SaaS Pricing: How to Model MRR, LTV, and CAC

Pricing is the fastest lever for SaaS growth. A 10% price increase drops straight to the bottom line if churn stays flat. But most founders guess. They look at competitors, pick something in the middle, and hope.

There is a better way.

Start With Unit Economics

Before you set prices, model what happens after someone pays. Three numbers drive everything:

MRR: Monthly Recurring Revenue per customer
LTV: Lifetime Value (how much they pay before they leave)
CAC: Customer Acquisition Cost (what you spent to get them)

If LTV is less than 3x CAC, you have a problem. At 5x or higher, you have room to grow.

Calculating MRR

MRR is straightforward: average revenue per user times number of paying users. But average hides the truth.

Break it down by plan. If you have a $29 basic tier and a $99 pro tier, your blended MRR depends on the mix. Track each tier separately. Know which customers drive your revenue.

Annual plans complicate this. A $290 annual payment is not $290 of MRR. It is $24.17. Spread annual payments across 12 months for accurate MRR.

From MRR to LTV

Lifetime value needs two ingredients: revenue and retention.

LTV = MRR x Gross Margin / Monthly Churn Rate

If your MRR is $50, gross margin is 80%, and monthly churn is 5%, your LTV is:

$50 x 0.80 / 0.05 = $800

That customer is worth $800 to you. If you spend $400 to acquire them, you are healthy. If you spend $900, you are burning cash.

Churn is the killer variable. Cut churn from 5% to 3% and LTV jumps 67%. This is why retention matters more than acquisition for mature SaaS.

Understanding CAC

Customer acquisition cost includes everything: ads, content, sales salaries, tools, commissions. Divide total sales and marketing spend by new customers acquired in the same period.

CAC = Total Sales & Marketing Cost / New Customers

If you spent $10,000 and got 50 customers, CAC is $200.

Payback period matters too. If CAC is $200 and MRR is $50, it takes 4 months to recover your acquisition cost. You need the cash to float that gap.

The Pricing Spreadsheet

Most founders build this in Excel. It works but it is fragile. Change one assumption and formulas break. Share it with a co-founder and versions multiply.

I built a free SaaS pricing calculator that handles the math for you. Input your plans, pricing, expected customers, churn, and acquisition costs. See MRR, LTV, CAC, and LTV/CAC ratio instantly.

Try the free SaaS pricing calculator here

Test different price points. See what happens if you cut churn 20%. Model annual vs monthly plans. Make decisions with numbers, not gut feel.

Pricing Psychology

Once the math works, psychology seals the deal. Three tactics that actually work:

Anchor high: Put your most expensive plan first. Makes the middle plan feel reasonable.

Decoy pricing: Create a plan that is only slightly cheaper than the better option. Pushes people to the upgrade.

Annual discounts: Offer 2 months free for annual payment. Improves cash flow and cuts churn.

The Bottom Line

Pricing is not set and forget. It is a test. Start with unit economics that work. Then iterate based on what the market tells you.

The founders who win are not the ones with the best product. They are the ones who figured out how to charge enough to grow.