A cohort is a group of people who share a common characteristic over a certain period of time. Cohort analysis originated in science but was adapted to business as a tool to understand customer behaviour.
There are three common variants of cohort analysis:
- Customer retention or churn which assesses the rate of attrition
- Revenue per month which shows spend per customer per month; especially critical for any company with a subscription or ‘land and expand’ strategy.
- Cumulative revenue which is used to determine the average time for a customer to become profitable.
To create a cohort analysis, customers are grouped by their date of acquisition. In most cases, it is best to group customers by month or quarter. Fast moving companies can analysis cohorts by day.
The date of acquisition is displayed on the vertical axis. The horizontal axis shows the months (or quarters or days) since acquisition.
CUSTOMER RETENTION COHORT ANALYSIS
Customer retention is an easy way to understand how long clients stay with the company.
Here is an actual example from the ScaleXP system. The numbers highlights that months 1, 2 and 3 have high churn. Customers who make it beyond month 3 stay for 12+ months.
This example also shows that customers acquired recently – since Sept 2020 – are most likely to churn.
Understanding the critical months for churn can allow the company to tailor its customer service programmes in the early months and then monitor the impact of these initiatives.
CUMULATIVE REVENUE
Cumulative revenue cohort analysis shows the length of time to ‘repay’ the cost of acquiring a new customer, which in the example below is £3500.
The green boxes highlight that most cohorts repay by month 3, which is very positive. A payback period of less than 6 months, combined with low churn, is an indication that a company is ready to accelerate their growth.
Continuing with this example, we can see that the customers acquired in January 2021 have not yet hit the payback threshold. A simple click reveals the names of these customers, allowing the company to swiftly identify any issues and take action.
Typically cohort analysis requires hours to build in a spreadsheet. At ScaleXP, we have fully automated the process, making it easier and quicker for companies to understand their customers’ buying behaviour. Time can be spent on designing actions to improve the business rather than compiling data.
At ScaleXP, our mission is to make the accessing and understanding of your data a quick & simple routine which can make a profound difference between ultimate success and failure. Our platform lets our clients take corrective actions, knowing that the system will measure their impact.
If you are interested in learning more, please visit our website or send us a quick message.
