Unit Economics Analysis

description: Analyze unit economics for PE targets — ARR cohorts, LTV/CAC, net retention, payback periods, revenue quality, and margin waterfall. Essential for software/SaaS, recurring revenue, and subscription businesses. Use when evaluating revenue quality, building a cohort analysis, or assessing customer economics. Triggers on "unit economics", "cohort analysis", "ARR analysis", "LTV CAC", "net retention", "revenue quality", or "customer economics".

Workflow

Step 1: Identify Business Model

Determine the revenue model to tailor the analysis:

**SaaS / Subscription**: ARR, net retention, cohorts
**Recurring services**: Contract value, renewal rates, upsell
**Transaction / usage-based**: Revenue per transaction, volume trends, take rate
**Hybrid**: Break down by revenue stream

Step 2: Core Metrics

#### ARR / Revenue Quality

**ARR bridge**: Beginning ARR → New → Expansion → Contraction → Churn → Ending ARR
**ARR by cohort**: Vintage analysis — how does each annual cohort retain and grow?
**Revenue concentration**: Top 10/20/50 customers as % of total
**Revenue by type**: Recurring vs. non-recurring vs. professional services
**Contract structure**: ACV distribution, multi-year %, auto-renewal %

#### Customer Economics

**CAC (Customer Acquisition Cost)**: Total S&M spend / new customers acquired
**LTV (Lifetime Value)**: (ARPU × Gross Margin) / Churn Rate
**LTV:CAC ratio**: Target >3x for healthy businesses
**CAC payback period**: Months to recover acquisition cost
**Blended vs. segmented**: Break down by customer segment (enterprise vs. SMB vs. mid-market)

#### Retention & Expansion

**Gross retention**: % of beginning ARR retained (excludes expansion)
**Net retention (NDR)**: % of beginning ARR retained including expansion
**Logo churn**: % of customers lost
**Dollar churn**: % of revenue lost (often different from logo churn)
**Expansion rate**: Upsell + cross-sell as % of beginning ARR

#### Cohort Analysis Build a cohort matrix showing:

| Cohort | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |--------|--------|--------|--------|--------|--------| | 2020 | $1.0M | $1.1M | $1.2M | $1.1M | | | 2021 | $1.5M | $1.7M | $1.8M | | | | 2022 | $2.0M | $2.3M | | | | | 2023 | $3.0M | | | | |

Show both absolute $ and indexed (Year 0 = 100%) views.

#### Margin Waterfall

Revenue → Gross Profit → Contribution Margin → EBITDA
Fully loaded unit economics: what does it cost to acquire, serve, and retain a customer?
Gross margin by revenue stream (subscription vs. services vs. other)

Step 3: Benchmarking

Compare unit economics to relevant benchmarks:

**SaaS Rule of 40**: Growth rate + EBITDA margin > 40%
**SaaS Magic Number**: Net new ARR / prior period S&M spend > 0.75x
**NDR benchmarks**: Best-in-class >120%, good >110%, concerning <100%
**LTV:CAC**: Best-in-class >5x, good >3x, concerning <2x
**Gross retention**: Best-in-class >95%, good >90%, concerning <85%
**CAC payback**: Best-in-class <12mo, good <18mo, concerning >24mo

Step 4: Revenue Quality Score

Synthesize into a revenue quality assessment:

| Factor | Score (1-5) | Notes | |--------|-------------|-------| | Recurring % | | | | Net retention | | | | Customer concentration | | | | Cohort stability | | | | Growth durability | | | | Margin profile | | | | **Overall** | | |

Step 5: Output

Excel workbook with ARR bridge, cohort matrix, unit economics dashboard
Summary slide with key metrics and benchmarks
Red flags and areas for further diligence

Important Notes

Always ask for raw customer-level data if available — aggregate metrics can hide problems
NDR above 100% can mask high gross churn if expansion is strong enough — always show both
Cohort analysis is the single most important view for revenue quality — push for this data
Differentiate between contracted ARR and actual recognized revenue
For usage-based models, focus on consumption trends and

Unit Economics Analysis

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