Unit Economics 101: Using CAC and LTV to Guide Pricing Strategy

May 12, 2025

In the competitive SaaS landscape, understanding the intricate relationship between what you spend to acquire customers and what those customers are worth over time isn't just financial housekeeping—it's the foundation of sustainable growth. Unit economics provides the framework to evaluate business efficiency at its most fundamental level: the individual customer unit.

For SaaS executives, mastering the balance between Customer Acquisition Cost (CAC) and Lifetime Value (LTV) isn't merely about measuring performance—it's about crafting pricing strategies that drive profitability and scale. Let's explore how these critical metrics can inform your pricing decisions and create sustainable competitive advantage.

Understanding the Fundamentals of Unit Economics

What Are Unit Economics?

Unit economics refers to the direct revenues and costs associated with a specific business model expressed on a per-unit basis. In SaaS, the "unit" is typically a customer or user account. This analytical approach allows companies to:

Determine if they can profitably acquire and serve customers
Project long-term business viability before achieving economies of scale
Make data-driven decisions about growth investments

According to a report by OpenView Partners, companies with strong unit economics are 2.5x more likely to successfully raise subsequent funding rounds and generally command higher valuations than their counterparts with weaker unit economics.

The Two Pillars: CAC and LTV

Customer Acquisition Cost (CAC) represents the total cost of acquiring a new customer, including marketing and sales expenses. It's calculated as:

CAC = Total Sales & Marketing Expenses / Number of New Customers Acquired

Lifetime Value (LTV) projects the revenue a business expects to generate from a customer throughout their relationship. A basic formula for SaaS companies is:

LTV = (Average Revenue Per User × Gross Margin) / Customer Churn Rate

The relationship between these metrics—particularly the LTV:CAC ratio—serves as a vital indicator of business health.

The Critical Relationship: LTV:CAC Ratio

While individual CAC and LTV figures matter, their relationship is perhaps the most revealing metric for SaaS executives. Tomasz Tunguz of Redpoint Ventures notes that successful SaaS companies typically maintain an LTV:CAC ratio of at least 3:1, meaning they generate three dollars of customer lifetime value for every dollar spent on acquisition.

Ratio < 1:1: Unsustainable business model where you're spending more to acquire customers than they're worth
Ratio 1-3:1: Potentially viable but needs optimization
Ratio ≥ 3:1: Strong unit economics indicating efficient growth

This ratio fundamentally influences how you should approach pricing strategy. A ratio significantly above 3:1 might indicate you're underpricing your product or underinvesting in growth.

Leveraging Unit Economics for Pricing Strategy

1. Determining Pricing Floors

Understanding your CAC provides a clear minimum threshold for your pricing strategy. If your fully-loaded CAC is $1,000 per customer, your pricing must ensure you recoup this investment within a reasonable timeframe—typically 12-18 months for SaaS businesses.

Patrick Campbell, CEO of ProfitWell, emphasizes that "your CAC payback period is directly linked to your cash efficiency and runway. The shorter your payback period, the more flexibility you have to reinvest in growth."

2. Tiered Pricing Guided by Segmented LTV

Different customer segments often display vastly different lifetime values. By calculating segment-specific LTV, you can develop tiered pricing that maximizes revenue from high-value segments while remaining competitive for acquisition-focused segments.

For example, Slack discovered that enterprise customers had 5-7x higher LTV than SMB customers, leading them to develop enterprise pricing plans with advanced features that smaller businesses rarely needed.

3. Feature Monetization Based on Value Metrics

Unit economics can help identify which features drive customer retention and expansion. OpenView's 2022 SaaS Benchmarks Report found that companies aligning their pricing with customer-perceived value metrics grow 10-15% faster than those using arbitrary pricing models.

When Adobe transitioned from perpetual licenses to subscription model, they analyzed feature usage patterns and customer LTV to determine which features belonged in different Creative Cloud tiers, optimizing both adoption and revenue.

4. Dynamic Pricing Optimization

Unit economics provides the foundation for continuous pricing optimization. By monitoring how pricing changes affect CAC, conversion rates, and LTV, SaaS companies can implement dynamic pricing strategies.

HubSpot regularly adjusts its pricing based on unit economic analysis, which has contributed to their ability to increase ARPU by over 40% while maintaining healthy growth rates, according to their investor presentations.

Practical Implementation: A Framework

To implement unit economics-driven pricing, follow this framework:

Measure baseline metrics: Calculate your current CAC, LTV, and LTV:CAC ratio by customer segment
Set targets: Establish desired LTV:CAC ratios (typically 3:1 minimum) and CAC payback periods (12-18 months)
Model pricing scenarios: Test how different pricing structures would affect your unit economics
Implement and monitor: Deploy pricing changes and track their impact on key metrics
Iterate: Continuously refine based on observed changes in conversion rates, churn, and expansion revenue

Common Pitfalls to Avoid

Ignoring Customer Segmentation

Calculating a single LTV figure across your entire customer base can mask significant variations between segments. According to research from Price Intelligently, B2B companies with segment-based pricing see 30-50% higher LTV than those using one-size-fits-all approaches.

Miscalculating True CAC

Many companies underestimate their true CAC by excluding costs like sales salaries, overhead, or content production. A comprehensive CAC calculation is essential for accurate unit economics.

Static Analysis

Unit economics isn't a one-time calculation. David Skok of Matrix Partners emphasizes that "the most successful SaaS companies continuously monitor their unit economics and adjust their growth strategies accordingly."

Conclusion: Unit Economics as Your Strategic Compass

In an environment where growth at all costs has given way to sustainable economics, understanding the relationship between CAC and LTV provides SaaS executives with a strategic compass for pricing decisions.

By anchoring pricing strategy in solid unit economics, companies can achieve the delicate balance between growth and profitability that characterizes the most successful SaaS businesses. This approach transforms pricing from an intuitive art into a data-driven science that supports long-term business health and competitive positioning.

As you refine your pricing strategy, continually revisit your unit economics calculations and let them guide your decisions. In doing so, you'll build pricing models that not only capture appropriate value for your offerings but also support sustainable and efficient growth.