Revenue Retention Analysis: What to Look For (Part III)
July 8, 2010
This blog post is about how to interpret the data and results of a billings/revenue retention analysis, and focuses on trends and patterns that you should look for. It is part of a series of posts that serve as a step-by-step guide on conducting the 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 the last two posts, I covered some trends, patterns and anomalies you should look for in a total billings by cohort chart and an average billings by cohort chart. In this post, I will discuss the insights that can be gained from analyzing a chart that illustrates billings as a percentage of the first month bill over time (or simply a billings growth chart).
A billings growth chart is essentially the same as the total billings by cohort chart, except that the start point for each cohort is normalized. This chart depicts the rate of billings growth (instead of growth in absolute dollars) for each cohort, and charting this data provides a better visualization of growth.
A billings growth by cohort chart allows you to more easily identify overperforming, underperforming, and anomalous cohorts, since the start point for each cohort is normalized to 100%, allowing you to do an apples-to-apples comparison of the cohorts. As we’ve covered before, finding overperforming cohorts and investigating what, if anything, the company did differently in that period should help the company identify initiatives to repeat or continue. Similarly, identifying underperforming cohorts will allow the company to focus on a set of customers that has had poor revenue retention, find out why, and remedy any underlying issues. The billings growth chart also allows you to better track the effectiveness of changes and initiatives that only affect retention (and not total billings), such as an improved onboarding process.
Below is an example of what billings growth chart looks like: