Money, Pricing & Model

How do I calculate CAC (customer acquisition cost) and LTV?

A starting point

CAC = total sales and marketing spend divided by new customers acquired in that period, count everything, not just ad spend. LTV = the profit (not revenue) a customer generates over their lifetime, which depends on margin and churn. Both are estimates early on; the point is to track the trend, not chase false precision.

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16 Startup Metrics

From a16z by Andreessen Horowitz (a16z) ~15 min read

Why we picked it

The reference primer on the metrics and market-sizing logic investors use, including bottom-up market sizing that keeps founders honest about how big a market really is. Canonical a16z source.

  • Size markets bottom-up from customer count and willingness to pay
  • Know the metrics that actually signal a healthy business
  • Distinguish real traction from vanity metrics
  • Use consistent definitions when comparing yourself to the market
Open a16z.com →
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SaaS Metrics 2.0, Detailed Definitions

From forentrepreneurs.com by David Skok long-form reference

Why we picked it

David Skok's For Entrepreneurs work is the foundational, near-universally cited source on SaaS unit economics and modeling. It's where the LTV:CAC and CAC-payback conventions were popularized.

  • Unit economics (LTV:CAC and months to recover CAC) reveal long-term profitability
  • Simple LTV formulas break when revenue expands over a customer's lifetime
  • Build financial models from real drivers, not top-down market-share guesses
Open forentrepreneurs.com →
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Why Do Investors Care So Much About LTV:CAC?

From a16z.com by Andreessen Horowitz (a16z) article

Why we picked it

A focused a16z piece on the single ratio that most captures a business's efficiency and drives its valuation. Great for founders who need to understand the 3:1 benchmark and its limits.

  • 3x LTV:CAC is a common rule-of-thumb benchmark for healthy unit economics
  • Higher LTV:CAC drives higher margins and therefore higher valuation
  • The ratio can mislead, CAC payback period matters just as much for cash
Open a16z.com →

People also ask

What are unit economics and why do they matter? Unit economics is the profit or loss on a single customer or unit, strip away the noise and ask 'do I make money on one customer?' If the answer is... Beginner 3 resources → What is a good LTV to CAC ratio? The rule of thumb is LTV:CAC of at least 3:1, earn back roughly three times what it costs to acquire a customer. Below 1:1 you lose money on every ... Intermediate 3 resources → What metrics should I actually track as an early-stage SaaS founder? Early on, obsess over MRR growth, churn, gross margin, and CAC payback, ignore vanity metrics like downloads and pageviews. Net revenue retention t... Intermediate 3 resources → How do I build a simple financial model or revenue projection? Build bottom-up from real drivers, leads, conversion rate, price, churn, not top-down from 'we'll grab 1% of a huge market.' A useful early model f... Intermediate 3 resources → What is churn and how much churn is too much? Churn is the rate customers leave, and it silently caps your growth because you're refilling a leaky bucket. For SMB SaaS, ~3-5% monthly is common ... Intermediate 2 resources → What tools should I use to track competitors and market landscape? Start free and manual before you pay for anything: Google Alerts and their newsletter for moves, G2/Capterra reviews for weaknesses, Crunchbase for... Intermediate 2 resources →