# Unit Economics

> Parameterized unit economics modeling for franchise structures. Builds franchisee and franchisor P&L models using revenue model-appropriate metrics: MRR/ARR/churn for subscription, ticket average/traffic for retail, utilization/ billable hours for service. Use when modeling franchise unit economics, franchisee P&L, franchisor royalty revenue, franchise breakeven analysis, or comparing franchise economics across business models.

- Skill: `kaakati/unit-economics` (Agent Skill)
- Install (CLI): `npx skillmds@latest add kaakati/unit-economics`
- Raw SKILL.md: https://api.skillmd.com/api/skills/kaakati/unit-economics/raw
- Safety review: pending
- Works with: Claude Code, Claude.ai, OpenAI Codex
- Category: AI & ML
- Author: Kaakati (https://skillmd.com/u/kaakati)
- Updated: 2026-09-17
- Page: https://skillmd.com/skills/kaakati/unit-economics

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# Unit Economics for Franchise Models

## Core Variables

| Variable | Impact on Model |
|---|---|
| `{revenue_model}` | Determines revenue build method and key metrics |
| `{business_model}` | Determines cost structure categories |
| `{franchise_model}` | Determines fee structures (single-unit vs. area dev vs. master) |
| `{territory_scope}` | Determines currency, tax, and cross-border considerations |

## Required Inputs

- **Revenue Model**: Subscription, transaction, retail, service, or hybrid.
- **Pricing Structure**: Per-unit pricing or tier structure.
- **Territory Definition**: How territories are sized and what they contain.
- **Royalty Structure**: % of revenue, flat fee, hybrid, or tiered.
- **Current Metrics** (if available): Existing unit economics from company-owned operations.

## Execution Steps

### 1. Revenue Build by `{revenue_model}`

**Subscription (SaaS, memberships, recurring services)**

| Metric | Definition | Build Method |
|---|---|---|
| MRR | Monthly Recurring Revenue | Active customers × ARPU |
| ARR | Annual Recurring Revenue | MRR × 12 |
| Gross Revenue Retention | Revenue retained excluding expansion | 1 - revenue churn rate |
| Net Revenue Retention | Including expansion/upsell | Gross retention + expansion rate |
| ARPU | Average Revenue Per User/Account | Total revenue ÷ active customers |
| Expansion Revenue | Upsell + cross-sell | % of base revenue |

**Transaction (restaurants, retail, e-commerce)**

| Metric | Definition | Build Method |
|---|---|---|
| Average Transaction Value | Revenue per transaction | Menu price × items per ticket |
| Transaction Volume | Transactions per period | Traffic × conversion rate |
| Revenue | Period revenue | ATV × volume |
| Same-Store Growth | YoY revenue growth | Comp analysis |
| Daypart Mix | Revenue by time period | % split across dayparts |
| Seasonal Adjustment | Revenue cyclicality | Index by month/quarter |

**Service (consulting, healthcare, education, fitness)**

| Metric | Definition | Build Method |
|---|---|---|
| Billable Hours | Revenue-generating hours | Staff × hours × utilization |
| Utilization Rate | Billable / available hours | Target: 65-85% |
| Average Rate | Revenue per billable hour | Rate card or blended rate |
| Revenue | Period revenue | Billable hours × average rate |
| Client Retention | Recurring client % | Repeat / total clients |
| Capacity | Maximum revenue at full utilization | Staff × hours × rate × utilization cap |

**Retail (physical goods, inventory-based)**

| Metric | Definition | Build Method |
|---|---|---|
| Revenue Per Sq Ft | Sales efficiency | Revenue ÷ selling sq footage |
| Inventory Turnover | Selling efficiency | COGS ÷ average inventory |
| Gross Margin | Product margin | (Revenue - COGS) ÷ Revenue |
| Footfall | Customer traffic | Door counts or equivalents |
| Conversion Rate | Traffic to purchase | Transactions ÷ footfall |
| Basket Size | Average purchase | Revenue ÷ transactions |

### 2. Franchisee Unit Economics (Territory-Level P&L)

Build a 5-year P&L per franchise unit/territory. Cost categories adjust by `{business_model}`:

**Universal Cost Categories**

| Category | Applies To | Typical % of Revenue |
|---|---|---|
| Royalty to franchisor | All | 4-15% (varies by sector) |
| Ad fund contribution | All | 1-3% |
| Technology/platform fee | All (may be in royalty) | 1-5% |
| Local marketing | All | 2-5% |
| Insurance | All | 1-3% |

**Business-Model-Specific Costs**

| Category | SaaS | Retail | Service | Hybrid |
|---|---|---|---|---|
| COGS / materials | Minimal | 25-40% | 5-15% | Varies |
| Labor | Sales + support staff | 25-35% | 40-60% | Varies |
| Occupancy / rent | Minimal (home office) | 8-15% | 5-12% | Varies |
| Equipment / buildout | Minimal | Significant | Moderate | Varies |
| Inventory | None | Yes | Minimal | Varies |
| Licenses / permits | Minimal | Food/health/liquor | Professional licenses | Varies |

**Franchisee Economics Summary Template**

| Metric | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| Revenue | | | | | |
| COGS / Direct Costs | | | | | |
| Gross Profit | | | | | |
| Royalty | | | | | |
| Operating Expenses | | | | | |
| EBITDA | | | | | |
| Owner's Compensation | | | | | |
| Net Cash Flow | | | | | |
| Cumulative Cash Flow | | | | | |

**Key Franchisee Metrics**

| Metric | Formula | Target (Healthy) |
|---|---|---|
| Total Initial Investment | Franchise fee + buildout + working capital | Recover in 2-3 years |
| Months to Breakeven | When cumulative cash flow turns positive | < 18 months |
| Cash-on-Cash Return (Y3) | Annual cash flow ÷ total investment | > 20% |
| Payback Period | Investment ÷ annual cash flow (at steady state) | < 3 years |
| Steady-State EBITDA Margin | EBITDA ÷ Revenue (mature unit) | > 15% (varies by sector) |

### 3. Franchisor Unit Economics (System-Level P&L)

Build the franchisor's economics based on network growth:

**Revenue Streams**

| Stream | Description | Recognition |
|---|---|---|
| Initial franchise fees | One-time per new unit | On unit opening (GAAP) |
| Ongoing royalties | % of revenue or flat fee | As earned monthly |
| Technology/platform fees | If separate from royalty | Monthly |
| Ad fund management | Management fee on fund | Monthly |
| Supply chain margin | Markup on required products/materials | On delivery |
| Training fees | For additional/ongoing training | On delivery |
| Transfer/renewal fees | On franchise resale or renewal | On event |
| Company-owned unit revenue | If franchisor operates units | As earned |

**Franchisor Cost Structure**

| Category | Description | Scaling Behavior |
|---|---|---|
| Platform / product development | R&D, product maintenance | Semi-fixed |
| Franchise sales | Recruitment marketing, sales team | Scales with growth targets |
| Franchisee onboarding | Training, opening support | Per new unit |
| Field support | Ongoing franchisee support team | 1 per 40-60 units |
| Corporate G&A | Management, finance, HR, legal | Step-function |
| Legal & compliance | FDD updates, registrations | Semi-fixed + per state |
| Brand marketing | System-wide marketing beyond ad fund | % of system revenue |

**Key Franchisor Metrics**

| Metric | Formula | Target |
|---|---|---|
| System-Wide Revenue | Sum of all franchisee + company-owned revenue | Growth trajectory |
| Royalty Revenue | Royalties collected | Predictable stream |
| Franchisor EBITDA Margin | EBITDA ÷ franchisor revenue | > 30% at scale |
| Franchisee Survival Rate | Units operating ÷ units ever opened | > 90% (5-year) |
| Support Ratio | Franchise units ÷ field support staff | 40-60:1 |
| Unit-Level Breakeven | # of franchise units for franchisor profitability | Know this number |

### 4. Win-Win Validation

The franchise model only works if both sides win:

| Metric | Franchisee | Franchisor | Healthy Range |
|---|---|---|---|
| Y3 EBITDA Margin | X% | X% | Franchisee > 15%, Franchisor > 25% |
| Cash-on-Cash Return | X% | N/A | > 20% |
| Payback Period | X months | X units to breakeven | Franchisee < 3yr, Franchisor < 50 units |
| Revenue Retained After Royalty | X% | Royalty: X% | Franchisee retains > 85% |

If the win-win test fails, adjust: royalty rate, territory size, initial investment,
or support model until both sides are viable. If no configuration works, franchise
may not be the right model.

### 5. Sensitivity Analysis

Model sensitivity on 4+ key variables (selected by `{revenue_model}`):

**Universal Sensitivity Variables**
- Royalty rate: ±2% impact on franchisee vs. franchisor economics.
- Unit growth rate: impact on franchisor revenue and support costs.

**Subscription-Specific**
- Churn rate: ±2% impact on LTV and franchisee breakeven.
- ARPU: pricing sensitivity on both sides.

**Transaction-Specific**
- Average transaction value: ±10% impact on unit P&L.
- Traffic volume: ±15% impact on revenue and staffing.

**Service-Specific**
- Utilization rate: ±5% impact on revenue at fixed cost.
- Average rate: pricing sensitivity.

Present as 2×2 matrices showing franchisee cash-on-cash return and franchisor EBITDA.

## Quality Checks

- Both franchisee AND franchisor P&Ls built (never just one side).
- Revenue build uses `{revenue_model}`-appropriate metrics.
- Win-win test explicitly verified with both sides showing viable economics.
- Sensitivity analysis on at least 4 key variables.
- Ramp-period economics distinguished from mature/steady-state economics.
- All assumptions sourced with confidence levels.
- Cost categories match the `{business_model}` (not generic).