Get control of your cohort analysis

Getting to grips with Cohort Analysis

If you are collecting customer data, cohort analysis is a hugely valuable tool to help you understand business performance, especially if you are running a successful fast moving e-commerce subscription business.

So, over to you Tyvand McKnee, founder of Bearded Colonel, and his thoughts on Cohort Analysis.

The importance of cohort analysis

When it comes to your mountain of unorganized data, cohorts are your best friend. Not only will they allow you to break down your data into digestible pieces, they're also a far more accurate way to analyze it than as a whole.

Taking the Customer Lifetime Value (LTV) example

Let’s take lifetime value (LTV) as an example. It might be tempting to simply take the sum of all of your sales and divide by total customers (sales/customers=LTV). While that is a metric, it does a terrible job of giving you an accurate number, or a full picture of what’s going on.

Perhaps most of your customers make their biggest purchase with you 3 months after their first (whether you know that they do or not). Let’s say 2 months ago you made a massive marketing push that saw you make twice as many sales as the previous 6 months.

That surge of new customers is going to warp your numbers as they haven’t made their biggest purchase yet; you’ll get a LTV that is lower than your actual LTV.

If you move forward with this number, you’ll be committing yourself to slower growth than what you could actually realize (due to reducing marketing budget/customer).

A similar and inverse situation (which is worse) is thinking the LTV is much higher than it really is, and you could be acquiring customers at a loss.

You can use cohorts for just about anything: LTV, retention/churn, effectiveness of cross selling systems, or general customer habits.

Using cohort analysis

Let’s get strategic. What you’re seeking to find out is going to determine how you make your cohorts.

If you’re looking for churn/retention rates, or LTV after X time, you’ll want to break them down based off of time (group them by which month or week they joined or became a customer).

Then track them as a group over that unit of time. A retention graph based on monthly cohorts will look similar.

Each line represents a monthly cohort and shows the % retained after X months.

It’s a very simplistic graph, but if yours looks like this, you’re doing pretty well; in the last 12 months you’ve increased retention by 10% (notice how each line is a little higher than the previous).

You can also use your cohorts to dive into finer details to maximize the efficiency of your marketing.

Get into the deep detail

If one marketing campaign has an average CPA (cost per acquisition) of £10 and the other £5, you’d be excused for thinking that you should pile all your cash into the £5 one.

However, if customers from the £10 campaign are spending 7x (or are far more active on your platform) as much as those from £5, you’d be wrong to do so.

In this case, you’ll want to group your data by their source (Facebook, Google, referrals, etc.). Note, it would be wise to segregate your data points by source AND by date as with retention.

This will give you an even clearer picture.

With that, you might decide that Facebook has the best ROI, but you have a 2 month goal you want to meet, so you’ll load up your Google campaigns for 2 months, then switch focus to Facebook.

Using Cohort Analysis to grow your business

Cohorts are also great for looking into habits of your users, cluing you in on when is the best time to cross-sell to them, or when they need extra attention.

You’ll never get that sort of insight without cohorts; data is faster, clearer, and numbers don’t lie or sugar coat.

One final note, while data analysis is much easier if you can code or if you know Excel macros, you don’t need it to get great data. I know only a handful of excel shortcuts, but with a little clever thinking, I can easily organize and analyze my data. Good luck!

Tyvand McKee (CEO/Founder – Bearded Colonel)

Let us take the hassle out of managing your cohorts

If you are looking for a platform to help you manage your cohorts, improve your marketing and generally make your life easier, follow Tyvand’s lead and sign up or book on the calendar below.