Revenue Retention Analysis: Technical 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.

Now that we’ve gone over the basic steps for performing a revenue retention analysis and the business benefits of the analysis, I will briefly cover some challenges that you may encounter.

Obtaining the data is the first, and not always easiest step in a revenue retention analysis. To conduct the analysis, you need a spreadsheet that has a list of all of the company’s customers, along with how much they have been billed by month. Depending on the accounting system the company uses, exporting this data may not be trivial. Further, if a company offers its customers a variety of billing options (monthly, quarterly, annual), separate revenue retention analyses should be performed for each billing cycle. Similarly, if a company has multiple products or different versions of the same product, separate revenue retention analyses should be done for each.

Other complications include determining whether to distribute a company’s customers into monthly, quarterly, half-year, or annual cohorts. The cohort period you pick should depend on how much historical data (in terms of time) and how many customers the company has. Choosing the wrong cohort period can seriously hinder the insights that can be gained from this analysis.