Private EquityBeginner
Unit Economics & Revenue Quality Analysis
Analyze unit economics for PE targets — ARR cohorts, LTV/CAC, net retention, payback periods, and margin waterfall for subscription and recurring revenue businesses.
#private equity#unit economics#SaaS metrics#cohort analysis#revenue quality#LTV CAC
A company reporting 40% ARR growth looks great on paper — until you discover that net retention is 85%, gross churn is masked by aggressive new logo sales, and the oldest cohorts are shrinking. Revenue quality analysis separates real growth from a leaky bucket.
Who it's for: PE associates, vice presidents, growth equity analysts, due diligence teams
Example
"Analyze the unit economics for this SaaS target — here's the customer data" → ARR bridge, cohort retention matrix, LTV/CAC by segment, revenue quality scorecard, and benchmark comparison
CLAUDE.md Template
New here? 3-minute setup guide → | Already set up? Copy the template below.
# 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 expansion patterns rather than traditional ARR metrics
- Professional services revenue should be evaluated separately — it's not recurring and margins are typically lower
README.md
What This Does
Analyzes unit economics for PE targets across SaaS, recurring services, and subscription businesses. Builds ARR bridges, cohort retention matrices, LTV/CAC analysis, net retention calculations, and margin waterfalls. Benchmarks results against best-in-class standards.
Quick Start
Step 1: Create a Project Folder
Create a folder for your unit economics analysis and place the downloaded template inside as CLAUDE.md. Add the target's customer data or financial reports to the same folder.
Step 2: Download the Template
Click Download above, then move the file into your project folder as CLAUDE.md.
Step 3: Start Working
"Analyze unit economics for this SaaS company"
"Build a cohort analysis from this customer data"
"What's the LTV/CAC ratio by customer segment?"
Core Metrics Covered
ARR / Revenue Quality:
- ARR bridge (New, Expansion, Contraction, Churn)
- ARR by cohort (vintage analysis)
- Revenue concentration (top 10/20/50 customers)
- Recurring vs. non-recurring breakdown
Customer Economics:
- CAC (Customer Acquisition Cost)
- LTV (Lifetime Value)
- LTV:CAC ratio
- CAC payback period
- Segmented by enterprise vs. SMB vs. mid-market
Retention & Expansion:
- Gross retention and net retention (NDR)
- Logo churn vs. dollar churn
- Expansion rate
Benchmarks
| Metric | Best-in-Class | Good | Concerning |
|---|---|---|---|
| NDR | >120% | >110% | <100% |
| LTV:CAC | >5x | >3x | <2x |
| Gross Retention | >95% | >90% | <85% |
| CAC Payback | <12 months | <18 months | >24 months |
| Rule of 40 | >40% | 30-40% | <30% |
Tips & Best Practices
- 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 rather than traditional ARR metrics
- Professional services revenue should be evaluated separately — it is not recurring and margins are typically lower