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 (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.
Scenario: Average customer pays $100/month. Average customer lifetime: 36 months (because churn is low).
LTV = $100 × 36 = $3,600
| Monthly Churn | Average Lifespan | LTV (at $100 ARPU) |
|---|---|---|
| 5% | 20 months | $2,000 |
| 3% | 33 months | $3,333 |
| 2% | 50 months | $5,000 |
A 1% improvement in retention increases LTV by 15–25%.
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.
Monthly metrics: Sales & Marketing spend: $50,000. New customers acquired: 25.
CAC = $50,000 ÷ 25 = $2,000 per customer
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.
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.
| 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 |
LTV: $3,600 / CAC: $1,200
LTV:CAC Ratio = $3,600 ÷ $1,200 = 3:1 — Excellent ratio. This business can scale profitably.
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.
| 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 |
High usage, responsive support interactions, growing MRR = Score: 85/100
Declining usage, 3 support complaints, shrinking MRR = Score: 25/100 (needs intervention)
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.
| Segment | Typical WTP | Reason |
|---|---|---|
| Startup | $100–500/month | Limited budget, cost-conscious |
| Mid-market | $500–2,000/month | Growing budget, ROI-focused |
| Enterprise | $2,000+/month | Mission-critical use case, budget available |
LTV (from retention) vs. CAC = Profitability → Health Scoring = Retention
The financial metrics tell the story of your business:
| 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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