit. Usually a signal to slow growth spending and fix the underlying economics first.
• 0.5–0.75: Below average but improving companies often operate here. Warrants scrutiny of sales cycle, conversion rates, and CAC components.
• 0.75+: Efficient. A common threshold beyond which investors become comfortable scaling S&M spend.
• 1.0+: Excellent. Every dollar of S&M spend generates more than a dollar of gross profit from new ARR within a year.
• 1.5+: Exceptional. Rare outside of very early stage or extremely product-led companies.

A low Magic Number doesn't necessarily mean poor unit economics at the customer level — a company can have a 7× LTV:CAC ratio and a 0.2 Magic Number simultaneously if fixed S&M overhead is high relative to current monthly new ARR generation. The Magic Number measures current period GTM efficiency; LTV:CAC measures lifetime return. Both matter.

What is the difference between Gross Revenue Retention and Net Revenue Retention?

Both metrics track what happens to a cohort of existing customers over time, but they measure different things.

Gross Revenue Retention (GRR) only counts losses — revenue churned from cancellations and lost to downgrades. It cannot exceed 100% because it excludes expansion. A GRR of 85% means that 15% of existing MRR was lost to cancellations and downgrades over the measurement period, with no consideration of upsells.

Net Revenue Retention (NRR) counts both losses and gains from the same cohort of customers — expansion, upsell, and cross-sell revenue as well as churn and contraction. Because it includes expansion, NRR can exceed 100%.

GRR tells you the floor — even if your expansion engine completely stopped working tomorrow, how much of your existing revenue would survive? NRR tells you the full picture of how existing customers are trending as a unit. The two numbers together reveal what's happening:

• High GRR + high NRR: customers stay and expand — the ideal
• Low GRR + high NRR: you're losing a lot of small customers but upselling heavily into a smaller number of large ones — often a segmentation or ICP issue
• High GRR + low NRR: customers stay but don't expand — a monetization problem, not a retention problem
• Low GRR + low NRR: a fundamental product-market fit or customer success issue

What should I include in Customer Acquisition Cost (CAC), and what are the most common mistakes?

CAC is the total cost required to acquire one new paying customer: CAC = Total Sales & Marketing Spend ÷ Number of New Customers Acquired. Both the numerator and denominator have significant judgment calls that companies get wrong in ways that make their CAC look better than it is.

Common CAC calculation mistakes:

• Including only variable costs. Many founders count only sales commissions and ad spend, omitting salaries for sales reps, SDRs, and marketing headcount. Fully-loaded CAC should include all compensation costs for sales and marketing employees, tools, events, agencies, and allocated overhead.
• Counting leads or trials as customers. CAC should only use the number of customers who actually converted to a paid subscription.
• Not matching the time period. If you're calculating CAC for Q2, use Q2 customer acquisitions in the denominator — but consider using Q1 S&M spend in the numerator to account for the lag between marketing investment and closed deals.
• Blending new and existing customer costs. Account management and customer success costs affect LTV rather than CAC directly and should be tracked separately.

What to include in fully-loaded CAC:

• Full salaries and benefits for everyone in sales and marketing
• Sales and marketing tools, software, and data subscriptions
• Advertising and demand generation spend
• Events, trade shows, and content production
• Commissions, bonuses, and recruiting costs for sales and marketing hires

A useful sanity check: calculate CAC by channel if you can. Blended CAC hides a lot — a company spending $200k/month on paid search with poor conversion and $50k/month on content with excellent conversion has very different economics than the blended number suggests.