SaaS Finance Metrics Glossary

Finance metrics are the language of SaaS unit economics. Understanding Customer Lifetime Value (LTV), Customer Acquisition Cost (CAC), and related metrics tells you whether your business is sustainable and profitable.

This glossary covers the financial metrics that matter most: how they're calculated, what they tell you, and how they interact with retention and churn.

Customer Lifetime Value Customer Acquisition Cost LTV:CAC Ratio Customer Health Score Willingness to Pay

Definition

Customer Lifetime Value (LTV), also called CLTV or CLV, is the total amount of revenue a customer will generate for your business over their entire relationship with you.

LTV is one of the most important metrics in SaaS because it determines how much you can spend to acquire customers while still remaining profitable.

Formula - Simple

Simple LTV:
LTV = Average Monthly Revenue Per User (ARPU) × Customer Lifespan (months)

Formula - Detailed

Detailed LTV:
LTV = ARPU ÷ Monthly Churn Rate

Example Calculation

Scenario:

  • Average customer pays: $100/month
  • Average customer lifetime: 36 months (because churn is low)

LTV = $100 × 36 = $3,600

Why LTV Matters

  • Profitability calculator: If CAC is $1500 and LTV is $3600, you're profitable
  • Retention ROI: Shows how much improving retention increases business value
  • Scaling decisions: Determines if you can spend more on acquisition
  • Pricing validation: Higher LTV means you can charge more

How Retention Impacts LTV

Monthly Churn Average Lifespan LTV (at $100 ARPU)
5% 20 months $2,000
3% 33 months $3,333
2% 50 months $5,000

Notice: A 1% improvement in retention increases LTV by 15-25%!

Definition

Customer Acquisition Cost (CAC) is the total cost of acquiring one new customer, including all marketing and sales expenses.

CAC includes salaries, software, advertising, events—every expense involved in selling and marketing.

Formula

CAC Formula:
CAC = Total Sales & Marketing Spend / Number of New Customers Acquired

Example Calculation

Monthly metrics:

  • Sales & Marketing spend: $50,000
  • New customers acquired: 25

CAC = $50,000 ÷ 25 = $2,000 per customer

Why CAC Matters

  • Go-to-market efficiency: Lower CAC = better unit economics
  • Payback period: Shows how long it takes to recover acquisition costs
  • Venture viability: Investors demand CAC < 1 year of revenue
  • Scaling decisions: Can you afford to acquire more customers at current CAC?

CAC Payback Period

Formula: CAC Payback = CAC ÷ Monthly Profit per Customer

If CAC is $2,000 and customer pays $100/month with 80% margin ($80), payback is $2,000 ÷ $80 = 25 months

Definition

LTV:CAC Ratio compares the lifetime value of a customer to the cost of acquiring them, showing the return on your acquisition investment.

This is the most important profitability metric in SaaS because it shows if your business model works.

Formula

LTV:CAC Ratio:
LTV:CAC = Customer Lifetime Value ÷ Customer Acquisition Cost

What It Means

LTV:CAC Ratio What It Means Action
3:1 or higher You earn $3+ for every $1 spent on acquisition Excellent; you can scale
2:1 to 3:1 You earn $2-3 for every $1 spent Healthy; acceptable to scale cautiously
1:1 to 2:1 You earn $1-2 for every $1 spent Risky; focus on improving retention or reducing CAC
Below 1:1 You lose money on every customer Not viable; stop scaling immediately

Example

  • LTV: $3,600
  • CAC: $1,200

LTV:CAC Ratio = $3,600 ÷ $1,200 = 3:1

Excellent ratio. This business can scale profitably.

How to Improve LTV:CAC

Increase LTV: Reduce churn, increase pricing, add upsells

Reduce CAC: Improve conversion, focus on high-value channels, automate sales

Definition

Customer Health Score is a composite score that predicts the likelihood of a customer staying, expanding, or churning based on their engagement and usage patterns.

It combines multiple signals (usage, support tickets, NRR, etc.) into one predictive score.

Common Health Score Components

Component What It Measures Impact
Usage Feature engagement, login frequency Low usage = high churn risk
Support Sentiment Tone of support interactions Frustrated users are at-risk
MRR Trend Is their account growing or shrinking? Declining MRR = churn signal
Contract Status Renewal coming up soon? Early warning for renewal risk

How It Works in Practice

Customer A: High usage, responsive support interactions, growing MRR = Score: 85/100 (Low risk)

Customer B: Declining usage, 3 support complaints, shrinking MRR = Score: 25/100 (High risk, needs intervention)

Why Health Scoring Matters

  • Proactive retention: Intervene with at-risk customers before they churn
  • Resource allocation: Focus support on customers who need it most
  • Expansion opportunities: Identify high-health accounts ready to expand
  • Predictive power: Correlate score with actual churn to validate

Definition

Willingness to Pay (WTP) is the maximum amount a customer would pay for your product or service before deciding it's too expensive.

It's determined by their perceived value, alternatives, and budget constraints.

How to Estimate WTP

  • Surveys: Ask customers directly: "What's the most you'd pay?"
  • Price testing: A/B test pricing tiers and measure conversion
  • Van Westendorp Analysis: Survey on price perception (too cheap, acceptable, expensive, too expensive)
  • Feature extraction: Analyze which features drive pricing willingness

Why WTP Matters

  • Pricing optimization: Set prices to capture maximum value
  • Expansion room: Know how much you can raise prices
  • Segment analysis: Different segments have different WTP
  • Profitability: Price closer to WTP = higher margins

WTP by Customer Segment

Segment Typical WTP Reason
Startup $100-500/month Limited budget, cost-conscious
Mid-market $500-2000/month Growing budget, ROI-focused
Enterprise $2000+/month Mission-critical use case, budget available

How These Metrics Connect

LTV (from retention) vs. CAC = Profitability → Health Scoring = Retention

The financial metrics tell the story of your business:

  1. Good retention → Higher LTV
  2. Higher LTV → Better LTV:CAC ratio
  3. Better ratio → Can invest more in CAC
  4. Health scoring → Predict & prevent churn
  5. Better retention → Cycle continues

Key Takeaways

Metric Formula Target
LTV ARPU ÷ Churn Rate 3x+ your CAC
CAC S&M Spend ÷ New Customers Lower is better
LTV:CAC LTV ÷ CAC 3:1 or higher
Health Score Composite of usage + sentiment Monitor trends, intervene on low scores
WTP Customer surveys + testing Set pricing near WTP ceiling

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