Your Complete Starting Guide To SaaS Cohort Analysis
When you’re running a SaaS business, customer retention is of prime importance. Yes, it’s even more important than customer acquisition.
Well, if you’re launching a SaaS startup, then of course you need to acquire new customers. But that’s just the beginning. In the long run, you need to make sure that your existing customers are loyal and that they continue using your SaaS product for as long as possible.
And one of the most granular ways to measure customer retention is through SaaS cohort analysis.
In this article, we’ll look at an overview of SaaS cohort analysis and some basic ways to do it for your SaaS business.
What Is SaaS Cohort Analysis?
SaaS cohort analysis is a type of data analysis in which you segment customers by their characteristics, such as when they joined your SaaS product or by user behavior. Then, you track how those cohorts behave over time.
This would require an analytics tool that can help you crunch the necessary numbers and metrics. It could simply be a spreadsheet, or it could be a more advanced tool, such as Google Analytics or ProfitWell. Of course, it would depend on the amount and complexity of the data that you need to track.
SaaS cohort analysis helps you understand customer behavior and figure out what’s working and what’s not for each cohort.
For SaaS businesses, cohort analysis allows them to assess the success rate of different groups of people who signed up for their SaaS product at different times. It can help you get a better understanding of user engagement and retention rates over time.
For example, if you see that your users who signed up in June have significantly higher retention rates than those who signed up in May, then that’s a good sign for you. And you can use it to make informed decisions about how to improve your SaaS product and other customer retention efforts.
Why Is SaaS Cohort Analysis Important?
There are several reasons why SaaS cohort analysis is important:
It Helps You Identify Seasonal Trends In Your Target Market
If your cohorts are based on when your customers sign up for your SaaS product, then cohort analysis can help you identify seasonal trends in your target market.
For example, you may see that customers who sign up in the summer tend to be more engaged with your SaaS product than those who sign up during later parts of the year, say November or December.
This may be an indication that the quality of leads you generate tends to be better in the summer months than in later times.
It Can Help You Identify New Opportunities
By tracking each SaaS customer cohorts’ engagement metrics over time, you may be able to identify new opportunities for growth or ways in which you could improve your SaaS product or marketing strategy.
For example, if you see that a certain customer segment is consistently more engaged with your SaaS product than others, then you may want to focus on targeting this particular cohort in your SaaS marketing efforts.
Investors Look At Cohort Analysis In Valuing A SaaS Company
When valuing SaaS companies, investors look at SaaS cohort analysis to get an idea of the company’s health. They want to know if the SaaS company is growing and retaining customers or not.
By analyzing SaaS cohorts, investors can get a better understanding of customer engagement and retention rates over time. This helps them make more informed decisions about whether or not to invest in a SaaS company.
And as a SaaS business owner, you want to make sure your SaaS cohorts are in good shape, so you can attract potential investors.
2 Common Types Of SaaS Cohort Analysis
There are two common types of SaaS cohort analysis:
Cohort Analysis Based On Acquisition Date
This type of SaaS cohort analysis is based on the date when customers signed up for your SaaS product.
For example, within a year, you might have 12 customer cohorts — one for each month of the year.
This type of SaaS cohort analysis can help you track the engagement and retention rates of your SaaS product over time.
For example, if you see that cohorts from July have higher retention rates than cohorts from May, then this may indicate a seasonal trend in customer engagement.
Among the two types of SaaS cohort analysis, this method is more widely used simply due to the fact that it is easier to do. After all, you would only have one basis for customer segmentation: the date when the customer signed up for your SaaS product.
Cohort Analysis Based On Customer Behavior
The second type of SaaS cohort analysis is based on customer behavior.
Now, “customer behavior” is sort of a vague term in this case. That’s because there are many possible customer behaviors that can serve as a basis for segmentation.
These behaviors may include the following:
- Their user persona
- Which marketing and sales channels they were acquired through
- Which subscription plans they purchased
- Which of your SaaS product’s features they tend to engage with
- Specific actions they have taken in-app (e.g., completed a tutorial)
Using SaaS cohort analysis based on customer behavior can help you identify valuable user segments that may have otherwise gone unnoticed.
For example, if you find out that customers who purchased a certain SaaS subscription plan tend to be more engaged with your SaaS product than users in other plans, then this may indicate new opportunities for growth or improvement.
How To Perform SaaS Cohort Analysis
Now that we’ve looked at different types of cohort analysis, let’s look at how you can do it for your SaaS business.
In our examples below, we will be using cohort analysis based on the acquisition date, since it is the more common type of SaaS cohort analysis.
1) Customer Cohort Analysis
For SaaS companies, cohort analysis usually segments the customers based on when they start subscribing to your SaaS solution. These customers are often grouped according to the month or quarter they signed up for your SaaS product.
As such, the first step would be to plot the number of new customers you acquire each month on a cohort analysis template or table. And since we’re trying to eventually look at customer retention, you will also need to count how many of those customers remain over time.
Here’s an example of what a customer cohort table might look like:
2) Customer Retention Rate By Cohort
Once you have the customer cohorts in place, it’s time to move on to customer retention cohort analysis. Here, you’ll be looking at how many customers remain with your SaaS solution month-on-month.
To do that, we first need to understand how to calculate the customer retention rate. It’s fairly simple. You just need to divide the number of customers who remain at the end of a given month by the total number of customers you acquired in that month.
For example, if you had 100 customers sign up for your SaaS product in January, and 80 of them still remain at the end of February — then your customer retention rate for January would be 80%.
Specifically for cohort analysis, the initial number of customers at the very start should always be the basis of the customer retention rate.
In our current example we started above, imagine that by August, only 50 customers remain out of the initial 100 customers in the January cohort. So in that case, the customer retention rate by August would be 50%.
Understanding these calculations will make it easier for you to create a formula on Microsoft Excel, Google Sheets, or whatever platform you are using for your cohort analysis template.
Once you have calculated the customer retention rate for each cohort, it should give you an idea of how engaged and loyal they are to your SaaS solution over time.
3) Net Monthly Recurring Revenue By Cohort
Now, remember that not all of your customers are spending the same amount of money on your SaaS product. Unless, of course, you have a flat-rate pricing model. In that case, cohort analysis will be much much easier for you.
But for this article, let’s say that you offer different tiers or different subscription plans based on usage or feature offerings. That means some of your customers may be spending more than others.
That’s why SaaS cohort analysis should also take into account your MRR or Monthly Recurring Revenue.
Basically, this metric looks at how much money you are getting from a specific customer cohort within a specific month.
Now, notice that we’re talking about Net MRR here. That means you also need to consider various additions and deductions from your MRR.
These may include the following:
- Expansion Revenue: This is the additional recurring revenue that you make as a result of successful SaaS upselling or cross-selling.
- Contraction Revenue: This is the lost revenue when SaaS customers downgrade their subscription plans.
- Churn Revenue: This is when SaaS customers cancel their subscriptions and stop using your SaaS solution altogether.
To get your Net MRR, you will need to add your expansion revenue to your starting MRR and then subtract your contraction and churn revenues.
Once you have this metric in place, it should give you a better idea of how much SaaS revenue you are generating month-on-month from each cohort.
On your cohort analysis template, however, it would just be a matter of adding up all of your actual revenue for the month.
Here’s an example of what that table may look like:
4) Net Revenue Retention By Cohort
Another important SaaS metric when it comes to customer retention is net revenue retention (NRR), also known as net dollar retention (NDR).
In SaaS cohort analysis, net revenue retention looks at how much of your SaaS solution’s total revenue has been retained in a given month.
Looking at the NRR alone, you can calculate it by dividing your Net MRR by your starting MRR.
For example, if your SaaS solution had a starting MRR of $3,000 in January and you have a net MRR of $2,400 in February, then the NRR for that cohort would be 90%.
But again, specifically for cohort analysis, your starting MRR should always be the MRR you initially had at the very start, for each cohort.
For instance, in our example above, let’s say that your net MRR in March was $2,100. So the NRR for the January cohort would now be 70%.
The reason why NRR is important in SaaS cohort analysis is that it gives you an indication of how well your SaaS product is retaining subscription revenue over time.
In our sample table above, you may notice that some of the NRR values are more than 100%. That means that SaaS customers belonging to those cohorts are actually spending more money than when they first signed up.
On the other hand, you may also see NRR values less than 100%. This usually indicates SaaS customer churn or contraction — and can be a sign of SaaS product issues or customer dissatisfaction.
5) Cumulative Lifetime Revenue By Cohort
SaaS cohort analysis should also take into account the cumulative lifetime revenue of each SaaS customer cohort.
This metric basically looks at how much SaaS revenue you have made from a specific cohort over its entire lifetime — or until they cancel their subscription.
It is important to note that this metric is not limited to a single month; it takes into account all SaaS revenues generated since the start, as long as they do not come from different cohorts.
Now, if your SaaS customers are loyal and engaged then chances are your cumulative lifetime revenue will increase with each passing month. But if SaaS churn rates are high, then your cumulative lifetime revenue may decrease steadily or even remain static.
6) Customer Lifetime Value By Cohort
One of the most important SaaS metrics is customer lifetime value (CLV). In SaaS cohort analysis, this metric will give you an indication of the total amount of money that a SaaS customer is likely to spend over their whole time subscribed to your SaaS product.
The CLV calculation takes into account multiple SaaS metrics, such as average revenue per user (ARPU) and average customer lifespan.
Looking at the metric alone, you can calculate a general CLV by multiplying your ARPU by the average customer lifespan.
However, through cohort analysis, you can simply divide cumulative revenue for each SaaS customer cohort by the number of SaaS customers in the cohort. This will give you an approximate lifetime value for each SaaS customer group.
Now, if you notice that SaaS customers from certain cohorts have a higher CLV than others then it could be a sign that you need to focus more on those cohorts and/or SaaS product features that are driving their engagement.
On the other hand, SaaS customers with low CLVs may indicate SaaS customer dissatisfaction and can help provide helpful insights into how to improve customer experience and reduce churn rates.
Final Thoughts About SaaS Cohort Analysis
SaaS cohort analysis is a must for any SaaS business — not just because it is a requirement for most venture capitalists. But also because it can give you a better understanding of customer behavior and reveal valuable insights into how to increase your recurring revenue and reduce SaaS churn.
Performing cohort analysis based on the customer acquisition date is simple and can help you gain a better understanding of your SaaS customer retention over time.
However, using customer behavior or usage-based cohorts can reveal even more insights and help you identify SaaS customer segments that are profitable and worth retaining.
Ultimately, SaaS cohort analysis allows for better decision-making when it comes to SaaS marketing strategies, customer segmentation, product features, and pricing strategy. It is an invaluable tool for any SaaS company looking to create a sustainable growth model and increase its SaaS revenue.
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