Unit Economics

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:

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

Hermes Profile Notes

This skill was packaged from pi-financial-services source path plugins/vertical-plugins/private-equity/skills/unit-economics for the Hermes financial-services profile. Use institutional data connectors first when available, cite sources, and stage outputs for qualified human review.

Common Pitfalls

1. Do not present drafts as investment, legal, tax, or accounting advice.
2. Do not use web search as the primary source when an institutional MCP/data connector is available.
3. Do not execute transactions, contact clients, post to a ledger, or approve onboarding. Stage outputs for review.

Verification Checklist

• Inputs, assumptions, dates, and currencies are explicit.
• Numbers tie across tables, models, decks, and memos.
• Sources are cited and institutional data is preferred where available.
• Output is labeled draft / for human review where appropriate.