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The first is a good way to figure out if you will be profitable in the long run, and the second is about measuring the time to profitability (which also greatly impacts capital efficiency).

The best SaaS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8. And many of the best SaaS businesses are able to recover their CAC in 5-7 months. However many healthy SaaS businesses don’t meet the guidelines in the early days, but can see how they can improve the business over time to get there.

The second guideline (Months to Recover CAC) is all about time to profitability and cash flow. Larger businesses, such as wireless carriers and credit card companies, can afford to have a longer time to recover CAC, as they have access to tons of cheap capital. Startups, on the other hand, typically find that capital is expensive in the early days. However even if capital is cheap, it turns out that Months to recover CAC is a very good predictor of how well a SaaS business will perform. Take a look at the graph below, which comes from the same model used earlier. It shows how the profitability is anemic if the time to recover CAC extends beyond 12 months.


For Entrepreneurs.com

More SaaS + Software Stats

The median cost for a SaaS company to acquire a dollar of new customer revenue is $1.18

Internet sales strategies are the only sales method to see a decline in CAC, dropping from $0.54 to $0.42 between 2014 and 2015

Smaller SAAS companies reported more frequent use of third-party providers as their primary application delivery method, while the largest companies were more likely to use self-managed servers

Net-revenue churn improves with larger Average Contract Value (ACV), likely due to more structural churn among SMB customers and higher switching costs associated with larger contracts

The largest SaaS companies (>$75million yearly revenue) attribute 2.5x as much new revenue to upselling than the smallest SaaS companies (<$1.25million): 28% versus 11%

Since churn is so important, wouldn’t it be useful if we could predict in advance which customers were most likely to churn?

A 2017 SaaS Capital survey showed that young companies actually have higher retention rates than more mature SaaS businesses

Analyzed by contract value, field sales are primarily evident for companies with median deals over $25K. Inside sales strategies are most popular for companies with $1K-$25K median deal sizes

Because of the losses in the early days, which get bigger the more successful the company is at acquiring customers, it is much harder for management and investors to figure out whether a SaaS business is financially viable.

When venture capitalists participate in seed rounds, the average round size is 3x larger