Cohort
Initial Logos
ASP
Initial ARR
CAC
Sales Effcy
LTV/CAC
GMPP
Q1 2022
294
805
$
236,624
$
332,506
$
0.7x
3.5x
19 Months
Q2 2022
435
702
$
305,494
$
230,574
$
1.3x
7.0x
10 Months
Q3 2022
441
774
$
341,524
$
355,121
$
1.0x
5.2x
13 Months
Q4 2022
595
978
$
581,668
$
347,113
$
1.7x
8.2x
9 Months
Q1 2023
382
1,115
$
426,079
$
286,055
$
1.5x
7.4x
10 Months
Q2 2023
587
1,119
$
657,018
$
347,695
$
1.9x
9.3x
8 Months
Average of TTM
501
997
$
501,572
$
333,996
$
1.5x
7.5x
10 Months
Software Unit Economics Primer
In examining the unit economics of a software business, the goal is to understand customer level profitability by scrutinizing revenue accrued over time versus the cost to
acquire and serve that customer. This analysis is particularly important for a subscription software business that incurs a high cost of acquisition in favor of building an annuity
revenue base. For a growing software business, unit economics are more informative than GAAP financials because they require a sophisticated analysis on the return of the
upfront customer acquisition cost – not a backwards facing statement or a snapshot of a moment in time.
By enabling an understanding of unit economics at the component level (e.g., vintage, customer profile, product mix, channel of acquisition), recurring revenue businesses
can more effectively allocate growth capital to their most profitable channels, resulting in better business performance.
Category
Good
Great
LTV/CAC
3.0x
5.0x
GMPP
18-months
12-months
M13 NDR
105%
115%
M13 Logo Retention
85%
90%
Snowball NDR
110%
125%
Snowball GDR
87%
93%
Sales Efficiency
0.75x
1.00x
Cohort
Initial ARR Month 4
Month 7
Month 10 Month 13 Month 16 Month 19 Month 22 Month 25
Q2 2021
481,015
$
100%
100%
101%
106%
106%
114%
117%
123%
Q3 2021
302,005
$
100%
105%
106%
111%
120%
122%
125%
Q4 2021
485,576
$
100%
100%
100%
99%
101%
102%
Q1 2022
236,624
$
100%
100%
111%
112%
114%
Q2 2022
305,494
$
100%
110%
117%
119%
Q3 2022
341,524
$
112%
115%
120%
Q4 2022
581,668
$
102%
105%
Q1 2023
426,079
$
103%
Weighted Average
102%
104%
106%
108%
109%
111%
117%
125%
Median
100%
101%
104%
107%
107%
110%
118%
122%
Q3 2022
Q4 2022
Q1 2023
Q2 2023
Starting ARR
3,341,379
$
3,694,194
$
4,671,686
$
5,215,867
$
New
341,524
$
581,668
$
426,079
$
657,018
$
Recovered
2,347
$
8,926
$
-
$
71,349
$
Expansion
118,213
$
560,791
$
244,024
$
369,886
$
Contraction
(21,094)
$
(78,676)
$
(75,426)
$
(148,657)
$
Net Expansion / Contraction
97,119
$
482,115
$
168,599
$
221,228
$
Churn
(88,175)
$
(95,217)
$
(50,497)
$
(67,747)
$
Ending ARR
3,694,194
$
4,671,686
$
5,215,867
$
6,097,716
$
TTM Gross Dollar Retention
91%
90%
90%
91%
TTM Net Dollar Retention
107%
119%
119%
120%
Cohort Net Dollar Retention Analysis
Cohort Logo Retention Analysis
Snowball Retention Analysis
Unit Economics Table
Benchmarking
Both LTV/CAC and GMPP are calculated on a gross
profit basis to understand customer level profitability
Gross profit tied to services-driven onboarding (e.g.,
implementation) should be netted (+/-) from CAC
Gross margin is burdened with customer success to
account for ongoing costs to service customers
Annual, upfront contracts should be factored in GMPP
(e.g., 9-month GMPP would be 0-month cash GMPP)
LTV is capped at 5-years; forecast monthly revenue
using retention curve (see framework for calculation)
Calculate unit economics in the aggregate and at the
component level (e.g., customer type, sales channel)
Benchmarks are dependent on ASP, target customer,
and business model
Renewal rates should be analyzed for businesses with
multi-year contracts as they can buoy retention
Points of Note
Cohort
Initial Logos
Month 4
Month 7
Month 10 Month 13 Month 16 Month 19 Month 22 Month 25
Q2 2021
472
100%
100%
100%
84%
84%
84%
84%
79%
Q3 2021
393
100%
100%
100%
85%
85%
85%
85%
Q4 2021
533
100%
100%
100%
83%
83%
83%
Q1 2022
294
100%
100%
100%
83%
83%
Q2 2022
435
100%
100%
100%
84%
Q3 2022
441
100%
100%
100%
Q4 2022
595
100%
100%
Q1 2023
382
100%
Weighted Average
100%
100%
100%
85%
85%
86%
86%
80%
Median
100%
100%
100%
85%
85%
85%
86%
80%
Software Unit Economics Primer
Gross Dollar Retention (“GDR”):
Revenue retained from existing customers over a given period; accounts for churned and contracted ARR
Net Dollar Retention (“NDR”):
Revenue growth from existing customers over a given period; accounts for expansion, contraction, and churned ARR
Logo Retention:
Logos retained over a given period; accounts for churned logos
Month 13 & Month 25 Retention:
Important months of retention in annual subscription businesses as these are the first and second renewal points
Snowball Retention Analysis:
Accounts for entirety of the customer base and analyzes retention period over period (e.g., Q2 2022 to Q2 2023)
Cohort Retention Analysis:
Accounts for vintage-based cohorts (e.g., Q1 2021) and analyzes retention over time (e.g., Month 1 to Month 25)
Lifetime Value (“LTV”):
Expected revenue accrued from a customer over a five-year period; based on historical cohort patterns and forecast
Customer Acquisition Costs (“CAC”):
Dollars spent to acquire a customer, inclusive of all sales & marketing costs
LTV/CAC:
Multiple of the acquisition cost provided by the cumulative gross profit of a customer through five years
Gross Margin Payback Period (“GMPP”): Number of months required to break even, on a gross profit basis, on the cost of acquiring a customer
Initial ARR:
Annual recurring revenue initially acquired; typically calculated as month 1 subscription revenue multiplied by twelve
Initial Logos:
Number of logos initially acquired in a cohort
Sales Efficiency:
Measure of customer acquisition cost productivity; calculated as Initial ARR divided by CAC
Average Selling Price (“ASP”):
Average revenue per account; calculated as ARR divided by Logos