What is Cohort Analysis and Why is it Used to Measure Retention?
Cohort analysis is an essential tool in understanding customer retention, allowing businesses to track the behavior of specific groups over time, distinct from the overall customer base. Let's explore.
Defining Cohort Analysis:
Cohort analysis involves grouping customers based on their shared characteristics during a specific time period and observing their behavior over subsequent periods.
For example, if a cohort of users signed up in January, and 100 users signed up while 80 were still active in February, the retention rate for this cohort would be 80%.
Benefits of Cohort Analysis:
This particular approach helps businesses understand retention without the distortion of new customer acquisitions.
For instance, while the overall number of transactions or active users might increase for a business, cohort analysis focusing on specific signup periods could reveal if earlier customer groups continue to engage or purchase, pinpointing potential long-term engagement issues not visible in aggregate growth figures.
Application in Different Business Models:
- ☞ E-commerce: For an e-commerce platform, consider a cohort defined by users who made their first purchase in January. If 1,000 users purchased in January and 300 returned to make another purchase in February, the monthly retention rate would be 30%. This measures the effectiveness of post-purchase engagement strategies.
- ☞ SaaS: A SaaS company might track a cohort of users who subscribed in the first quarter. If 500 users subscribed in Q1 and 400 were still subscribed in Q2, the quarterly retention rate would be 80%, reflecting the ongoing value the service provides to its users over a longer period.
- ☞ Consumer Apps: A fitness app may analyze a cohort of users who downloaded the app in the first week of January. If 1,000 users downloaded it and 700 were still active by the end of the week, the weekly retention rate is 70%, indicating how well the app retains users in the short term after initial engagement.
Takeaway:
By applying cohort analysis, companies can gain precise insights into customer retention and behavior, identifying the effectiveness of their strategies and uncovering potential areas for improvement.
This method is crucial for businesses aiming to distinguish growth being driven from returning customers from growth being driven from new customer acquisition.