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