As a startup begins to scale, one of the greatest signs that you will be able to maintain that scale and work towards sustainability is strong customer and dollar cohort retention. What do we mean by this? Over time, the % of customers and their dollar that continue to renew month after month. Let's get into what they look like, how you can use these charts and how you can calculate this from your existing systems.
First, let's see what a sample retention cohort chart looks like:
In the second column, you can see the total number of new customer accounts acquired in the given month. Then as you look across each row from the initial month, the % represents how many of those customers, acquired in the month in the first column of each row, are still paying customers.
Now obviously the higher the % that remains over time the better. Though for recurring revenue businesses there will be logo churn over time, the goal is just for that churn to stay low and increase the average lifetime of each new account you acquire.
The above is an account or customer retention cohort chart. To best understand the pulse of your business you will also want to do a dollar retention cohort chart. Instead of the number of accounts, look at their total MRR that they generate. Give that you can expand MRR, this is a number that can be above 100%. When you look at how these two metrics behave in relation to one another, you can start to see how your business is performing over time.
Customer retention drops, but revenue retention stays high. You are doing a great job of expanding accounts. But the question then becomes, are you seeing customer churn because your sales funnel is target the wrong customer profiles? Or maybe your CS team is doing a poor job checking-in with that particular subset of customers. The best approach here is to segment out the customers who stay and expand versus the ones who churn off more quickly and do a comparative analysis. What is different about the two and how they behave and interact with your business.
Let's say your customer and revenue retention mirror one another. This is typical of Startups with a single price point. The issue here is it limits your upside, you have no path to customer expansion and net dollar expansion which is a critical sign of success for companies that hope to achieve scale.
So how do I measure cohort retention in my own startup?
The best place to start is if you have a subscription management/payment system in place such as Stripe, Zuora, or Chargebee. You want to go into those systems and use a BI tool or SQL editor to group all of your customers by their first month as a customer, typically labeled at "created_date" or "start_date".
Then tally how many new customers you added in each month and how much MRR they represent. Save the subscription or customer IDs in each of these groups and then look back at each month since those customers first started and count how many of them were active, and from the active ones how much they paid. Then take that number and divide by the original value in the first month, multiply by 100 and you have the percentage remaining.
You can use a BI tool or format an excel spreadsheet with formulas like the chart above, using the heat map tool to recreate the colors that change as the % drops.
Cohort charts answer a lot of questions for recurring revenue startups. They can help you know when you have found product-market fit, if you land and expand strategy is working, how you are retaining logos vs dollars, and a whole lot more. Cohort charts can also be a powerful fundraising tool, it helps demonstrate retention, strong unit economics, and your ability to expand accounts after the first sale.