Churn and cohort analysis, explained simply
Churn shows how much revenue leaves the base. Cohort analysis shows whether retention is improving or deteriorating by comparing newer customers with older ones at the same age.
Low, stable churn supports a higher valuation. Newer cohorts retaining worse than older ones suggest that future revenue may be weaker than history implies.
Revenue retained by cohort
IllustrativeLumen Ops Software, % of initial revenue
The 2024 cohort is retaining less revenue than the 2023 cohort at the same age.
Key measures
| Measure | Formula |
|---|---|
| Customer (logo) churn | Customers lost ÷ customers at the start |
| Gross revenue churn | (Revenue lost to cancellations and downgrades) ÷ starting revenue |
| Net revenue retention | (Starting revenue + upgrades − downgrades − cancellations) ÷ starting revenue |
Worked example
Lumen started 2025 with 200 customers and lost 24, an annual customer churn of 12%. The cohort table shows that customers who joined in 2024 retained 85% of revenue after one year, against 92% for the 2023 cohort. The buyer asks what changed: pricing, product quality or the sales approach.
Lumen Ops Software is a fictional company. All figures are illustrative.
Why it matters in a deal
Churn drives the predictability of revenue. Rising churn in recent cohorts is an early warning that history may overstate the future.
Red flags
- Churn hidden by strong new sales
- Cancelled customers still counted as active
- Recent cohorts retaining worse than older ones