Cohort Analysis

A cohort analysis is a technique that implies dividing customers into groups (called cohorts) based on their behavior or actions they perform within a certain timeframe. It is aimed at obtaining insights into customer retention and churn.

In this article, we’ll review the importance and types of cohort analysis and make the difference between cohorts and segments clear. We’ll also uncover how to do cohort analysis and use it to increase customer retention.

Why is cohort analysis important?

Customer behavior and actions are the most valuable source of information when it comes to evaluating a company's product or overall experience interacting with a brand. By analyzing the behavior and actions of their users, business owners obtain valuable information and use it to identify the problems within the company, improve onboarding process and acquisition strategies, develop techniques to meet consumers’ needs, and come up with innovative ideas for product development.

After cohort analysis, marketers can increase a company's performance, analyze and improve user experience, test their hypothesis about the influence of a certain customer action on specific areas of a company, improve conversion funnel and customer retention. Results help understand several crucial points about a business. They allow companies to:

• see customers’ actions and find out how their behavior influences product development and marketing strategies;
• unveil customer churn and determine the causes of its increase;
• estimate customer lifetime value to find out whether a certain customer is worth the company’s efforts and time;
• improve customer engagement.

Now that you know why cohort analysis is important, it’s time to proceed to its types.

Types of Cohort Analysis

There are three main types of cohort analysis. They differ in the way cohorts are grouped. Let’s review all of them to see the difference.

• Segment-based cohorts. The group involves consumers who bought a certain type of product or service in the past. With this type of cohort analysis, companies divide customers into segments based on the product or service they paid for. Clients can have different needs and brands should be aware of them. This information enables companies to develop services and products that satisfy the needs of certain audience segments.
• Time-based cohorts. These are clients who started using a product or service during a specific time. This information allows businesses to trace customers’ behavior based on the time they used the product for the first time. Time-based cohorts help brands find out what they did right and wrong during product promotion. For example, 60% of people who signed up with a brand in September still stayed with a company in March while only 10% of those who signed up in December stayed with a brand until May. This result shows that the business wasn’t able to keep the promises given in promotional campaigns in December and meet the expectations of their clients. The company needs some changes in its advertising campaigns.
• Size-based cohorts. This type is used for B2B. Startups, small firms, well-established companies, and huge enterprises, all can become clients. By grouping customers according to their size, companies can identify consumers who bring the biggest profit. The information about customers who bring the least income is equally important since it helps a business find out the problems with a product that might bother these clients. A brand can eliminate the possible issues and increase sales volume.

When you know the types, it’s crucial to figure out the main distinctive features of cohorts and segments.

Cohorts vs Segments

Although cohort and segment might define similar things, they are different and are used in different situations. Let’s discuss the meaning of each term in more detail.

A cohort is a group of clients a company chooses for analysis. To be more clear, it’s a group of customers who share common characteristics within a certain timeframe. In business, consumers are divided into cohorts based on the actions they perform at a specified time. For example, people who purchased a premium plan in January. These groupings are created to answer the main questions, identify the problems and eliminate them, and make some improvements that influence customer retention.

A segment is a group of customers who share common behavior, actions, interests, gender, locations, etc. When marketers divide the audience into segments, they don’t take into consideration a time parameter.

Simply put, when companies group users into cohorts they do it based on the timeframe and similar behavior while segmentation is about dividing customers into groups only based on common interests, behavior, gender, location, etc.

To better understand how the analysis works, let’s walk you through the main steps of this process.

How to do a cohort analysis?

The technique enables businesses to identify factors that influence customer actions. These factors include ad content, campaigns, channels, new product lines, sales, etc. So, if you are interested in improving your company, let’s start.

1. Write down the targeted questions. Since the main goal of the analysis is to obtain insights into your product, service, or user experience, you need to ask the right questions. If you strive to receive useful and accurate information after conducting the analysis, think over every question to the smallest detail. Collaborate with the experts that specialize in this field to create good clear questions for customers.
2. Decide on the metrics that will help you obtain information. It’s advisable to find out the subscription start, cancel dates, and the value every client brings you each month. This way, you’ll be able to find out the drawbacks of specific campaigns or some problems with a certain version of your product and remove them.
3. Identify the relevant cohorts. Divide clients into cohorts based on the distinctive traits they share. Often, customers are divided into groups according to the date they started using the product or service for the first time. The selection process doesn’t end at the date. Later, customers who started using the product at the same time can be divided based on the subscription plan they use or some other characteristics.
4. Do the analysis. You can choose from different techniques and services to do cohort analysis for your company. Consider using Excel for this purpose. With its help, you can assess churn rate, monthly revenue, and customer lifetime value by visualizing data and applying pivot tables.

When you are aware of the necessary steps, it’s time to figure out how to use this knowledge to improve customer retention and reduce churn rate.

There are many different scenarios in which you can use the results of cohort analysis. It’s necessary to review them to see how to use the technique.

Meet customer expectations

Sometimes, businesses can’t meet customers’ actual expectations. This causes frustration and confusion. The reasons might include targeting the wrong audience or exaggerating the benefits of a product during promotion. If customers sign up for a product or service and it doesn’t meet their needs, they are more likely to churn.

The best way to figure out whether your product makes customers happy is to do cohort analysis. First, you need to identify users who left. Secondly, find out the reasons. It will help you unveil the main problems with a product that bother users. Thirdly, create a cohort of people who decided to stop using the product because of their unmet expectations. You also need to see the date when they joined your company to identify what and when went wrong. Do your best to remove the problem and avoid additional churn.

Revise your customer onboarding process

People can give up on using a product or service because they don’t know how to make the most out of it. Since poor onboarding results in 23% churn, it’s essential to provide customers with a flawless experience.

To prevent users from leaving, you need to develop step-by-step guides and other informative educational content that will help them explore your product, provide best practices, design product tours, and send all the necessary materials. However, if you want to check whether you have some issues when you welcome customers onboard, you can perform the same sequence of actions as in the previous step.

You should look through the list of users who canceled the subscription. Ask them questions to figure out the actual reason for their cancellation. If the number of these people is big, you need to consider reviewing your customer onboarding.

Improve your customer acquisition

Today, companies can choose from a wide variety of channels and marketing techniques to acquire new customers. Sales, discounts, and special offers are old and proven ways of winning new customers. However, customers who come during sales can leave quickly. It can result in customer churn. That’s why before running any sale, make sure that it will bring benefits for your brand.

If you aren’t sure that your acquisition model fits your business, do an analysis. Change your model and compare the results of the first and second models. The experiment will help you find out the ways that bring more quality leads.

Simply put, cohort analysis is one of the effective ways to analyze different areas of your business, identify problems, and eliminate them. It helps improve retention and prevent further churn.

References:

1. This article defines the term and unveils how to use cohort analysis.
2. In this article, you’ll find a beginner’s guide to improving retention.
3. This article uncovers how to reduce churn and make strategic decisions.

Last Updated: 22.03.2023