business-health-diagnostic

Purpose

Diagnose overall SaaS business health by analyzing growth, retention, unit economics, and capital efficiency metrics together. Use this to identify problems early, prioritize actions by urgency, and deliver a comprehensive health scorecard for board meetings, quarterly reviews, or fundraising preparation.

This is not a single-metric check—it's a holistic diagnostic that connects revenue, retention, economics, and efficiency to reveal systemic issues and opportunities.

Key Concepts

The Business Health Framework

A SaaS business is healthy when four dimensions work together:

1. Growth & Retention — Are you growing and keeping customers?
2. Revenue growth rate
3. NRR (Net Revenue Retention)
4. Churn rate
5. Quick Ratio

1. Unit Economics — Is the business model profitable at the customer level?
2. CAC (Customer Acquisition Cost)
3. LTV (Lifetime Value)
4. LTV:CAC ratio
5. Payback period
6. Gross margin

1. Capital Efficiency — Are you using cash efficiently?
2. Burn rate
3. Runway
4. Rule of 40
5. Magic Number

1. Strategic Position — Are you positioned for sustainable success?
2. Market positioning (below, at, above market pricing)
3. Competitive moat (network effects, data, brand)
4. Revenue concentration risk
5. Operating leverage

Stage-Specific Benchmarks

Early Stage (Pre-$10M ARR):

• Focus: Product-market fit, unit economics
• Growth: >50% YoY
• LTV:CAC: >3:1
• Gross Margin: >70%
• Runway: >12 months
• Acceptable: Negative margins, high burn (if unit economics work)

Growth Stage ($10M-$50M ARR):

• Focus: Scaling efficiently
• Growth: >40% YoY
• NRR: >100%
• Rule of 40: >40
• Magic Number: >0.75
• Acceptable: Moderate burn if growth is strong

Scale Stage ($50M+ ARR):

• Focus: Profitability, efficiency
• Growth: >25% YoY
• NRR: >110%
• Rule of 40: >40
• Profit Margin: >10%
• Required: Positive or near-positive cash flow

Red Flag Categories

Critical (Fix immediately):

• Runway <6 months
• LTV:CAC <1.5:1
• Churn accelerating cohort-over-cohort
• NRR <90%
• Magic Number <0.3

High Priority (Fix within quarter):

• Rule of 40 <25
• Payback >24 months
• Quick Ratio <2
• Gross margin <60%
• Revenue concentration >50% in top 10 customers

Medium Priority (Address within 6 months):

• NRR 90-100% (flat, not growing)
• Magic Number 0.3-0.5
• Operating leverage negative
• Churn rate stable but high (>5% monthly)

Anti-Patterns (What This Is NOT)

• Not a single metric: "Revenue is growing 50%, we're great!" (ignoring burn, churn, unit economics)
• Not stage-agnostic: Early-stage burn is acceptable; scale-stage burn is a problem
• Not static: Health is directional—are metrics improving or degrading?
• Not just numbers: Context matters (competitive pressure, market changes, team capacity)

When to Use This Framework

Use this when:

• Preparing for board meetings or investor updates
• Quarterly business reviews (QBR)
• Fundraising preparation (know your numbers)
• Annual planning (identify improvement areas)
• You suspect problems but can't pinpoint them
• New PM/exec joining and needs health assessment

Don't use this when:

• You're pre-revenue (focus on product-market fit first)
• You're in pure research mode (not enough data)
• You need tactical guidance (use specific skills: feature, channel, pricing)

Facilitation Source of Truth

Use [workshop-facilitation](../workshop-facilitation/SKILL.md) as the default interaction protocol for this skill.

It defines:

• session heads-up + entry mode (Guided, Context dump, Best guess)
• one-question turns with plain-language prompts
• progress labels (for example, Context Qx/8 and Scoring Qx/5)
• interruption handling and pause/resume behavior
• numbered recommendations at decision points
• quick-select numbered response options for regular questions (include Other (specify) when useful)

This file defines the domain-specific assessment content. If there is a conflict, follow this file's domain logic.

Application

This interactive skill asks up to 4 adaptive questions, then delivers a comprehensive diagnostic with prioritized recommendations.

Step 0: Gather Context

Agent asks:

"Let's diagnose your business health. I'll need metrics across four dimensions: growth, retention, unit economics, and capital efficiency.

Company context:

• Stage: (Pre-$10M ARR, $10M-$50M ARR, $50M+ ARR)
• Business model: (PLG, sales-led, hybrid)
• Target market: (SMB, mid-market, enterprise, mixed)

Why this matters: Benchmarks vary by stage. Early-stage optimizes for growth; scale-stage optimizes for efficiency.

Please provide the following metrics. Use 'unknown' if you don't have a metric."

Step 1: Growth & Retention Metrics

Agent asks:

"Growth & Retention:

1. Revenue:
2. Current MRR or ARR: $___
3. Revenue growth rate: ___% (MoM or YoY)

1. Retention:
2. Monthly churn rate: ___%
3. NRR (Net Revenue Retention): ___%
4. Quick Ratio: ___ (or I can calculate it)

1. Expansion:
2. Expansion revenue as % of total MRR: ___%

1. Cohort trends:
2. Are recent cohorts retaining better or worse than older cohorts?
3. Better (improving)
4. Same (stable)
5. Worse (degrading)
6. Unknown"

Based on answers, agent evaluates:

• ✅ Healthy growth: Growth >40% YoY (growth stage) or >25% (scale stage)
• ✅ Healthy retention: NRR >100%, churn <5% monthly, Quick Ratio >2
• 🚨 Growth problems: Growth <20% YoY
• 🚨 Retention problems: NRR <100%, churn >5%, cohort degradation

Step 2: Unit Economics Metrics

Agent asks:

"Unit Economics:

1. Acquisition:
2. CAC (Customer Acquisition Cost): $___
3. Blended or by channel? (If by channel, what's your best channel CAC?)

1. Value:
2. LTV (Lifetime Value): $___
3. LTV:CAC ratio: ___ (or I can calculate it)
4. Payback period: ___ months (or I can calculate it)

1. Margins:
2. Gross margin: ___%
3. Contribution margin (if known): ___%

1. Trends:
2. Is CAC increasing, stable, or decreasing over time?
3. Decreasing (improving efficiency)
4. Stable
5. Increasing (diminishing returns)
6. Unknown"

Based on answers, agent evaluates:

• ✅ Healthy economics: LTV:CAC >3:1, payback <12 months, gross margin >70%
• ⚠️ Marginal economics: LTV:CAC 2-3:1, payback 12-18 months
• 🚨 Poor economics: LTV:CAC <2:1, payback >24 months, gross margin <60%

Step 3: Capital Efficiency Metrics

Agent asks:

"Capital Efficiency:

1. Cash:
2. Cash balance: $___
3. Monthly net burn rate: $___
4. Runway: ___ months (or I can calculate it)

1. Efficiency ratios:
2. Rule of 40: ___ (Growth % + Profit Margin %) (or I can calculate it)
3. Magic Number: ___ (S&M efficiency) (or I can calculate it)

1. Operating expenses:
2. S&M as % of revenue: ___%
3. R&D as % of revenue: ___%
4. Is OpEx growing faster than revenue?
5. No (positive operating leverage)
6. Yes (negative operating leverage)
7. Unknown

1. Profitability:
2. Profit margin: ___%
3. Path to profitability: (already profitable, 6-12 months, 12-24 months, >24 months, unknown)"

Based on answers, agent evaluates:

• ✅ Healthy efficiency: Rule of 40 >40, magic number >0.75, runway >12 months
• ⚠️ Acceptable efficiency: Rule of 40 25-40, magic number 0.5-0.75, runway 6-12 months
• 🚨 Poor efficiency: Rule of 40 <25, magic number <0.5, runway <6 months

Step 4: Deliver Comprehensive Diagnostic

Agent synthesizes all metrics and delivers:

1. Overall Health Score — Healthy / Moderate / Concerning / Critical
2. Dimension Scores — Growth, Retention, Economics, Efficiency
3. Red Flags — Critical, High Priority, Medium Priority
4. Prioritized Recommendations — Top 3-5 actions with expected impact
5. Stage-Appropriate Benchmarks — How you