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Estd 4.22.2023
In the competitive landscape of SaaS businesses, understanding your customer base goes far beyond simple customer counts or total revenue figures. Revenue retention by cohort has emerged as one of the most powerful analytical frameworks for measuring the health and sustainability of subscription-based businesses. This deep-dive metric provides crucial insights into how well you're retaining the revenue from specific customer groups over time, revealing patterns that aggregate metrics often mask.
What Is Revenue Retention by Cohort?
Revenue retention by cohort refers to the process of tracking how much revenue is retained from a specific group of customers (a cohort) that started using your product during the same time period. Unlike traditional retention metrics that simply count customers, revenue retention focuses on the actual dollars retained, accounting for upgrades, downgrades, and expansions.
A cohort is typically defined by the month or quarter in which customers first subscribed to your service. For example, all customers who subscribed in January 2023 would form the "January 2023 cohort."
Types of Revenue Retention Metrics
There are two primary ways to measure revenue retention by cohort:
Gross Revenue Retention (GRR) - This metric tracks how much revenue from the original cohort is retained over time, excluding any expansion revenue. GRR can never exceed 100% as it only accounts for downgrades and churn.
Net Revenue Retention (NRR) - This measures the total revenue retained from the original cohort, including expansions and upsells. NRR can exceed 100% if expansion revenue outpaces churned revenue.
Why Is Revenue Retention by Cohort So Important?
1. Reveals the True Health of Your Business
According to a study by Bain & Company, improving customer retention rates by just 5% can increase profits by 25% to 95%. Revenue retention by cohort provides a detailed picture of how well you're achieving this critical goal.
"Cohort analysis is more than a metric—it's a diagnostic tool that reveals the underlying dynamics of your business model," notes David Skok, venture capitalist at Matrix Partners and SaaS metrics expert.
2. Predicts Future Revenue Stability
By analyzing patterns across multiple cohorts, you can forecast future revenue with greater accuracy. If your older cohorts consistently maintain strong retention rates, you can more confidently predict long-term revenue.
3. Identifies Product-Market Fit Trends
According to OpenView Partners' 2023 SaaS Benchmarks report, elite SaaS companies with strong product-market fit typically show net revenue retention rates above 110%. Cohort analysis helps identify if your product-market fit is improving or deteriorating over time by comparing newer cohorts to older ones.
4. Directs Strategic Initiatives
Revenue retention by cohort highlights where to focus your efforts. For instance, if newer cohorts show declining retention compared to older ones, you might need to revisit your onboarding process or recent product changes.
5. Validates Pricing Strategies
Cohort analysis can reveal how pricing changes affect retention patterns, providing hard data on whether price increases lead to higher churn or sustainable growth.
How to Measure Revenue Retention by Cohort
Step 1: Define Your Cohorts
Start by grouping your customers based on when they first became paying customers. Monthly cohorts work well for most SaaS businesses, though quarterly may be more appropriate for enterprise-focused companies with fewer, larger customers.
Step 2: Track Monthly Recurring Revenue (MRR)
For each cohort, record the starting MRR and then track how that MRR changes over time. For example, if the January 2023 cohort started with $100,000 in MRR, you would track what percentage of that original $100,000 remains after 1 month, 2 months, and so on.
Step 3: Calculate Both GRR and NRR
Gross Revenue Retention (GRR) Formula:
GRR = (Starting MRR - Downgrades - Churn) ÷ Starting MRRNet Revenue Retention (NRR) Formula:
NRR = (Starting MRR + Expansions - Downgrades - Churn) ÷ Starting MRRStep 4: Create a Cohort Analysis Table
A cohort table typically displays time periods in columns (months 1, 2, 3, etc.) and different cohorts in rows. Each cell shows the percentage of original revenue retained at that point in time.
Step 5: Visualize the Data
Create line graphs showing retention curves for different cohorts. This visualization makes it easier to spot trends and compare performance across cohorts.
Best Practices for Analyzing Cohort Retention
1. Compare Similar Time Periods
When analyzing cohorts, ensure you're comparing apples to apples. Seasonal variations can significantly impact retention, so compare January cohorts with other January cohorts when possible.
2. Look for Inflection Points
Pay special attention to months where retention drops significantly. These often indicate critical moments in the customer journey where intervention could improve outcomes.
According to research by Gainsight, the most critical periods for churn are typically the first 90 days and around renewal points.
3. Segment by Customer Characteristics
Go beyond time-based cohorts by further segmenting based on:
- Customer size
- Industry
- Acquisition channel
- Product plan
- Geography
This multi-dimensional analysis can reveal which customer segments have the best retention dynamics.
4. Set Benchmarks and Goals
Industry benchmarks from sources like KeyBanc Capital Markets' SaaS Survey suggest that top-quartile SaaS companies achieve net revenue retention rates of 120%+ and gross revenue retention above 90%. Use these benchmarks to set appropriate goals for your business.
Common Challenges and How to Address Them
Challenge 1: Early Cohorts Showing Better Retention
If older cohorts consistently outperform newer ones, this may indicate:
- Declining product-market fit
- Changes in customer acquisition strategy attracting less ideal customers
- Underwhelming new features or product changes
Solution: Conduct customer interviews with recent cohorts and review product changes and marketing strategies that may have affected the quality of new customers.
Challenge 2: Inconsistent Retention Across Cohorts
Significant variability between cohorts can make forecasting difficult.
Solution: Look for external factors (market changes, competitive moves) or internal changes (pricing updates, feature launches) that correlate with retention shifts.
Challenge 3: Data Quality Issues
Missing or incorrect data can undermine your cohort analysis.
Solution: Invest in data infrastructure and regular auditing processes to ensure accurate tracking of subscription changes.
Conclusion: From Measurement to Action
Revenue retention by cohort is more than a backward-looking metric—it's a strategic tool that provides actionable insights for SaaS leaders. By understanding how different customer groups maintain their spending with your product over time, you can make informed decisions about product development, customer success initiatives, and growth strategies.
The most successful SaaS companies don't just measure cohort retention; they build entire organizational processes around improving it. This means coordinating efforts across product, sales, marketing, and customer success to address retention at every stage of the customer lifecycle.
Remember that improvements in retention compound over time. A seemingly modest increase in cohort retention can dramatically impact your company's long-term valuation and growth trajectory. As venture capitalist Tomasz Tunguz notes, "A 1% improvement in revenue retention often results in a 12% increase in company valuation after five years."
For SaaS executives, few metrics deserve more attention than revenue retention by cohort. It's not just about measuring the past—it's about securing your company's future.