Unit Economics

Unit Economics Analysis

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:

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:

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 expansion patterns rather than traditional ARR metrics

• Professional services revenue should be evaluated separately — it's not recurring and margins are typically lower