Why Cohorts Matter for Revenue Forecasting

Let's talk about a mandatory task you all know, perhaps one of the most dreaded: Revenue forecasting! While the goal is straightforward — to predict how much revenue your brand will generate over the next year(s) - the path to getting there is anything but simple. It's always a balancing act between keeping complexity low and factoring in historical data, future strategic changes and market trends.

But here's the good news: to incorporate your historical data and performance over time, you can utilize the Revenue by Cohorts analysis.

Review historical data

Analyzing historical data serves as the foundation for creating sales forecasts and identifying patterns that inform future projections. We are often asked to advise brands on their revenue projections, and typically face the following scenario: In the early years, everything looks great — revenue has been growing rapidly over time. But then that growth starts to slow and eventually revenue levels off.

The big question is, what's next? What will sales look like in the future? Most brands see the overall trend and assume that sales will probably stabilize or return to growth with the right initiatives. So they'd come up with a base case and an optimistic case. Both seem reasonable at first.

Identify growth drivers

But it's not enough to stop there! It's important to understand where the revenue is coming from — your new customers versus your repeat customers and how that dynamic has changed over time.

New Customer Development The first step is to understand the volume of new customers over time. Especially for young brands, growth is often driven by new customer acquisition, and this acquisition rate is likely to start declining at some point.

Customer Retention We need to understand the impact of repeat customers. To grow sustainably, you need to keep your customers coming back. And we should remember that the customer lifecycle tends to follow a predictable pattern: churn is high in the beginning, especially after the first order, and then stabilizes.

Understand revenue by cohort

So far, so good! Let's put the two growth drivers together and analyze the revenue contribution per customer cohort - grouped by when they made their first purchase. The Revenue by Cohorts analysis shows where your revenue is coming from.

The report analysis shows you how much of a given period's revenue was generated by each customer cohort. In the following example, we can see which customers contributed to the total revenue of ~$4 million in 2024. 64% was generated by new customers, and the remaining 36% was added by customers who were acquired in previous years, but who purchased again in 2024:

So we now have all the data we need to understand the dynamics of our growth drivers. We will be able to understand how the share of new customer revenue has evolved, how customer retention has progressed, and at what growth rates.

For example, if we were to observe that the revenue contribution of new customers begins to decline and their retention rates shrink, this would ultimately lead to slower overall revenue growth rates. Projecting these trends forward, it would become clear that instead of revenues remaining flat, they’re more likely to decline unless changes are made to how the brand acquires and retains customers.

Combat declining revenues

Now we have two choices: ignore the data and hope for the best, or face reality head-on. When brands ignore cohort dynamics, they typically end up reacting too late, cutting staff and spending every few quarters while sales continue to decline. The real problem? They haven't addressed the core economic drivers of the business.

The other option is to make proactive changes, such as boosting customer retention rates, promoting products with a high stickiness, improving new customer acquisition, optimizing conversion rates, or focusing on increasing order values. These are the factors that can turn things around and reignite growth.