How can you tell if your customers stick around?

This is still one of the hardest questions to answer, despite an abundance of analytics tools.

It’s silly, because long term retention is one of the most important health indicators for your SaaS business.

And having customers stick around achieves one of your most highly sought after goals:

Product-Market Fit

The problem with churn rate

You might be thinking: I already know if my customers are sticking around. I know my churn rate.

Well here’s the problem with churn rate…

Churn rate is great at telling you how many people are leaving.

It is terrible at telling you who is leaving.

It doesn’t tell you if new customers are leaving or old customers are leaving and how many of each.

That information is lost when everyone is lumped together into a single number.

What your business needs for success is a core group of customers that have high retention and it’s impossible for your churn rate metric to tell you if you have that or not.

So how can you find out?

A much better tool to see how well customers stick around is the stacked cohort retention chart.

Spoiler Alert: There’s a free app that will generate this chart for you at the end of this article.

It looks like this:

Each color band represents a cohort—the group of customers that signed up in the same month.

This report makes it clear to see if they are flattening out or steadily dwindling until they disappear from the chart—and your business.

Flattening out is good, it means you have a group of customers in each cohort that have a high retention rate. They find value in your product and stick around.

If your retention is bad, this chart will slant down and to the right. Like this simulated chart with a consistent 15% churn:

Eventually your growth flattens out because it takes all your new customers just to fill the hole left by those that churned out. This chart is one of the best ways to truly see how that behaves.

Just for fun, here’s what negative churn looks like. Each cohort continues to grow each month. This is rare and is the holy grail in SaaS businesses:

This is one of the ways to get a “hockey stick” growth curve.

Calculating this for yourself

If you want to skip the DIY, there’s a free web app that will generate this chart from your Stripe data at the end of the article.

This chart is a great tool, but it is not available in most analytics apps. It’s technically possible in ChartMogul (on the expensive plan) but you have to construct it yourself. Here’s what you need to do.

Here’s how you can make this for yourself.

What you’ll need:

• Divide your customers into cohorts (who signed up in the same month).
• For each cohort, record how many customers are active in each month following their signup. This is the hardest part of the tutorial.
• Excel or Google Docs

Excel Instructions

1. Open Excel to a new worksheet.

2. Label the first column ‘Cohort’ and add a column for each month you want to analyze (at most you’d have a column for each month your app has existed)

3. List each cohort you are analyzing down the first row. I just name them based on the month the cohort signed up for my app.

   In this example, I have generated 18 month columns and am analyzing the most recent 18 cohorts:

4. Then fill in the number of active customers per cohort in a diagonal as you go down the list of cohorts.

   

5. Highlight your data, choose Insert > Recommended Charts, and then click Stacked Area.

   

6. Your stacked cohort retention chart is complete.

   

Google Docs Instructions

1. Open a new spreadsheet.

2. Label the first column ‘Cohort’ and add a column for each month you want to analyze (at most you’d have a column for each month your app has existed)

3. List each cohort you are analyzing down the first row. I just name them based on the month the cohort signed up for my app.

   In this example, I have generated 18 month columns and am analyzing the most recent 18 cohorts:

4. Then fill in the number of active customers per cohort in a diagonal as you go down the list of cohorts.

5. Highlight all of your data, choose Insert > Chart.

6. Choose Stacked Area Chart under the Chart Type drop down box.

7. Scroll down to the bottom of the Chart editor and make sure “Switch rows / columns” and “Use column A as headers” are selected.

   

8. Your stacked cohort retention chart is complete.

A MUCH easier way to calculate this for yourself

If you read the instructions, you probably noticed that calculating the number of active customers per month per cohort is an extremely tedious task.

You have to

1. find the data for your own biz
2. divvy it up into months
3. add everything up
4. put it into a spreadsheet

This is….. not fun.

If you can even get ahold of the data.

But you don’t have to worry about all that, because I have already built a free web application to calculate this for you.

All you have to do is sign up below with an email and connect your Stripe account with just a click.

You’ll get an email once it’s done calculating everything for you.