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Cohort analysis is the most rigorous way to understand customer retention. Instead of tracking an aggregate churn rate, you follow a specific group of customers (those who started in January, for example) and measure how many are still active over time.
What Cohort Analysis Reveals
Aggregate churn hides critical signals. A company growing 20% monthly with 5% monthly churn looks like a 5% churn business — but cohort analysis reveals that older cohorts retain much better (or worse) than newer ones.
Cohort signals to watch: - Month 1–3 churn spike: Usually an onboarding issue - Month 6–12 churn spike: Often a value realization problem - Stable churn after month 12: "Power user" retention floor — the core audience
LTV from Cohort Churn Rate
For a constant monthly churn rate:
LTV = Monthly Revenue per Customer ÷ Monthly Churn Rate
At $99/month and 2% monthly churn: LTV = $99 ÷ 0.02 = $4,950
At $99/month and 5% monthly churn: LTV = $99 ÷ 0.05 = $1,980
Cutting churn in half doubles LTV — the single most powerful lever in subscription economics.
Cohort Half-Life
The cohort half-life is the number of months until 50% of the original cohort has churned:
Half-life = log(0.5) ÷ log(1 − monthly churn rate)
At 2% monthly churn: half-life ≈ 34 months At 5% monthly churn: half-life ≈ 14 months At 10% monthly churn: half-life ≈ 7 months
Benchmarks by Company Type
| Company Type | Monthly Churn | Annual Churn | LTV at $100/mo |
|---|---|---|---|
| Enterprise SaaS | 0.5–1% | 6–11% | $10,000–$20,000 |
| Mid-market SaaS | 1–2% | 12–22% | $5,000–$10,000 |
| SMB SaaS | 2–5% | 22–46% | $2,000–$5,000 |
| Consumer apps | 5–15% | 46–80% | $700–$2,000 |
Frequently asked questions
What is a good monthly churn rate for SaaS? Below 1% monthly churn (under 12% annual) is considered good for SMB SaaS. Enterprise SaaS should target 0.5–0.75% monthly (6–9% annual). Consumer apps with 3–5% monthly churn can be viable if CAC is low and ARPU high enough.
How do I do a full cohort analysis? Group customers by the month they first subscribed. For each cohort, track what percentage remains active at months 1, 3, 6, 12, 24. Plot these as a retention curve. Compare curves across cohorts — improving retention curves over time means your product and onboarding are getting better.