Revenue Retention Analysis: What to Look For

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.

Once you have calculated and visualized the total spend over time, average customer bill over time, and billings growth for each customer cohort, there are a number of trends and patterns that we should look out for. In this post, I will focus on the total billings by cohort data and chart, and what they can tell us.

The total billings by cohort chart tells us how much total billings increase or decrease over time. Ideally, billings will remain steady or increase over time, which means that a cohort is a perpetuity, or better yet, a perpetuity with growth. If billings are increasing over time, this means that upsells are more than counterbalancing attrition in that cohort. If, on the other hand, billings are decreasing over time, you should try to figure out if they decrease at a steady rate, or if there is a point at which the drop-off is steeper. If you find steep drop-off points, it is probably worth investigating why billings decline as much as they do.

One basic pattern to look for is whether customer cohorts start at a higher or lower total billings amount than the preceding cohort. If they do, it indicates that the company is either signing up more customers over time, they are paying more on average, or potentially both. Typically, if bookings are increasing over time, each subsequent cohort should start at a higher billing amount than the previous one.

Beyond that, it is important to see if there are common trends in many or all of the cohorts. For example, if there is a dramatic decline in the billings in month 2 of all or most of the cohorts, it may indicate that the company is selling to customers that do no find a lot of value in the product, that there may be problems with the product, or that the customer on-boarding process needs to be improved. Finding trends like this can uncover an issue that needs to be investigated and addressed.

After finding common trends in the cohorts, try to identify anomalous cohorts — either over-performing or under-performing (relative to the others). Finding over-performing cohorts and investigating what, if anything, the company did differently in that period (improved customer service, finding better target segments to focus on and sell to, etc.) should help the company identify initiatives to repeat or continue. Similarly, identifying under-performing cohorts and figuring out why they are under-performing gives the company an opportunity to improve the revenue retention of those cohorts and not make the same mistake in the future.