The Unit Economics That Actually Matter

I've watched hundreds of SaaS founders obsess over their LTV:CAC ratio, only to burn through runway because they're measuring the wrong things. The problem isn't that unit economics don't matter—it's that most founders are calculating them wrong.

The LTV:CAC Lie Most Founders Tell Themselves

Here's the uncomfortable truth: that 3:1 LTV:CAC ratio you're bragging about to investors? It might be worthless.

Most founders calculate LTV using simple formulas they found in blog posts, without understanding the assumptions baked in. They use annual churn rates when they should use monthly. They ignore gross margins. They assume linear churn when reality is exponential.

The result? Beautiful unit economics on paper, burning cash in reality.

Try Your Real Numbers

Before we dive deeper, let's see where your unit economics actually stand. Plug in your real numbers—not the ones you tell investors:

Uncomfortable with those results? You're not alone. Let's break down what's actually happening.

The Four Metrics That Actually Matter

1. Time-Based LTV (Not Revenue-Based)

Most founders calculate LTV as:

LTV = Average Revenue ÷ Churn Rate

This assumes customers churn linearly forever. In reality, churn rates change over time. Early customers behave differently than late ones. Power users have different patterns than casual users.

**What to track instead:**

- 12-month LTV (actual revenue from cohorts)
- Cohort-based retention curves
- LTV by customer segment

### 2. True CAC (Not Blended CAC)

That \$200 CAC you calculated? It's probably wrong. Most founders use blended CAC across all channels, which hides the fact that their best channel has a \$50 CAC while their worst has a \$800 CAC.

**What to track instead:**

- CAC by acquisition channel
- Fully-loaded CAC (including salaries, tools, overhead)
- CAC payback period by channel

### 3. Gross Margin Reality Check

SaaS companies love to claim 80%+ gross margins by ignoring:

- Support costs
- Infrastructure scaling costs
- Customer success overhead
- Payment processing fees

**What to track instead:**

- Unit-level gross margins
- Margin degradation as you scale
- Support cost per customer

### 4. The Payback Period Truth

A 3:1 LTV:CAC ratio sounds great until you realize it takes 18 months to pay back CAC. You'll run out of cash before you see returns.

**The reality check:**

- Payback period should be under 12 months
- Shorter is better for cash flow
- Factor in your burn rate and runway

```chart
{
  "title": "The Great $100M Vanishing Act",
  "description": "When CAC payback stretches past a year, cash falls off a cliff long before the spreadsheet LTV arrives.",
  "xKey": "period",
  "xLabel": "Time",
  "yLabel": "Cash Balance ($M)",
  "yTickFormat": "currency",
  "ySuffix": "M",
  "yDecimals": 0,
  "legend": false,
  "referenceLines": [
    {
      "value": 0,
      "label": "Runway Gone",
      "color": "hsl(0 84% 60%)",
      "variant": "dashed"
    }
  ],
  "data": [
    { "period": "Month 0", "cash": 100 },
    { "period": "Month 3", "cash": 72 },
    { "period": "Month 6", "cash": 44 },
    { "period": "Month 9", "cash": 18 },
    { "period": "Month 12", "cash": -4 },
    { "period": "Month 15", "cash": -22 },
    { "period": "Month 18", "cash": -37 }
  ],
  "series": [
    {
      "dataKey": "cash",
      "name": "Cash Left ($M)",
      "color": "hsl(0 84% 60%)",
      "area": true,
      "fillOpacity": 0.25,
      "curve": "monotone"
    }
  ]
}
```

## The Unit Economics Death Spiral

Here's what kills most SaaS companies:

1. **Growth at all costs** - "We'll fix unit economics at scale"
1. **Channel mixing** - Blending good and bad acquisition channels
1. **Retention blindness** - Focusing on new revenue, ignoring churn
1. **Margin erosion** - Costs that grow faster than revenue

I've seen companies with "amazing" unit economics fail because they:

- Couldn't sustain their best acquisition channels at scale
- Didn't account for market saturation
- Ignored the cash flow timing of their business model

## What Healthy Unit Economics Actually Look Like

**For early-stage SaaS:**

- LTV:CAC of 3:1 minimum (calculated conservatively)
- Payback period under 12 months
- Monthly churn under 5%
- Gross margins above 70% (fully loaded)

**For growth-stage SaaS:**

- LTV:CAC of 4:1+ (with channel diversification)
- Payback period under 9 months
- Monthly churn under 3%
- Improving unit economics as you scale

## The Action Plan

1. **Recalculate everything** using conservative assumptions
1. **Segment by channel** and kill the worst performers
1. **Track cohort retention** over time, not averages
1. **Model cash flow** timing, not just ratios
1. **Stress test** your assumptions with 20% worse performance

The goal isn't perfect unit economics—it's sustainable, cash-flow-positive growth that you can actually achieve and maintain.

## The Bottom Line

Unit economics matter, but only if you're measuring the right things. That beautiful LTV:CAC ratio means nothing if you can't sustain it, scale it, or fund it.

The companies that survive aren't the ones with the best unit economics on paper. They're the ones who understand their real economics and build around them.

Stop lying to yourself about your numbers. Your bank account will thank you.
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