Cohort AnalysisvsNet Revenue Retention (NRR)

Cohort analysis groups customers by their signup date (or another shared attribute) and tracks their behavior over time. Instead of looking at blended metrics that mask trends, you see how each 'class' of customers performs independently. A SaaS company with 5% monthly churn might discover that January cohort churns at 3% while March cohort churns at 9% — the blended 5% hides a deteriorating acquisition quality problem. Amplitude found that companies using cohort analysis identify retention problems 6-8 weeks earlier than those using aggregate metrics.

NRR measures the percentage of recurring revenue retained from existing customers over a period, including upgrades, downgrades, and churn. An NRR above 100% means your existing customers are spending MORE over time even without new sales — your revenue grows automatically. NRR = (Starting MRR + Expansion − Contraction − Churn) ÷ Starting MRR × 100. Best-in-class SaaS companies have NRR of 120%+: Snowflake (158%), Datadog (130%), Twilio (127%). NRR is the single most predictive metric for long-term SaaS success — VCs have said it's the first metric they check.

The trap is treating all customers as one pool. Blended metrics create dangerous illusions: your overall retention might look stable at 85%, but if Q1 cohorts retain at 95% and Q4 cohorts retain at 70%, you have a ticking time bomb. By the time blended metrics show the drop, the damage has compounded for months. Another trap: analyzing cohorts too narrowly (daily) creates noise, or too broadly (annually) hides actionable trends. Monthly cohorts are the sweet spot for most SaaS businesses.

The trap is confusing NRR with gross retention. Gross retention ignores expansion — it's just (Starting MRR − Contraction − Churn) ÷ Starting MRR. A company with 90% gross retention and 30% expansion has 120% NRR, which looks great. But if expansion revenues come from price increases (not increased usage), they're masking a retention problem. If you raise prices 20% but lose 10% of customers, NRR looks positive but you've damaged trust. Sustainable NRR comes from customers CHOOSING to spend more, not being forced to.

Build a cohort retention table: rows = signup month, columns = months since signup. Calculate retention rate for each cell. Look for two patterns: (1) Vertical drops — if a specific cohort has abnormally low retention, investigate what changed in acquisition that month. (2) Diagonal patterns — if ALL cohorts drop at month 3, you have an onboarding or value-delivery problem at that stage. Target: Month 1 retention ≥ 80%, Month 12 retention ≥ 50% for healthy SaaS.

Calculate NRR monthly: (Starting MRR + Expansion − Contraction − Churn) ÷ Starting MRR × 100. If NRR < 100%, your business is a leaky bucket — fix churn and build upsell paths before spending on acquisition. If NRR is 100-110%, focus on expansion revenue (usage-based pricing, premium tiers, cross-sells). If NRR > 120%, you have an exceptional business — invest aggressively in acquisition since each customer compounds in value.