Cohort analysis sounds fancy, but it's really just a smart way to slice and dice your data to make better decisions, and understand what your customer lifetime value is.
Think of it as a high-tech magnifying glass that helps you see patterns and trends in your user behavior. Here’s why every startup should be all over this.
What is Cohort Analysis?
A cohort is simply a group of people who share a common characteristic within a specific time frame. In cohort analysis, you break your user base into these groups (or cohorts) to analyze their behaviors over time. For example, you might create cohorts based on the month users signed up for your service, or the day they made their first purchase.
How to Understand a Monthly Customer Cohort Analysis Table?
Each row starts with the customers who made their first purchase in that particular month. Then the subsequent columns on that row show the purchases of that cohort in the following months.
Here's a small example:
In the below table, customers who made their first purchase in January 2022, spent £1,729 (but this is only their 1st purchase). Before January finished those exact same customers then spent a total of £169 extra. Then in February those customers spent £90, but they didn't spend anything in March.
Then in February, a different set of customers made their first purchase and spent £2,496. Before February finished they spent an extra £177. They didn't spend anything in March but did spend £36 in April.
| Date | First Order | Month 0 | Month 1 | Month 2 |
|---|---|---|---|---|
| Jan 2022 | £1,729 | £169 | £90 | £0 |
| Feb 2022 | £2,496 | £177 | £0 | £36 |
| Mar 2022 | £2,487 | £0 | £37 | £0 |
| Apr 2022 | £2,569 | £27 | £43 | £36 |
Why is Cohort Analysis Important?
1. You Can Spend More to Acquire a Customer
It helps you understand your customer lifetime value. If you have a really high lifetime value you can spend more to acquire customers. This is a massive advantage, as you can basically outbid all of your competitors to steal all the customers. This point cannot be understated, as it is so important! You will crush your competitors If they can't advertise and acquire customers profitably.
2. Understand User Retention
Retention is the lifeblood of any startup. Cohort analysis allows you to see how long users stick around and why they leave. By comparing cohorts, you can pinpoint when users tend to drop off and investigate why. Maybe they don’t like your onboarding process, or perhaps your app crashes more than a demolition derby. Cohort analysis can help you find and fix these issues.
3. Optimize Marketing Strategies
Throwing marketing dollars around willy-nilly is a rookie mistake. Cohort analysis helps you understand which marketing campaigns are bringing in users who actually stick around. Instead of just looking at the number of sign-ups, you can see which cohorts are converting into long-term, loyal customers. This means you can double down on the strategies that work and scrap the ones that don’t.
4. Improve Product Features
Ever wonder which features are a hit and which are a miss? Cohort analysis can tell you. By analyzing user engagement with different features over time, you can see which ones keep users coming back. This can guide your development team on what to improve, what to add, and what to ditch.
5. Track Revenue Trends
Money talks, but cohort analysis helps you listen better. By examining revenue from different cohorts, you can identify trends and forecast future earnings. Are your early adopters spending more than your latest users? Are there seasonal trends in spending? Cohort analysis can answer these questions and more.
Example: The 2022 Cohort Analysis From My Previous E-commerce Company
Right so you probably want an example with a bit more meat on it. I've got one but it shows very poor results, and that's probably why my previous E-commerce company didn't take off. That said at the time I didn't realise how important it was. You should. And don't forget it.
Let’s dive into the details. Here's my 2022 monthly customer cohort based on gross sales. My company was a retail company in the Home and Garden niche.
Okay, so you can clearly see this is pretty bad. Barely anyone is sticking around, other than on the odd occasion. So it's very clear that unless I made a profit on the first purchase I wasn't going to be making a profit overall. Luckily I was managing to make about a 10% profit during this particluar period on my first sale.
So you can see it from another angle, here it is based on customer retention rate percentages.
My 2022 Cusomter Cohort Analisys based on Customer Retention Rates.
Conclusion
Retaining customers is damn well important! And, a good cohort anlysis can help you figure out how to keep those customers around!