> ## Documentation Index
> Fetch the complete documentation index at: https://financecontext.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Unit Economics Analysis

> Analyze unit economics for PE targets — ARR cohorts, LTV/CAC, net retention, payback periods, revenue quality, and margin waterfall

## What is Unit Economics?

Unit economics is the analysis of revenue and cost on a per-customer (or per-unit) basis. It answers the most fundamental question about any business: does the company make more money from each customer than it spends to acquire and serve that customer? If the answer is yes, and by a healthy margin, the business can scale profitably. If not, growth actually destroys value.

The concept originated in subscription and SaaS businesses, where the math is cleanest: you spend money to acquire a customer (CAC -- Customer Acquisition Cost), that customer pays you a recurring fee, and the total revenue over their lifetime (LTV -- Lifetime Value) must significantly exceed the acquisition cost. A healthy SaaS business has an LTV:CAC ratio of 3x or higher, meaning each dollar spent on sales and marketing returns at least three dollars over the customer relationship.

But unit economics applies to any business. A restaurant's unit is a meal or a seat. An industrial services company's unit might be a service contract or a truck route. The principle is universal: understand the economics at the atomic level, and you understand whether the aggregate business is healthy.

## Why It Matters

For PE investors, unit economics is the best tool for assessing **revenue quality** -- the durability, predictability, and profitability of a company's revenue. A company with strong unit economics (high retention, low CAC payback, expanding customer value) commands a premium valuation. A company with weak unit economics (high churn, expensive customer acquisition, declining customer value) is risky regardless of its top-line growth.

Unit economics also reveal the truth behind aggregate metrics. A company reporting 120% net dollar retention might look fantastic -- but if that number is driven entirely by a few large upsells masking 30% logo churn, the picture is very different. Cohort analysis (tracking each year's customer group over time) is the gold standard for cutting through aggregate numbers.

## Key Concepts

| Term                                | Definition                                                                                                                      |
| ----------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- |
| **ARR** (Annual Recurring Revenue)  | The annualized value of all active recurring contracts; the core metric for subscription businesses                             |
| **CAC** (Customer Acquisition Cost) | Total sales and marketing spend divided by new customers acquired in a period                                                   |
| **LTV** (Lifetime Value)            | The total revenue (or gross profit) a customer generates over their entire relationship                                         |
| **LTV:CAC Ratio**                   | LTV divided by CAC; measures the return on customer acquisition investment (target: >3x)                                        |
| **CAC Payback Period**              | The number of months to recover the cost of acquiring a customer from their revenue                                             |
| **NDR** (Net Dollar Retention)      | The percentage of beginning-of-period ARR retained from existing customers, including expansion and contraction (target: >110%) |
| **Gross Retention**                 | The percentage of ARR retained excluding expansion -- measures pure customer stickiness (target: >90%)                          |
| **Cohort Analysis**                 | Tracking each year's (or quarter's) customer group over time to see how revenue from that group evolves                         |
| **Rule of 40**                      | Revenue growth rate + EBITDA margin should exceed 40% for healthy SaaS businesses                                               |

## How It Works

<Steps>
  <Step title="Identify Business Model">
    Determine the revenue model: SaaS/subscription, recurring services, transaction/usage-based, or hybrid. Tailor the analysis framework accordingly.
  </Step>

  <Step title="Analyze ARR and Revenue Quality">
    Build the ARR bridge (Beginning ARR to New to Expansion to Contraction to Churn to Ending ARR), analyze cohort vintages, assess revenue concentration (top 10/20/50 customers), and evaluate contract structure (ACV distribution, multi-year percentage, auto-renewal percentage).
  </Step>

  <Step title="Calculate Customer Economics">
    Compute CAC (total S\&M spend / new customers), LTV ((ARPU x Gross Margin) / Churn Rate), LTV:CAC ratio, and CAC payback period. Break down by segment (enterprise vs. SMB vs. mid-market).
  </Step>

  <Step title="Assess Retention and Expansion">
    Calculate gross retention, net retention (NDR), logo churn, dollar churn, and expansion rate. Build a cohort matrix showing how each vintage retains and grows over time.
  </Step>

  <Step title="Benchmark and Score">
    Compare metrics to benchmarks and produce a revenue quality score (1-5) across: recurring percentage, net retention, customer concentration, cohort stability, growth durability, and margin profile.
  </Step>
</Steps>

## Cohort Analysis Template

| Cohort | Year 0 | Year 1        | Year 2        | Year 3        | Year 4 |
| ------ | ------ | ------------- | ------------- | ------------- | ------ |
| 2020   | \$1.0M | \$1.1M (110%) | \$1.2M (120%) | \$1.1M (110%) |        |
| 2021   | \$1.5M | \$1.7M (113%) | \$1.8M (120%) |               |        |
| 2022   | \$2.0M | \$2.3M (115%) |               |               |        |
| 2023   | \$3.0M |               |               |               |        |

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

## How to Add to Your Local Context

```bash theme={null}
claude plugin install private-equity@financial-services-plugins
```

Customize the analysis:

```markdown theme={null}
## Benchmarks by Sector
### B2B SaaS
- NDR: >120% best-in-class, >110% good, <100% concerning
- LTV:CAC: >5x best-in-class, >3x good, <2x concerning
### Recurring Services
- Gross retention: >95% best-in-class, >90% good, <85% concerning
- Revenue per customer growth: >5% annually
```

Connect to your CRM (Salesforce, HubSpot) or data warehouse for automatic cohort data extraction.

## Best Practices

<Warning>
  NDR above 100% can mask high gross churn if expansion is strong enough -- always show both metrics. Cohort analysis is the single most important view for revenue quality -- push for this data.
</Warning>

* Always ask for raw customer-level data if available -- aggregate metrics can hide problems
* 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 is not recurring and margins are typically lower
* Be skeptical of "adjusted" metrics -- understand every adjustment