Before scaling your SaaS, fix cash flow dips and churn. Learn what causes the trough and how to grow without breaking your business.

Fun_Ostrich_5521 Scaling a SaaS? Read This First (Cash Flow Trough + Churn Fixes Inside)

When you’ve seen SaaS products rise, plateau, and scale again, you learn what truly moves the needle—and what’s just noise.

This guide distills David Stok's SaaS Metrics 2.0 into clear, actionable insights—blended with real-world lessons from operators like Ron Gill (former CFO, NetSuite) and Brad Coffey (former CSO, HubSpot).

Originally published in 2016, Stok's framework became the North Star for SaaS leaders aiming to decode unit economics, reduce churn, and navigate the cash flow trough with precision.

From CAC payback and LTV:CAC ratios to The Magic Number and Quota-to-OTE benchmarks, this guide breaks down each core metric—with practical context from the trenches of scaling SaaS products.

Whether you're facing boardroom scrutiny or sprinting toward your next funding round, this is your blueprint for confident, metrics-driven growth.

Why SaaS Metrics Matter (and Why Founders Cant Ignore Them)

SaaS businesses aren’t like traditional models—you invest upfront and earn revenue slowly over time. That delay between cost and return makes metrics not just helpful, but mission-critical.

To build a thriving SaaS, you must nail three things:

Efficient Customer Acquisition High Retention Smart Monetization

But gut feeling isn’t enough. That’s where David Skok’s framework comes in—giving you a crystal-clear lens to answer:

• Is my SaaS financially healthy—or bleeding silently?
• Which parts of my funnel are working, and which need fixing?
• Are we ready to scale—or should we patch the leaks first?

Get these answers early, and you don’t just grow—you scale with confidence.

The Cash Flow Trough: Growth Hurts Before It Pays

In SaaS, you pay upfront to acquire customers—but earn revenue back slowly. That creates a dangerous dip early on—what’s known as the cash flow trough.

Example: If you spend $6,000 to acquire a customer who pays $500/month, you won’t break even until month 12. Until then, you’re burning cash.

And here’s the kicker: The faster you grow, the deeper that trough becomes.

“Even with perfect execution, an acceleration of growth will often be accompanied by a squeeze on profitability and cash flow.” — Ron Gill, former CFO, NetSuite

Takeaway: Growth is non-negotiable—but it comes with a cash crunch. Plan your funding runway with this in mind, or risk stalling just when momentum starts building.

Unit Economics: Is Your SaaS Business Viable?

Before you scale, make sure the economics actually work. These two core metrics tell you whether your business model is sustainable:

1. Customer Lifetime Value to Customer Acquisition Cost Ratio (LTV:CAC)

• Formula: Lifetime Value ÷ Customer Acquisition Cost
• Target: Above 3:1 is healthy. Elite SaaS companies hit 7:1 or 8:1.
• Below 3:1? You’re spending too much or retaining too little.

2. Months to Recover CAC (Payback Period)

• Formula: Customer Acquisition Cost ÷ Monthly Gross Profit per Customer
• Target: Under 12 months. Best-in-class? 5–7 months.
• Longer payback = cash flow stress, slower scaling.

Real-World Example: HubSpot cut its Monthly Recurring Revenue (MRR) churn from 3.5% to 1.5%. That simple shift boosted its LTV:CAC ratio from 1.6 to 4.2—thanks to better onboarding and smarter pricing.

Bookings: The Real Growth Engine

Don’t just track revenue—track the sources. Split your bookings into:

• New ARR/MRR: Revenue from new customers
• Churned ARR/MRR: Revenue lost from cancellations
• Expansion ARR/MRR: Revenue from upgrades, add-ons, usage increases

Net Bookings = New + Expansion – Churned This gives you a clear picture of whether you’re growing or leaking revenue.

Churn: The Silent Killer

The bigger you get, the more churn hurts. Even 3% monthly churn is tolerable at 100 customers—disastrous at 10,000.

“Churn + new ARR sets your growth rate and max size.” — Ron Gill, former CFO, NetSuite

Fix it if Net Revenue Churn exceeds 2% per month (or ~22% annually):

• Poor product value or stickiness
• Bad onboarding or overselling
• Targeting the wrong customer segment

Pro Tip: Founders should personally call churned customers to find out why. You’ll learn more in one week than in a year of dashboards.

Negative Churn: The SaaS Superpower

This is when your expansion revenue exceeds churn—meaning your revenue grows even if you don’t add new customers.

How to achieve it:

• Usage-based pricing (per seat, volume, features)
• Upsell/cross-sell into premium tiers, add-ons, modules

Example: If you achieve 3% negative churn, you can triple your revenue in 40 months—compared to positive churn, which limits scale.

11: Cash Flow Trough

Definition: The period when a growing SaaS company’s cash outflows (mainly from CAC and operational costs) exceed inflows. It creates a financial “trough” before recurring revenue builds up and catches up.

Example: You spend aggressively on sales and marketing to acquire customers, but the revenue from those customers takes time to materialize. This creates negative cash flow for several months.

How to Manage:

• Monitor CAC Payback Period closely
• Raise enough capital to bridge the trough period
• Improve sales efficiency and reduce payback time
• Delay or phase non-essential spending

12: Practical Spreadsheet Model

Tip: Build a live spreadsheet that tracks all SaaS metrics together. This allows scenario modeling and quick identification of growth bottlenecks.

Include Columns for:

• MRR/ARR
• CAC, LTV, Churn Rate
• Gross Margin
• Net New ARR
• Quota:OTE Ratio, Sales Ramp Time
• Cash Flow Projections over 12–18 months

Example: Track each cohort by acquisition month. Include monthly revenue, churn, upsells, and CAC recovery status. Adjust churn or pricing assumptions to forecast future cash position and growth curve.

Actionable Takeaways

Real-World Examples and Solutions for Common SaaS Challenges

1. Calculating and Improving Your LTV:CAC Ratio

Scenario: You spend $300 (CAC) to acquire a customer. The customer pays $50/month (ARPA) and churns at 4% monthly.

LTV = 50 ÷ 0.04 = $1250 LTV:CAC = 1250 ÷ 300 = 4.17

Healthy ratio (above 3)

Solutions if LTV:CAC is too low:

• Reduce churn through better onboarding and customer support
• Increase ARPA with upsells and value-based pricing
• Lower CAC via content marketing and referral programs

2. Fighting Churn: Practical Strategies That Work

Example: A SaaS startup had 7% monthly churn. They launched a personalized onboarding flow and live chat support—churn dropped to 3%.

Solutions:

• Survey churned users to find exit reasons
• Guide users to early “aha moments”
• Use product usage scoring to flag and help at-risk users
• Ship improvements based on user feedback consistently

3. Achieving Negative Churn in Your Market

Example: A SaaS with tiered plans added usage-based add-ons. Monthly expansion revenue grew by 5%, churn stayed at 3%, resulting in negative churn.

Solutions:

• Add per-seat, per-feature, or per-usage pricing
• Equip success teams with upsell playbooks
• Build features that scale with customer usage
• Reward power users or growing accounts

4. Building a Dashboard That Drives Action

Example: A company dashboard tracked

• New, churned, expansion MRR
• CAC, LTV, Churn Rate
• Funnel conversion rates
• Net Promoter Score (NPS)

They spotted rising churn early and launched a successful retention campaign.

Solutions:

• Track cohorts monthly—segment by plan, persona, or source
• Add alerts for churn or NPS spikes
• Visualize funnel bottlenecks
• Act fast on early signals from dashboard data

5. Funding the Cash Flow Trough: Planning for Growth Pain

Example: A SaaS startup raised enough capital for 18 months of burn, expecting a 12-month CAC payback. Through better targeting and automation, they cut payback to 8 months.

Solutions:

• Forecast burn using realistic CAC and LTV metrics
• Raise capital before scaling
• Optimize ad spend and sales productivity
• Track burn and cash runway monthly

TL;DR

SaaS success = Acquire → Retain → Monetize

Based on David Skok’s SaaS Metrics 2.0, with insights from Ron Gill (NetSuite) and Brad Coffey (HubSpot).