Understanding cohort analysis: A beginner’s guide

Long-term company success is dependent not just on acquiring new clients but also on maintaining and providing them with customized experiences tailored to their needs.

Due to the large amounts of data generated from a company’s sales and operations, the rise of business analytics has been entirely useful. It helps businesses improve their profits and customer experience.

This article will tackle the basics of cohort analysis, its importance, types, and processes.

What is cohort analysis?

The term “cohort analysis” refers to behavioral analytics in which a business categorizes its customers into cohorts based on shared or comparable traits.

A simple example of a cohort can be all users who engage first in the forum before taking action on the page.

A cohort analysis is also an observation of what the users are doing with a product, identifying who among the group of users is most engaged with the company’s product.

Through cohort analysis, a company can examine trends and patterns of a  customer’s life cycle to adapt and tailor its services to those specific cohorts.

In addition, it is an informative analytics tool that every business owner should have to know how user behaviors affect a business.

Two types of cohort analysis approach

Cohort analysis helps compare how the same behaviors differ for different cohorts and track how users behave over time.

There are two ways to break a group of users into cohorts for cohort analysis: Acquisition cohorts

This cohort approach divides users when they sign up first for your product. It also segments the users based on the acquisition date and the time of the service when they signed up.

Tracking how long users continue to use a company’s products or applications from the start point can be done daily, weekly, or monthly.

To determine the success of a newly released app, you may divide the number of users that downloaded it into cohorts by day for the first week, by week for the first month, and so on.

Behavioral cohorts

This cohort analysis approach divides users based on their actions while using an application or a company’s product within a given period.

In behavioral cohorts, this is where a group of users has done specific actions within a specified timeframe. For example, they clicked on the ‘watch ads’ button during the first five days of application use.

Using this cohort analysis approach, the team can monitor how long these cohorts stay active after performing specific discreet actions in the application.

Utilizing behavioral cohorts provides an organization with greater insight into its user base. This allows you to monitor what customers do or do not do with your company’s product.

Cohort analysis to run in business.

Most businesses utilize cohort analysis to track and improve the retention rate of customers who use their services.

Cohort analysis is essential because it lets an organization determine which users leave and understand why they stop using a service or product.

Cohort analysis allows a company to strategize several ways to increase retention after analyzing what works and what does not for the products and services offered.

The following are examples of cohort analyses to run in a business:

Customer retention

Successful businesses and marketing strategies establish client loyalty and connections.

Cohort analysis for customer retention enables a firm to understand how many customers continue to be active users in the days, weeks, and months that follow.

Customer retention can determine which cohorts are the most loyal, so companies can encourage them to stay longer and use their products or services. It is more cost-effective compared to acquiring new customers.

Customer lifetime value

Cohort analysis for customer lifetime value enables firms to see when customers stop buying their products.

With this information, your marketing team can better plan your advertising expenses and campaign strategies. It can also help them figure out what to do for the next trend to encourage customers to repurchase your products.

Research app performance

Cohort analysis is a favorite method of application analysts because it shows user interest in an app, activity inside an app, etc. 

It helps app marketers better understand where users have difficulty using an app through research, survey, or forums so developers can improve it.

How cohort analysis helps with customer retention

Marketers are responsible for various activities, such as executing ads, modifying the client onboarding process, and introducing new product features. Cohort analysis aids in assessing the success of each of these endeavors.

Cohort analysis helps a firm know what makes customers loyal to its brand. It also boosts customer retention by aiding in improving product features and offers.

This analysis helps the marketing team see who among the users is more likely to buy and engage. 

Organizations can apply the results of cohort analysis to their offers, ad targeting, and personalized email. Doing so can help them improve customer retention, dig deeper into behavioral data, and eliminate churns.