Acquiring new customers and retaining existing ones is one of the top priorities for businesses. While acquiring new customers can drive growth, retaining existing customers is equally important, if not more so, as it is more cost-effective. According to the Harvard Business Review, attracting a new customer can cost 5 to 25 times more than keeping an existing one.
This is why organizations must focus on taking care of their existing customers by delivering an exceptional customer experience, addressing their needs, and measuring the recurrence of business from them. In this regard, cohort analysis is an invaluable tool that can help organizations better understand their customers and create effective retention strategies.
Cohort analysis involves grouping customers based on common characteristics and studying their behavior over time. This analysis is different from customer segmentation as it focuses on customer groups over a specific period. By analyzing customer behavior across different cohorts, businesses can identify patterns and trends that can inform marketing strategies, product development, and other business decisions.
For instance, a company that wants to improve customer retention can use cohort analysis to identify customers who are at risk of churning and develop strategies to retain them. By tracking customer behavior over time, businesses can see if certain events or activities influence customer retention rates and adjust their strategies accordingly.
Cohort analysis is especially useful in e-commerce, SaaS, finance, and healthcare industries, among others. For example, a subscription-based business can use cohort analysis to understand how quickly customers adopt new products, which can inform their pricing and product development strategies.
This is an example of a cohort analysis carried out using Power BI. In the first column, we can see the month in which a certain group of customers made a purchase. Once this group, also known as a cohort, has been identified, we can track their progress over time and analyze it in the months following the initial purchase (Month 1, Month 2, Month 3, etc.) to see how many of them make another purchase.
It’s important to keep in mind that the frequency of customers returning to our business is not by chance. There are several variables that can affect customer behavior and must be considered when making strategic decisions. These variables include factors such as promotions, product or service quality, and most importantly, the overall customer experience. It’s essential to always consider the customer’s perspective and perception of “value” when developing our business model. By focusing on providing a positive customer experience, we can enhance our business’s reputation, build customer loyalty, and ultimately increase recurring business.
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