The Essential Unit Economics Guide For SaaS Businesses

Unit economics is fundamental to the success of any early-stage SaaS company. As TechCrunch put it, venture capitalists (VCs) rely on unit economics to assess if a company can thrive financially and scale without relying heavily on outside funding or capital. And that makes perfect sense.

“Companies presenting strong unit economics and reinvestment opportunities may have more leverage […] because of their impressive health: They’re burning less [money], have more room to breathe, and have more runway. In short, they’re growing sustainably.” 

Keeping an eye on unit economics is essential to ensure your decisions are profitable. For example, if you decide whether to acquire a customer at one price or another, unit economics can guide you to the right choice. The same goes for how much you should spend on sales and marketing. 

Simply put, unit economics is all about measuring efficiency. However, pulling together the necessary data for these calculations, like Customer Acquisition Cost (CAC), can be tricky — unless you have the right technology to support you. 

Conventional knowledge often links unit economics with consumer industries, but it’s just as relevant to SaaS companies. Unit economics involves the breakdown of direct revenues and costs for a particular business model or product calculated per unit. For SaaS companies, a “unit” typically represents a single customer.

Simply put, positive unit economics signals that when you acquire more customers, your profit margin increases, encouraging you to invest further in growth initiatives like sales, marketing, or product development.

Unit economics is particularly critical for early-stage SaaS startups that have to validate their business model, confirm market demand, and make informed decisions about pricing strategy, marketing, and growth decisions. 

But established SaaS companies rely on unit economics, too. It can help more mature businesses identify areas for improvement, optimize pricing and marketing efforts, and make strategic decisions about product lines, customer segments, and expansion plans.

Essentially, this framework signals your company’s financial viability and is a key component of SaaS financial models.

Key Components of Unit Economics

Unit economics really matters when looking at your products’ profitability and scalability. Below, we’ve shared some of the financial metrics that make up key elements of unit economics:

• Customer acquisition cost (CAC)
• Customer lifetime value (LTV or CLV)
• LTV to CAC ratio
• CAC Payback Period
• Annual recurring revenue (ARR)
• Rule of 40 (R40)
• SaaS Magic Number

These metrics can help you and other stakeholders figure out just how well your company is doing financially and whether it can grow sustainability. Take, for instance, LTV and CAC. By analyzing your LTV relative to the CAC, you can determine if your SaaS company is actually profiting from each new customer it gains. A high LTV/CAC ratio indicates profitability, whereas a low ratio suggests you’re spending too much on customer acquisition compared to the revenue they bring in.

These insights also open up the opportunity for you to refine your business strategies to improve the metrics. This way, you’ll see higher profitability, better cash flow, and stronger appeal to investors.

Calculating Unit Economics for SaaS

Remember when we said that pulling these critical metrics on an ongoing basis can be complex without the right tech? That still holds true. Luckily, this is where Mosaic — our strategic finance platform designed for SaaS — comes in. With Mosaic, you can create crucial inputs for your unit economics metrics, formulate your calculations, and automate them to ensure they’re always available and up-to-date.

Specifically, Mosaic’s Analysis Canvas allows you to seamlessly integrate all your key metrics into one cohesive dashboard. With just a few clicks, you can open a new canvas and start adding out-of-the-box unit economics metrics like CAC, LTV, rule of 40, SaaS magic number, and more.

Moreover, Mosaic’s intuitive interface enables you to visualize these metrics in various formats, apply date filters, and customize your reports effortlessly. And for more complex calculations, such as the LTV to CAC ratio, Mosaic’s Metric Builder lets you create custom metrics tailored to your company’s specific needs, making sure your analysis is based on accurate and holistic data. 

Let’s dive into how you calculate two of the most significant unit economics metrics and how Mosaic makes a difference.

CAC Calculation

CAC is how much you typically spend to gain one new customer. It’s a crucial part of your unit economics and sheds light on how well your sales and marketing efforts are working to bring in new business, so let’s zoom in on this metric.

To calculate CAC, start by adding all your sales and marketing expenses, then divide that total by the number of new customers you gained during that period.

While this formula seems straightforward, it’s easy to slip up. Gathering all the data you need quickly complicates things. Moreover, this data is often scattered across different systems and not standardized. 

For example, employee salaries and commissions are in your HR system, advertising expenses are in your ERP, and customer counts are in your CRM. You also need to consider indirect costs like travel, software tools, and equipment, which are mixed into general business expenses in your ERP. Plus, there’s no automatic system to compile and calculate all this data. It’s a manual process, usually updated quarterly or, at best, monthly after the period ends. 

Mosaic can compile all this data into a single source of truth, giving you real-time insights into your metrics. Mosaic links up with all the essential data sources you need for your CAC calculation. The clear, straightforward interface and intuitive features let you easily define what goes into your CAC, saving you from the dreaded hours of manual data crunching or wrestling with Excel.

Mosaic also helps you create predictive models to see how changes like increasing your ad spend or adding more sales reps might affect your CAC. This allows you to adjust your marketing and sales budgets more strategically and make informed decisions.

LTV Calculation

LTV is the total amount of money you expect to earn from a customer throughout the relationship, a.k.a. the customer lifespan. It’s an important metric that helps you understand how much your customers value your product, what you’re doing right, and where you could improve.

To calculate LTV, multiply the average revenue you earn from each user (ARPU) by your gross margin. Then, you divide that result by your churn rate.

While there are more granular ways to calculate LTV, this formula gives you a good sense of how much each customer is worth over the time they stay with you.

That said, in reality, calculating LTV is quite challenging. You need to collect detailed data like purchase dates, contract lengths and costs, and any changes such as upsells or renewals. You might also want to sort this data by product type and time period to understand how various factors influence customer relationships.

Basically, you’d be sifting through a lot of customer data from different stages of their lifecycle, which is often tucked away in your CRM in formats that are not easy to work with. Obviously, gathering, cleaning, and analyzing this data takes much effort. Additionally, you’d need to compare this data with your CAC to inform your business strategy and ensure sustained growth.

Mosaic integrates with your CRM to automatically gather, normalize, and calculate your customer LTV. It also organizes customers by cohort and product line, allowing you to monitor the success of particular sales and marketing strategies and identify the most valuable customer journeys and milestones — all in real time.

And we’re barely scratching the surface of what Mosaic can do for SaaS finance teams.

The Role of Unit Economics in Business Strategy

Unit economics is key to shaping your business decisions and strategies, whether you’re a startup or running an established SaaS company.

By looking at the direct revenues and costs associated with a product or customer, you gain essential insights that influence many parts of your operations and long-term planning — from pricing and marketing spending to product development and growth strategies.

Making Data-Driven Decisions with Unit Economics

Unit economics can really guide your strategic decision-making to be more data-driven, especially when tightening your spending.

For instance, if you discover that your LTV justifies it, you might decide to spend more on acquiring customers, whether that’s through beefing up sales commissions or investing more in impactful paid marketing channels. Conversely, if the numbers don’t add up, pulling back on these expenses can prevent wasteful spending.

Unit economics can also help ensure that the sales quotas set for your Account Executives (AEs) align with their On-Target Earnings (OTE), ensuring their goals are achievable and directly contribute to the company’s profitability. This way, you don’t just keep your budget in check but also align your team’s efforts with the overall financial health of your company.

Unit Economics in Forecasting and Growth Planning in Volatile Markets

Unit economics is a critical tool for predicting future performance and planning for growth, especially in an unpredictable economy.

Take a volatile market, for example. With greater visibility into financial metrics, you can adjust metrics to fit your company’s unique needs, like extending the CAC for longer sales cycles and creating more accurate forecasts that truly capture your operational reality. Additionally, you can predict financial outcomes more accurately, prepare for growth, and allocate resources efficiently.

Notably, granular and reliable forecasts can be key to your survival in such uncertain economic environments. Dr. Barry Keating, a professor of business economics and predictive analytics at Notre Dame, stressed the importance of “nowcasting,”  i.e., making short-term, real-time forecasts. According to him, companies that don’t use near- or real-time data to spot external threats “are going to be the ones who don’t exist in the future.”

And that’s where Mosaic really shines.

Mosaic’s Unique Approach to Unit Economics

All these metrics, in isolation, only tell you part of the story. In unit economics, you’d really have to dig deep and look at all the key metrics together to truly understand what’s happening with your company and the impact of your decisions on its financial health. And spreadsheets aren’t cut out for that.
But with Mosaic, you get access to all of your data from different sources — ERP, CRM, HRIS, billing, and flat file upload — in real time on a continuous basis. Mosaic comes with 150+ out-of-the-box metrics relevant to most SaaS businesses, but you can also create custom metrics unique to your business with Metric Builder.

You can monitor your company’s financial performance and gather immediate insights. Plus, it comes with financial dashboards that make it easy to understand the data and share insights with your stakeholders and investors — in a way that resonates with them.

In other words, Mosaic streamlines SaaS finance, for you and your team.

The Strategic Value of Unit Economics

As you’ve gathered by now, unit economics is pivotal in assessing and shaping the profitability and scalability of your business model. By optimizing key unit economic metrics like CAC and LTV, you can drive sustainable growth, attract investors, and make strategic decisions that align with your overall business goals.

Simplify unit economics with Mosaic. Request a personalized demo.