Product Management: Foundations to Practice · Product Analytics and Metrics
SaaS Metrics: Churn, LTV, and CAC
These three metrics, combined, tell a product and business team whether the underlying economics of a subscription business actually work. This chapter breaks each down and how they combine into the industry's most-cited health check.
Churn rate measures the proportion of customers who leave during a given period, and it is the single most sensitive input into most other subscription business metrics [21]. A small change in monthly churn compounds dramatically over a customer's lifetime: reducing churn from 3 percent to 2 percent monthly does not just modestly extend average customer lifetime, it extends it by roughly 50 percent, since average customer lifetime is mathematically the inverse of the churn rate.
- Churn is the most sensitive input into subscription metrics; small churn reductions compound significantly over customer lifetime.
- LTV should include gross margin, not just revenue, or it measures lifetime revenue rather than lifetime profit.
- CAC should be fully loaded with all acquisition-related costs, not just ad spend, to avoid an artificially favorable ratio.
- An LTV:CAC ratio of roughly 3:1 signals health; below 1 signals losing money per customer; well above 5 may signal underinvestment in growth.