Definition of one unit in business for SaaS <\/a>companies, as a rule, is a customer. Thus, unit economics for them boils down to the calculation of profit and loss per client.<\/p>\n\n\n\n Unit economics analysis depends on the unit economics model you\u2019re using in your company. The unit economics model presupposes two approaches to calculating revenues and costs depending on how companies define their unit: unit defined as \u201cOne item sold\u201d and unit defined as \u201cOne customer.\u201d<\/p>\n\n\n\n If a unit is defined as \u201cone item sold,\u201d a company can determine its revenue\/cost balance using the contribution margin. It is calculated as a difference between a price per item and variable costs per sale:<\/p>\n\n\n\n Variable costs are the expenses that vary depending on the quantity of the product you produce, e.g., materials, sales compensation<\/a>, and so on. <\/p>\n\n\n\n Example:<\/strong><\/p>\n\n\n\n A particular laptop in a computer hardware store costs $150. The computed variable cost per laptop is $60, so the contribution margin will be:<\/p>\n\n\n\n Contribution margin per laptop = $150 \u2013 $60<\/em><\/p>\n\n\n\n Contribution margin = $90<\/em><\/p>\n\n\n\n To count the total contribution value, you should calculate the number of items sold during a certain period. Say, one customer purchases an average of one such laptop (which costs $150). For the first month, it was sold to 130 clients. To count the total price of items, you should multiply the number of customers by the cost of one laptop:<\/p>\n\n\n\n Total price of laptops = 130 \u0445 $150<\/em><\/p>\n\n\n\n Total price of laptops = $19,500<\/em><\/p>\n\n\n\n To count the total number of variable costs, you should multiply the variable cost per laptop by the number of laptops sold:<\/p>\n\n\n\n Total variable costs = 65 \u0445 130<\/em><\/p>\n\n\n\n Total variable costs $8,450<\/em><\/p>\n\n\n\n So, the total contribution margin will be:<\/p>\n\n\n\n Total contribution margin = $19,500 \u2013 $8,450<\/em><\/strong><\/p>\n\n\n\n Total contribution margin = $11,050<\/em><\/strong><\/p>\n\n\n\n For companies that define a unit as \u201cone customer,\u201d unit economics is commonly determined by the ratio of two metrics: customer lifetime value (CLV) and customer acquisition cost (CAC). Some businesses, however, count a CAC payback period instead. Let\u2019s consider both options.<\/p>\n\n\n\n Customer lifetime value (CLV)<\/strong> is how much money a business gets from a customer before they stop purchasing from the company. To calculate CLV, you should multiply the average value of purchase by the number of times your customer makes purchases a year, as well as an average length of your customer relationship in years:<\/p>\n\n\n\n You may find more information about CLV in this glossary article<\/a>.<\/p>\n\n\n\n Customer acquisition cost (CAC)<\/strong> is how much money a business allocates in attracting a customer. This includes the total sales and marketing costs (campaigns, salaries, programs, and so on).<\/p>\n\n\n\n To calculate CAC, you need to divide the total sales and marketing costs by the number of new customers won. <\/p>\n\n\n\n Example:<\/strong><\/p>\n\n\n\n A SaaS company spent $150 on marketing in 2020 and acquired 100 customers in the same year. Their CAC will be:<\/p>\n\n\n\n Cost to acquire a customer = $150 \/ 100<\/em><\/p>\n\n\n\n Cost to acquire a customer = $1.5<\/em><\/p>\n\n\n\n CAC varies from industry to industry and depends on many factors such as purchase value, frequency, length of a sales cycle<\/a>, company maturity, customer life span, etc. <\/p>\n\n\n\n The probability of selling to a new customer ranges between 5 and 20%, while the likelihood of selling to an existing customer is 60-70%. This is why a company needs to count the balance between CLV and the cost of obtaining new customers. <\/p>\n\n\n\n Experts claim that an ideal LTV to CAC ratio<\/a> is considered to be 3:1. In other words, the value of your customers should be three times the cost of obtaining them.<\/p>\n\n\n\n If your ratio is lower (e.g., 1:1), it means you spend too many resources on acquiring new clients. If your ratio is too high (e.g., 7:1), it means the revenue you get from a customer exceeds the money it costs you to onboard<\/a> them. In this case, you spend too little.<\/p>\n\n\n\n Some businesses prefer using an approach that focuses on how many months it takes to start making money from each customer. This is more suitable for startups that have a higher churn rate<\/a> and need time to adapt their product to meet the needs of a market. As a result, counting CLV for them is rather complicated. <\/p>\n\n\n\nUnit economics model<\/h2>\n\n\n\n
![\"unit](\"https:\/\/lh4.googleusercontent.com\/pEanN0SYbA6ZQHTV1DKj_50QG4Y27cSlT9l8pGt-5lZga8c1FLeRb9VcZsAR_8_Q9BqpaYuhZmgM2qQkog07uidukXy20TRNEB2StWGKTzqU5pGHhGGxcghh2RoAmOcTUjheuXsP\")
Approach 1. Unit defined as \u201cOne item sold\u201d<\/h3>\n\n\n\n
![\"contribution](\"https:\/\/lh4.googleusercontent.com\/rwHGBZDOUs5mS-2LYc0peOOrcg3aM2ye1s-62U1C6OyCpeoiFB-QCNIJrlTkYxCW_d9GbvYrNaiaPEns8BIGaolwj7fGWtzGcP_bk3YNwwdu4mrCdMJLn_jt8lJ-ewQ8TkxpukXd\")
![\"email](\"https:\/\/snov.io\/glossary\/wp-content\/uploads\/2020\/01\/verifier-2-1024x317.png\")
<\/a><\/figure>\n\n\n\nApproach 2. Unit defined as \u201cOne customer\u201d<\/h3>\n\n\n\n
CLV to CAC ratio<\/h4>\n\n\n\n
![\"customer](\"https:\/\/lh5.googleusercontent.com\/p5iUN2GzTvjdz1fLfHzkwJ6nzy0rIPgqVPAlSNNBRtttFFNFunnqkN1_YToYE6jLsnNwPxTmWBBaV_zZ9hCRfzrA8S_2EcrNixvUsFbI1G0unDBPqz7uJw_kyqP5yQJ_6_jT8Jtp\")
![\"customer](\"https:\/\/lh4.googleusercontent.com\/biPy4HtzUOsfmVc77vFUOMjGShwAZovAupPE0MiSALmwASPiPNlavBG0AT8z_gNgSBbXLBpys39xHu8JGkmsRTqAGQ3MK6HW3Hc1lNOCzddGoQS_fTRWSMOYrBaFoPRluq468NKO\")
![\"average](\"https:\/\/lh3.googleusercontent.com\/34jXTs4aRZrF7vqrtLf-QhaGxFQnnxV-LvFg6W2KiJNEiYCAEYRpb_ot8Az17KRnZ786YMK5CLuKJQd0ygzXJfNZNk-Mg7rik_uJQQTV4q-f1VNMe8JzgG38XSf_yxIvG6eRP3UR\")
CAC payback period<\/h4>\n\n\n\n