Revenue Retention Analysis: Interpretive Challenges to Success

This blog post is part of a series of posts that serve as a step-by-step guide on conducting a revenue retention analysis from start to finish. Beyond the insights you will gain, conducting the analysis will be helpful for most expansion stage companies hoping to raise expansion capital. Many venture capital firms will perform this analysis at some point during the due diligence process. Presenting this data upfront will save them time and likely impress their management teams with your “metrics-driven approach” to management.

In my last post, I went over some of the technical challenges that you may face while conducting a revenue retention analysis. I will now cover some of the interpretive challenges, since interpreting the data is probably the trickiest part of the exercise.

When interpreting the results of a revenue retention analysis, it is important to understand that the spend behavior of customers is only a symptom of potential issues or opportunities, and usually, there are multiple explanations for trends and anomalies you will find. For example, if you find that the total billings for a couple of cohorts declines steeply in month two, there is a number of potential explanations for it. Perhaps the company had problems with that specific product release, or the company was aggressively signing up customers at the time, many of whom did not find the product useful. Maybe the company had a poor onboarding process at the time, which has since been significantly improved. A revenue retention analysis can uncover symptoms of problems, but usually not their causes, so it is important to be very careful when interpreting the data.