The annual cohort bridge
For this exercise, ARR is annualized recurring subscription value. All movements use a consistent currency and definition; there are no acquisitions, foreign-exchange effects, restatements or reactivations. The expansion, contraction and churn figures refer only to the opening customer cohort. New customers are excluded from retention calculations.
| ARR movement, $m | Amount |
|---|---|
| Opening live ARR | 10.0 |
| Expansion from opening customers | +2.0 |
| Contraction from opening customers | -0.5 |
| Churn from opening customers | -1.0 |
| New-customer ARR | +2.0 |
- Calculate ending ARR and total growth.
- Calculate gross revenue retention (GRR) and net revenue retention (NRR).
- Calculate the opening cohort's ending ARR and its contribution to net growth.
- Explain why NRR above 100% does not mean there was no churn.
Keep the cohort denominator fixed
GRR = (opening ARR - contraction - churn) / opening ARR. NRR = (opening ARR + expansion - contraction - churn) / opening ARR. The opening denominator stays fixed for both calculations. Do not add new-customer ARR to the retention numerator.
Opening cohort ending ARR / new ARR / total ending ARR
GRR / NRR / total growth
What the metrics show / what they do not show
Use your own notes or the writing space in the downloadable PDF.
Worked retention bridge
The existing cohort adds a net $0.5m while new customers add $2m, so 80% of the $2.5m net ARR increase comes from new-customer ARR. NRR above 100% masks $1.5m of contraction and churn, because expansion from remaining customers is larger.
The metrics do not show the number of customers lost, concentration, discounts, contract duration or gross margin. Two companies with 105% NRR can have very different customer risk and economics.
| Calculation | Result |
|---|---|
| Opening cohort ending ARR: 10 + 2 - 0.5 - 1 | $10.5m |
| Total ending ARR: 10.5 + 2 | $12.5m |
| Total growth: 12.5 / 10 - 1 | 25% |
| GRR: (10 - 0.5 - 1) / 10 | 85% |
| NRR: 10.5 / 10 | 105% |
| Opening cohort net growth contribution | $0.5m |
| New customer growth contribution | $2.0m |
The cash question
The company began the year with $8m unrestricted cash and ended with $5m. There was no financing, acquisition, asset sale or distribution; treat the $3m cash decline as operating and investing net burn for this exercise. The next-year plan assumes the same net burn. Management uses burn multiple = net cash burn / net new ARR.
- Calculate the year's burn multiple.
- Calculate constant-burn runway from year-end cash.
- Stress expansion down to $1m and new ARR down to $1.5m, holding contraction and churn fixed. Recalculate ending ARR, growth, NRR and burn multiple if cash burn remains $3m.
Cash and downside answerOpen worked answer
Base burn multiple is $3m / $2.5m = 1.2x. Annual burn of $3m equals $0.25m monthly, so $5m year-end cash provides 20 months at constant burn. This is an illustrative runway, not a monthly cash forecast.
The downside produces opening-cohort ARR of $10 + $1 - $0.5 - $1 = $9.5m, so NRR falls to 95%. Adding $1.5m new ARR gives $11m ending ARR and 10% growth. GRR remains 85%. Net new ARR is $1m and burn multiple increases to 3.0x. The same cash burn now buys less reported growth.
The denominator matters: a burn multiple becomes unstable as net new ARR approaches zero and is generally not meaningfully interpreted as a positive efficiency measure when net new ARR is negative.
What to request before paying for growth
Finish by writing one question that would disconfirm your preliminary view. A strong investment discussion explains what evidence could change the conclusion, not just what evidence would support it.
| Diligence request | Decision it informs |
|---|---|
| Customer-level beginning and ending ARR, with movement reasons | Whether the aggregate bridge hides concentration or weak cohorts |
| Contract pricing and discount schedules | Whether expansion reflects durable usage or temporary commercial terms |
| Gross profit and customer-support costs | Whether retained revenue produces attractive contribution |
| Monthly billing, collections and cash forecast | Whether headline runway masks a near-term cash trough |
| Sales efficiency by cohort and channel | Whether new ARR depends on repeatable acquisition economics |
Source notes
Sources support the underlying concepts. The worked cases, figures and examples are original teaching material with the assumptions stated in the resource.
Background on reviewing disclosures and risk. The ARR definitions, dataset, scenarios and investment questions are original and explicitly stipulated.
Questions about this resource
Does NRR include new customers?
Not under this case's definition. NRR measures the opening customer cohort, including its expansion, contraction and churn.
Is 105% NRR automatically attractive?
No. You also need context such as customer mix, gross retention, pricing, margins and the cost of acquiring and serving customers.
Build on the exercise
More practice for the gap you found.
The full guide extends the analysis to customer data, cash forecasting, entry-price decisions and spreadsheet cases.
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Growth equity: reconcile the retention story
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Explain how retention, new customer acquisition and cash needs change an investment view.