Decoding Magic Number, CAC Payback & LTV:CAC
The metrics you hear about but don’t always know quite what to make of.
Magic Number… CAC Payback Period… LTV:CAC Ratio… These metrics frequently appear in any SaaS benchmarking report. To me, these metrics always feel like a health score coming from a fitness app. I’m always a bit unclear of what to make of it. Your Fitness Score is 86. Your Magic Number is 0.6. So what should I do?
These SaaS KPIs are compound metrics that are used by investors rather than decision makers. They are theoretical and have truth to them, but less valuable when you are trying to influence the levers of a business and change underlying behavior.
I’ve decoded these metrics. When you dig into these metrics you can see this trio mostly uses very similar components. Their setup differs and their intent is different. But the bones? Similar stuff.
Magic Number measures overall GTM efficiency with comparing Net New ARR to acquisition costs, but doesn’t factor in gross margin.
CAC Payback Period measures overall GTM efficiency telling you how many months it takes to break even on a customer by comparing Net New ARR to CAC and adjusting for gross margin.
LTV:CAC measures lifetime value, based on Avg ARR per customer, customer lifetime, and gross margin, and compares with CAC.
Other CRO-CFO metrics I’ve shared like Gross Retention Rate or Net Retention Rate are also compound metrics, but the underlying drivers are easier to understand and influence within an organization. This is why I tend to gravitate here, because it spurs action.
I admittedly think a fun Saturday night is looking at 10-Qs and SaaS metrics. It’s also why I love Strava and my Garmin after riding. Metrics are only useful if I have enough context and information. Without context then metrics are meaningless. The compound nature of these metrics hide the context, so keep them for the investors.