Metrics That Matter (4 of 5): Cheat Sheet On Unit Economics, The Scalability Test
A quick reference guide on how to measure the true efficiency of your customer lifecycle and decide whether to hit the gas or rebuild the engine.
Having covered GAAP’s universal language and SaaS’s recurring revenue metrics, we now turn to unit economics. A quick reminder of where we are
Measurement Alone Is Not Enough - Relativity, Levers, and Alignment
Levers - Definitions, Cheat Sheets, and Scenarios
Alignment - Frameworks for getting the enterprise rowing in the same direction
Unit economics dig one layer deeper, revealing the profitability and sustainability of your business model at its core. By zeroing in on the economics of a single customer or an average transaction, they show whether each unit you acquire drives long-term value or burns capital.
**Pull up this quick reference Cheat Sheet (GAAP, SaaS, and unit economics) to follow along in the next few posts**
Unpacking Unit Economics
While GAAP and SaaS metrics provide a high-level view of the business’s financial health and recurring revenue, unit economics zoom into the efficiency of the customer lifecycle - covering acquisition cost, retention, and lifetime revenue. Unit economics are all about understanding the cost and value associated with each “unit” of your business, typically, each customer.
They connect your acquisition funnel (winning customers) with your retention and expansion funnel (keeping and growing them). By analyzing unit economics, you can identify bottlenecks, optimize spend, and determine if each customer contributes positively over time. Ultimately, they tell you whether to press the gas or rebuild the engine. While this article introduces metrics applicable at the organizational level, unit economics often lead to department-specific metrics like marketing ROI, sales conversion rates, or customer success scores…topics for future exploration.
Cheat Sheet - Unit Economics
The Metrics, Defined
These metrics are particularly compelling for investors, as they demonstrate the fundamental scalability of your business model. They can also suggest whether and where increased investment in the customer lifecycle might pay off.
CAC (Customer Acquisition Cost): CAC measures the average cost of acquiring a new customer, calculated by dividing total sales and marketing expenses (salaries, commissions, ads, events, tools, etc.) by the number of new customers in a given period (SaaS Academy example of how CAC is calculated). Tracking CAC helps optimize spend and channel effectiveness. A high CAC may signal inefficient lead generation, bloated sales/marketing infrastructure costs, or staffing levels that aren’t generating sufficient bookings. You might consider shifting toward more cost-effective sources like organic content strategies or optimizing your sales process efficiency. A low CAC shows efficiency, but if it’s too low, you may be underinvesting in growth. Because CAC can lag, especially with long sales cycles, some companies use time-phased or cohort-based measurement for more accuracy.
ARPA (Average Revenue Per Account): ARPA is the average amount of revenue generated from each active customer account (or user) over a specific period, typically a month or a year. This metric provides a simple yet powerful snapshot of how much individual customers are spending and can indicate your pricing power, upsell effectiveness, and the general value you provide. Growing ARPA usually signifies a healthy product with increasing value and working expansion motion.
LTV (Lifetime Value): LTV represents the total profit (revenue times gross margin) you can expect to generate from a single customer over the entire period of their relationship with your company. While some calculations use total revenue, focusing on profit provides a more accurate view of a customer's true worth. (more detail at SaaS Academy). Either way, a robust LTV indicates stick product, happy customers, and significant long-term revenue potential. Improving LTV can be done by reducing churn (thus increasing customer lifespan), increasing Average Contract Value, or improving Gross Margin.
LTV:CAC Ratio: This is the ultimate efficiency metric, comparing customer lifetime value (LTV) to acquisition cost (CAC). A healthy ratio (around 3:1) shows you’re acquiring customers efficiently and turning them into profitable, long-term revenue. Investors watch this closely as a signal of capital efficiency and growth potential. According to the Phoenix Strategy Group, a ratio below 1:1 means you’re overspending on acquisition, while an excessively high ratio (5:1+) may indicate underinvestment in sales and marketing to accelerate growth.
Customer Contribution Margin: Similar calculation to Gross Margin but at the individual customer level. This tends to be more sophisticated, requiring time/cost tracking and hardened cost allocation logic. Particularly useful for larger ACV businesses or ones with higher revenue concentration. If meaningfully lower than Gross Margin targets, address implementation efficiency, support scalability, or drive strategic account plans to drive upsells/cross-sells (or reduce service “giveaways”) to create profitable, sustainable engagements. You may even decide to set minimums for a cohort of smaller ARPA customers.
Scenarios
What do your unit economics metrics suggest to you? Do you need to rebuild the engine or step on the gas?
By tracking and optimizing these unit economics, you gain a clear picture of the profitability of your customer relationships. This lets you make data-driven decisions about everything from marketing spend and sales strategies to pricing and product development. This is the key to ensure that your growth is not just fast, but fundamentally sustainable and profitable.
Final Thoughts
We’ve cut through the alphabet soup and framed SaaS metrics in three tiers:
GAAP Metrics – the universal financial language for investors and stakeholders.
SaaS-Specific Metrics – the growth and retention signals unique to recurring revenue.
Unit Economics – the granular view of customer value and profitability.
The point isn’t just to track numbers, it’s to run your business by them. Metrics aren’t paperwork, they’re the engine that turns products into scalable, repeatable revenue machines that build enterprise value.
And this is just the start. Knowing the metrics is one thing. Driving alignment across the company and from the boardroom to front-line teams is what turns insight into outcomes. That’s where we’ll go next.
 |
|