Customer cohort analysis & KPIs
An acquirer’s lens to understanding revenue quality
One subject I've been eager to explore is cohort analysis and its relevant KPIs. While I may have been contemplating a bit too long, as many other writers have posted about the topic, today I hope to share a different perspective that will prioritize evaluating a business model from the perspective of an acquisition entrepreneur. The truth is that obtaining clean data sets for extensive analysis is often a pipe dream when you're in the initial stages of evaluating a company. It’s not like you are in the operating seat and have better access to near-perfect information, so you must cut some corners and make a judgment call based on the information at hand.
With today’s post, let’s assume that you’ve had a preliminary conversation with a business owner and, through your qualifying questions, have determined that there may be a potential partnership between you and the business owner. For next steps, you’ve requested some financial information from the owner and a granular sales by customer by period by product data set for the past four years. And because we’re really reaching for assumptions here, I will go on a limb and say that the owner sends this information over promptly.
From here, I’ll discuss conducting the cohort analysis and some key metrics you can easily calculate with this data in mind, although this exercise has many caveats. I'll try to highlight as many nuances as possible, but some will inevitably slip through the cracks. To cover all my bases, I will share other helpful resources you can leverage as you determine what makes the most sense for you. Depending on the level of interest, I am more than happy to elaborate on these topics in future posts.
One last thing before diving in. While cohort analysis and its related KPIs are well-understood in venture capital and enterprise SaaS, this analysis can be broadly applied. It's relevant for any business with a reasonably stable customer base and predictable revenue streams, especially those relying on subscriptions or long-term contracts.
Here’s the agenda:
Nature of revenue streams
What is cohort analysis?
Setting up the analysis
Additional resources worth exploring
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