Revenue Retention Analysis: Preparing the Data

This blog post is about preparing data for a billings/revenue retention analysis, and part of a series of posts on how to prepare and conduct such an analysis and interpret the results. 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 do this analysis at some point during the due diligence process, and presenting it to them up front will save them time and likely impress them with your “metrics-driven approach” to management.

To conduct a billings/revenue retention analysis for a company (presumably yours) that charges its customers a periodic software subscription fee, you will need a spreadsheet of the company’s billings by customer by month. If the company bills on a monthly basis, its billings will usually equal or be very similar to revenue (this is why billings retention analysis can often serve as a revenue retention analysis). Normally, the spreadsheet will look something like this (if the company bills customers monthly):

Individual customers should be in the row headers and the months should be in the column headers. The amount each customer was billed in a given month should be shown in the cells. If the company bills its customers on a quarterly or annual basis, the spreadsheet will look the same, except that the months in the column headers will be quarters or years.

In the simple example above, the company bills only on a monthly basis and has five different monthly price points (maybe based on usage or product version, such as consumer/pro/enterprise). Your company may bill on a quarterly or annual basis, or perhaps offers customers a variety of billing options (monthly, quarterly, and annual). In any of these cases, you should still create a spreadsheet of billings by customer by month, but take note the company’s billing cycles, as they have implications on the cohorts (groups of customers) you will create (this will be explained in the next post). If the company bills on more than one cycle (such as monthly and annual), have separate spreadsheets for the monthly and annual customers, because you will want to conduct a separate revenue retention analysis for each set of customers (distinguished by billing cycle).

If your company offers and bills additionally for professional services, you will need to separate and filter out the professional services bills from the software/subscription bills (to get a clear understanding of your software/subscription revenue retention). Further, your company may have multiple products, in which case you will also want to segregate billings between the products into separate spreadsheets. I advise this because the revenue retention of a certain product may be dramatically different from the revenue retention of others, and you will likely want to conduct separate analyses for each.