SaaS Metrics 2.0
David Skok · 2013
"A definitive dashboard of SaaS unit economics (CAC, LTV, churn, magic number) for building and funding SaaS."
Subscription software businesses (SaaS) don't get paid all at once like a normal sale — they get a little bit of revenue every month for as long as the customer stays. That changes what actually matters to track. Skok's essay lays out the core numbers every SaaS founder and investor should watch: how much it costs to acquire a customer (CAC), how much that customer is worth over their whole lifetime (LTV), how fast customers cancel (churn), and how efficiently each new dollar of sales/marketing spend turns into new recurring revenue (the 'magic number'). Get the relationship between these numbers wrong, and a SaaS company can look like it's growing while actually burning cash faster than it can ever earn it back.
The mechanism is that in subscription businesses, the money to pay back what you spent acquiring a customer arrives slowly, in installments, over months or years — so if a customer cancels (churns) before you've earned back their acquisition cost, you've lost money on them permanently, no matter how much revenue they generated before leaving. This is why the ratio of LTV to CAC (rule of thumb: LTV should be roughly 3x or more of CAC, recovered within about 12 months) matters more than raw revenue growth, and why churn is treated almost as dangerous as a leak in a bucket you're constantly pouring new water into. A SaaS company with high growth but bad LTV:CAC or high churn isn't actually building a durable business — it's renting growth.
Why is customer churn especially dangerous in a SaaS/subscription business, more than in a one-time-purchase business?
Read more about the topic
The explanation above is written with AI assistance. These are the originals — go to them to check it.
- SaaS Metrics 2.0 (original essay)forEntrepreneurs — David Skok
- David Skok of Matrix Partners: Driving SaaS Success Using Key MetricsYouTube
- David Skok, GP @ Matrix Partners (video + transcript)SaaStr
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