Measuring and growing SaaS cohorts

Before we get into the meat of this post, first, a quick refresher: a cohort is a group of customers acquired at a particular time; for instance the “January 2018” cohort would be those customers who were acquired in January 2018. One very important measure in SaaS is cohort growth. Often times this is depicted in the form of a chart where the revenue of the cohort is shown over time.

A chart that is sloping upwards and to the right is what you want as it means your cohorts are a source of revenue growth (you are expanding bookings within the existing customer base), and the steeper the slope the better. Additionally, upward sloping cohorts mean net dollar retention is in excess of 100%, which is where you want it. For instance, at IPO Datadog had net dollar retention of 146%, which is remarkable; net dollar retention is the difference between the ARR of a customer cohort when you first acquired them and ARR at some point in the future, usually 1 year later. 

To expand your cohorts, it’s imperative to constantly improve your value proposition to the customer. This means always improving the product, releasing new features, improving the customer success function, and finding ways to create value for other divisions at existing customers. Another sustainable way to expand your cohorts is to make sure your contracts include automatic annual price escalators of 3% to 5%.

Examples of cohort performance from the prospectus’ of companies like Gitlab, Cloudflare, Datadog, Livongo, and Blend are below. Commentary is from their prospectus’ (S1).

Cloudflare: “We are uniquely positioned due to our distinct advantages to grow with our customers as they add new Internet properties or expand the usage of our global cloud platform within their organizations. We have grown our Annualized Billings with our paying customer base over time as the needs of those organizations grow and expand as well. The below chart illustrates the growth in Annualized Billings for cohorts of customers that first became paying customers in each of the years from 2011 to 2018, and demonstrates how we attract new paying customers and expand their Annualized Billings with us over time.”

Datadog: “Once our platform is deployed we have experienced significant expansion historically, with customers engaging with our customer success team as well as increasing usage and spend in a self-serve manner. The chart below illustrates this expansion by presenting the ARR from each customer cohort over the years presented. A further indication of the propensity of our customer relationships to expand over time is our dollar-based net retention rate, which compares our ARR from the same set of customers in one period, relative to the year-ago period. As of June 30, 2018 and 2019, our dollar-based net retention rate was 146%, and as of December 31, 2017 and 2018, it was 141% and 151%, respectively.”

Livongo: “The chart below illustrates growth of diabetes members who have enrolled in Livongo for Diabetes and have satisfied contractual billing criteria for each cohort over the periods presented. Each cohort represents the number of diabetes members who first became a Livongo user in a given year. For example, the 2018 Cohort includes all diabetes members that first became a member during 2018.”

Blend: “To illustrate the economics of our customer relationships, we are providing an analysis of the revenue growth to date of the customers we acquired during 2018, which we refer to as the 2018 Cohort, and customers we acquired during 2019, which we refer to as the 2019 Cohort. To provide context, we have also included the customers we acquired in 2020. We selected the 2018 Cohort and 2019 Cohort to illustrate the potential long-term growth of our customer base. The 2018 Cohort and 2019 Cohort represent various financial services firms and include some that have expanded their usage of our software platform as well as those that have reduced or terminated their use of our software platform, and we believe the 2018 Cohort and 2019 Cohort fairly represent our overall customer base. These customer cohorts reflect the success of our “land and expand” approach to growing customer relationships. Once we have acquired a new customer and completed our initial deployment, we are well positioned to introduce more products and marketplaces.”

Hashicorp: “The cohort for a given year represents customers that acquired their initial subscription from us in that fiscal year. For example, the cohort for the fiscal year ended January 31, 2018, or fiscal 2018, represents all customers that made their initial subscription from us between February 1, 2017 and January 31, 2018. The fiscal 2018 cohort increased their initial ARR from $26.0 million in fiscal 2018 to $52.2 million in fiscal 2021, representing a 2.0x multiple."

Braze: “We believe our successful land-and-expand strategy is evidenced by our dollar-based net retention rate, which for the trailing 12 months ended July 31, 2021, January 31, 2021 and January 31, 2020 was 125%, 123% and 126%, respectively, for all our customers, and 135%, 133% and 127%, respectively, for our customers with ARR of $500,000 or more.  Each cohort in the chart below represents customers that made their initial purchase from us in a given fiscal year. For example, the 2016 cohort includes all customers that had their initial purchase within the fiscal year 2016. This cohort increased their ARR from $6.4 million as of January 31, 2016 to $20.1 million as of January 31, 2021, representing a multiple of approximately 3.2x since fiscal year 2016.”

Gitlab: “Our ability to retain and expand our customers is demonstrated in the chart below, which presents the ARR from each customer cohort over the years presented. The cohort for a given year represents customers that acquired their initial subscription purchase from us in that year. For example, the fiscal 2018 cohort represents all customers that made their initial subscription from us between February 1, 2017 and January 31, 2018. The compound annual growth rate, or CAGR, of ARR for our fiscal 2016 cohort, fiscal 2017 cohort, fiscal 2018 cohort, and fiscal 2019 cohort from the fiscal year of the cohort through January 31, 2021 is 90%, 71%, 73%, and 79%, respectively.”

Forgerock: “We continuously focus on increasing the value our customers derive from our platform. The chart below illustrates the strong relationship with our existing customers by showing the initial ARR of a cohort (defined by the year in which they became a ForgeRock customer) of new customers in a given year and the increase in ARR over time for that same cohort of customers. By increasing ARR with existing customers over time, we can significantly increase the return on our upfront sales and marketing investments.”

Thank you for reading.  Visit us at blossomstreetventures.com for more SaaS data and blogs.  Email the author at sammy@blossomstreetventures.com