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People talk about ‘unit economics’ all the time in SaaS.
But what is it?
Here’s a layperson’s definition:
Unit economics is figuring out how much money you’ll make or lose every time you sign up a new customer.
Why is this important?
To determine how profitable your company can be in the long run. Or if it can even be a viable business at all.
Unit economics take into account a number of factors, like…
1/ Revenue
The amount customers pay you for your product.
2/ Gross Profit
The amount of revenue left over after cost of goods sold (COGS) are subtracted from revenue.
(In SaaS COGS include product infrastructure and hosting costs as well as the salaries of support, services, and success teams.)
3/ Gross Retention Rate
The rate at which we retain customer revenue over a period of time, typically a quarter (annualized) or a year.
4/ Customer Acquisition Cost
How much we spend in marketing and sales to land a dollar of new customer ARR.
The classic unit economics metric is LTV:CAC.
Again in laypeople terms…
How much (gross) profit do we make across the life of a paying customer versus how much we spent to acquire them in the first place.
In SaaS we need this ratio to be 3-5x. Or even higher.
(this metric has some serious limitations, but more on that later…)
Interestingly, none of this accounts for customer expansion sales which can catapult unit economics into the stratosphere.
I write about the business aspects of SaaS so that leaders in sales, marketing, customer success, and product development can level up as leaders.
In this weekend’s GrowthCurve newsletter I’ll dive deep into unit economics.
GrowthCurve.io
What thoughts and questions do you have about SaaS unit economics?
#saas #sales #marketing #product
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