The Power of Cohort Analysis

Cohort analysis is a helpful e-commerce tool to help you optimize your marketing and promotion efforts by focusing on customer experience and retention.

In simple terms, cohort analysis classifies customers into groups based on a common trait and tracks their behavior over time.

It looks at things such as the frequency with which your customers shop in your store, how long they stay, and how much they spend. Customers are typically grouped concerning their purchasing behaviors.

For example, customers can be grouped according to the type of campaign that converted them, the first product they ever bought from you, or even something as straightforward as conversion time.

What Is a Cohort and What Is Its Role in E-Commerce?

In e-commerce, a cohort is a group of customers grouped based on a commonly shared characteristic over a period of time.

Here are some specific examples:

● Customers acquired via Instagram ads.

● Customers who purchased after a free trial.

● Customers who returned over the past three months.

Essentially, people can be grouped based on similar behavior exhibited over a specific amount of time. Cohort analysis looks at the ‘customer’ not just as one single entity with similar tastes and buying habits but as a diverse group of people with varied behaviors. Once you’ve pinpointed significant patterns and trends with regard to customer behavior, you will be able to formulate marketing campaigns targeting these specific groups.

This is often a better approach than launching a singular marketing campaign targeted towards a very broad audience and wishing it would land on the right people that you can convert as customers.

Types of Cohorts

  1. Acquisition Cohorts

These are groups divided by when they signed up for your product. For example, you can break down cohorts according to their sign-up date on your e-commerce app. You’ll then be able to measure retention by how long they continue to use your app since their sign-up date.

  1. Retention Cohorts

This helps you understand the percentage of users retained on your app until a certain, defined day. User retention can also be measured by how often and how regularly or rarely they come back to use your app or browse your online store.

  1. Behavioral Cohorts

These are groups divided based on the behaviors they exhibit within your app over a certain period of time. ‘Behaviors’ can refer to any number of actions performed within an app or site, such as sharing a photo, posting something, liking something, etc. You can then look at how long these cohorts are retained after performing such actions.

Photo by Sharon McCutcheon on Unsplash

How Does Cohort Analysis Help E-Commerce Businesses?

Predicts Future Customer Behavior

Cohort analysis is very helpful in terms of predicting customer behavior. Because you have specific data that allows you to target potential customers with localized efforts (ads, promos), it allows you to convert leads to customers.

These insights allow you to understand customer behavior and anticipate their needs, thereby also increasing chances of retention.

Increases/Improves Customer Retention

Retention is king. If you lose customers, you lose sales.

Cohort analysis gives you valuable insight that will allow you to retain existing customers and maximize revenue. Studies have shown that returning customers spend at least 67% more than new customers - that’s a lot.

Not to mention that it costs significantly less to keep existing customers happy than to keep on launching campaigns to attract new ones due to poor customer retention.

Helps to Understand Your Best Products and in Turn Create Offers

Cohort analysis can give you insights into what your ‘best sellers’ are. Cohorts are often grouped according to ‘first product ordered,’ and from this alone you can see which of your products stand out the most to new customers.

You might also find which products customers buy often and repeatedly, thereby creating loyal customers. You can then highlight these products or create offers that will further improve customer engagement and retention.

Helps to Customize Your Marketing Strategies

Cohort analysis is a powerful tool that will help you customize your marketing strategies based on what works and what doesn’t. Insights from cohort analysis will let you know how exactly you need to adjust your marketing activities and what you need to focus on.

For example, cohort analysis will help you determine whether or not you need to launch or bolster your loyalty or rewards program for existing customers. Insights from cohort analysis will allow you to find out if your existing clients are satisfied even without a loyalty program.

In this case, you can just continue your best practices and may not urgently need to launch a loyalty program.

Metrics for Cohort Analysis That You Need to Know

Average Order Value

Average Order Value (AOV) measures the average total of every order placed with a merchant over a defined period of time. This is one of the most important metrics that merchants should be aware of because it drives important business decisions such as pricing, advertising budget, and store display. such as advertising spend, store layout, and product pricing.

AOV is determined by sales per order and not per customer. Even if one customer comes back multiple times to make a purchase, each order would still be factored separately into AOV. The formula for AOV is

Customer Lifetime Value

Customer lifetime value (CLV) helps to measure long-term business success as well as predict future revenue. CLV determines how much profit you can expect from a client over the course of their ‘customer lifetime’.

Depending on your margins, you can figure out how much you need to invest by estimating the ‘lifetime value’ of a customer for your business.

Marketing Metrics reports that the probability of selling your product or service to a new customer is at 5–20% whereas your chance of selling the same to a regular customer is at 60–70%. That’s such a big difference, and it drives that point that retention is indeed more cost-effective than customer procurement. Retention is a lot cheaper than acquisition.

Time Between Orders

This refers to the time between successive orders. Depending on your type of product or service, this time period could be in terms of hours, days, weeks, or even months.

This is valuable to help you determine the timing of marketing emails to remind customers to repurchase or offer promotions that will continue to keep their repeat order rate high.

Repeat Rate Per Percentage to Second Order

Repeat rate is the most telling metric in proving how successful you are in retaining your customers.

This is the share of customers who patronize your business repeatedly (as opposed to cohorts who bounce after a single purchase). 

Orders Per Customer

This is closely related to the previous metric. Simply put, the more repeat customers you have, the more orders they make each. High values in this metric likewise indicate a strong retention rate.

Image by Author - Cohort Analysis in Graphite Note

Final Thoughts

Compared to more popular analytics methods, cohort analysis tends to be more long-term and can provide slower feedback. It’s not a one-off analysis. Instead, it allows you to see patterns and insights on trends regarding customer behavior.

It takes time to observe, gather, and analyze data, which you will then translate into actual marketing and advertising strategies.

However, cohort analysis can be very rewarding in the sense that it provides real-world, reliable insights regarding customer behavior. It shows you ways to save money (ads, loyalty programs) in areas where you don’t need to spend, and also where you need to increase your investment.

It provides you with a more thorough, big-picture overview of your user journey, and creates long-term value for your company over time.

Graphite Note strives to provide businesses with automated cohort analysis models built with the help of predictive analytics to create a time-efficient, pro-tech solution to their data analysis needs. We’ve worked with real-life customers and standardized the ML models to be applicable for every customer.

New vs Returning Customers: Who’s More Important in E-commerce & Retail?

Whether you’re in e-commerce or retail, your customers are your undisputed gods. The dilemma that a lot of business owners face is: should I focus on acquiring new customers, or should I pamper my returning ones? 

There is no easy answer to this question. 

Ask any e-commerce expert and they will tell you both are important. But, one has a definitive edge over the other when it comes to your business health. 

Let’s find out more on the matter. 

Returning Customers will Always Have Your Back  

Who are returning customers?

They are the ones who have made more than one purchase from your e-commerce or retail business.

Research shows that such customers have a 27% chance of buying from you again after their first purchase. 

Truth is, retaining an existing customer will cost you five times less money and effort than it takes to acquire a new customer. You have to invest 16 times more money to make your new customers spend as much as your repeat customers. 

Here the top reasons why returning customers are invaluable: 

  1. Repeat customers pour more money into your product or service than new ones. Their spending is 300 times more compared to the latter. 
  2. You have a 60-70% chance of persuading a returning customer to make a new purchase. From a marketing perspective, investing your efforts in them makes better business sense than heavily spending on prospects. After all, only 13% of future consumers make a purchase. 
  3. Returning customers can promote your business among their peers, adding to your prospective client pool. Never underestimate the power of word-of-mouth advertising, even if it comes from happy customers. The best part? You don’t have a spend a penny on marketing yourself. 
  4. On average, 80% of a businesses’ revenue comes from 20% of its customers. Returning customers contribute to a major chunk of it. Don’t forget that how you treat your old customers also influences your ability to acquire new customers. 

Returning customers save you a lot of time, effort, and money. That’s why you cannot falter in your relationship with them. 

Image by Etiene Girardet,

New Customers Help in Revenue Growth

On the other hand, acquiring new customers is the only way of creating a customer base for any business. You cannot have repeat customers if you do not have prospects making their first buys. 

New customers are indispensable to your business, because: 

  1. They allow you to form the foundation of your customer base. 
  2. They help build brand recognition. 
  3. They give you insight into what is expected of you, how can improve your current offering, and what to add to your repertoire of services/products. 
  4. They can fill in the shoes of old customers who have moved on from your business. 

So, new customers are vital to your business growth. They too cannot be disregarded in any manner. 

Focus on Converting All Customers to Loyalists

Here’s a startling fact for you: 60-80% of customers who made a purchase from your business and were satisfied with your service might not return for business. One-time customers exist. It’s upon you to reconnect with them and make them repeat customers. 

What is imperative for you to understand is customer relationship management is everything. 

That way, old or new does not matter. As a business, whether online or offline, your focus should be on building a great rapport with all your customers. Make your customers feel special. 

Here a few tips on how to convert new customers into loyalists and retain returning customers: 

  1. Keep the connection alive. Customer relationship, like every other interpersonal relationship, needs your attention and effort. Be in regular contact with all your customers. Engage with them on social media outside your business needs. Understand what they expect from you and offer them your best possible service. 
  2. Give them rewards. Everyone loves to feel pampered. Don’t reserve your discounts for first-time customers, make sure your repeat customers get appreciated for their trust in you. Discounts, surprise rewards, etc. work well in keeping your consumers satisfied. 
  3. Start a loyalty program. It is never too late to jump on that bandwagon. Such programs have proven to increase Customer Lifetime Value (CLV) by 79% in a matter of just 3 months! 
Image by Author, Graphite Note Customers ML Model screenshot

The Graphite Note Edge 

With cutting-edge predictive analytics in tow, Graphite Note gets you all the data on new and returning customers. Compare absolute figures and percentages, learn how many customers you are currently retaining on a daily, weekly, or monthly basis. 

Let the best predictive analytics guide you with your marketing and customer relationship management. Decide which customers need your immediate attention. Plan your marketing and promotional activities to fit the need of the hour. 

Your customers are smart and intuitive. You should be too.