TL;DR
If you can’t answer how long it takes to earn back a customer or how much you spend to add a dollar of revenue, you don’t know if your growth is real.
Four metrics — CAC Payback, Burn Multiple, Magic Number, and Revenue per Employee – tell you the truth.
Last week, we talked about knowing which marketing actually works. This week, let’s talk about the numbers that tell you if your business model works.
A founder called me recently, excited about their growth. “We’re up 40% year over year!” they said. “Revenue’s never been higher!”
“What’s your CAC payback period?” I asked.
Silence.
“How about your burn multiple?”
More silence.
They had no idea if their growth was sustainable or if they were buying revenue at a loss. These four metrics would have given them the answer.
The Four Numbers That Explain Your Business
These metrics reveal the mechanics of your business. Once you understand them, you can make informed decisions about growth, spending, and strategy.
Customer Acquisition Cost (CAC) Payback Period
What it tells you: How long it takes to recoup the money you spend acquiring a customer.
How to calculate it:
- Calculate your CAC: Total sales and marketing costs ÷ new customers
- Calculate monthly gross margin per customer: (Monthly revenue – direct costs)
- Divide CAC by monthly gross margin
Example:
- You spend $3,000 to acquire a customer
- They pay you $500/month
- Your gross margin is 70% = $350/month
- CAC Payback = $3,000 ÷ $350 = 8.6 months
What this reveals:
- How much runway you need to break even on customers
- Whether you can afford to grow faster or need to grow slower
- If your pricing and acquisition costs are aligned
Context matters:
- A bootstrapped company might need 3-month paybacks to self-fund growth
- A funded startup might be comfortable with 18-month paybacks
- High retention businesses can afford longer paybacks than high-churn businesses
The key is knowing YOUR number and what it means for YOUR situation.
Burn Multiple
What it tells you: How much you’re spending to generate each dollar of new revenue.
How to calculate it: Net Burn (cash out minus cash in) ÷ Net New Revenue
Example:
- You burned $100K last quarter
- You added $50K in new revenue
- Burn Multiple = 2.0 (spending $2 to add $1 of revenue)
What this reveals:
- The efficiency of your growth
- How long your runway will last at current growth rates
- Whether you’re buying growth or building it
Your situation determines what’s acceptable:
- Bootstrapped companies often can’t afford any burn (infinite burn multiple)
- Early-stage startups might accept higher multiples to find product-market fit
- Mature companies typically need lower multiples to satisfy investors
There’s no universal “good” – only what works for your funding situation and timeline.
Sales & Marketing Magic Number
What it tells you: The efficiency of your sales and marketing engine.
How to calculate it: (Current Quarter Revenue – Previous Quarter Revenue) x 4 ÷ Previous Quarter Sales & Marketing Spend
Example:
- Q2 Revenue: $150K
- Q1 Revenue: $100K
- Q1 Sales & Marketing Spend: $60K
- Magic Number = ($50K x 4) ÷ $60K = 3.3
What this reveals:
- For every dollar spent on sales and marketing, how much annual revenue you’re adding
- Whether your GTM engine is ready to scale
- If you should invest more or optimize first
Understanding your number:
- Above 1.0 means you’re generating more in annual revenue than you’re spending
- Below 1.0 means it takes more than a year to recoup S&M spend
- Your acceptable range depends on your gross margins, runway, and growth goals
Revenue Per Employee
What it tells you: How efficiently your team generates revenue.
How to calculate it: Annual Revenue ÷ Total Employees
Example:
- $2M annual revenue
- 10 employees
- Revenue per employee = $200K
What this reveals:
- Whether you’re scaling efficiently
- How your productivity compares to your industry
- If you’re ready to hire or need to improve efficiency first
Context is everything:
- Professional services firms have different targets than software companies
- Early-stage companies often have lower numbers that improve with scale
- Some businesses prioritize this metric, others optimize for different outcomes
Using These Metrics Together
These four numbers tell a story:
- CAC Payback reveals your unit economics
- Burn Multiple shows your growth efficiency
- Magic Number indicates your GTM effectiveness
- Revenue Per Employee demonstrates operational leverage
Together, they explain whether your business model works at your current stage and funding situation.
How to Use This Information:
Step 1: Calculate your numbers Do this monthly. Track the trends.
Step 2: Understand your context
- What’s your funding situation?
- What’s your growth timeline?
- What’s your competitive environment?
- What are your investor expectations (if any)?
Step 3: Make informed decisions
- If CAC payback exceeds your runway, adjust pricing or acquisition strategy
- If burn multiple is unsustainable for your funding, slow growth or improve efficiency
- If magic number is low, optimize before scaling
- If revenue per employee is declining, examine your hiring and productivity
Questions to Ask Yourself
Rather than comparing to benchmarks, ask:
- “Given our CAC payback, how much capital do we need to fund growth?”
- “Can we sustain this burn multiple with our current runway?”
- “Does our magic number justify increased S&M investment?”
- “Is our revenue per employee trending in the right direction?”
The Path Forward
These metrics aren’t grades. They’re gauges. Like the instruments in your car, they tell you speed, fuel level, and engine temperature. What’s safe depends on road conditions, how far you’re going, and what you’re driving.
Calculate them monthly. Watch the trends. Understand what they mean for YOUR specific situation.
Most founders don’t know these numbers. Those who do make better decisions – not because they hit certain benchmarks, but because they understand their business mechanics.
That’s the difference between hoping things work out and knowing how to make them work.
