How to Perform Cohort Analysis: A Comprehensive Guide

However, cohort analysis can be challenging, especially when you don’t know about it. Don’t worry! We are here to assist you regarding this. In this post, we will tell you how to perform this analysis.

What is Cohort Analysis?

It is the breakdown of available data into specific groups, called cohorts. It involves segmenting customers based on shared characteristics. For instance, you can make a cohort of all customers who registered in the same month. It prevents you from examining your entire customer base at once. You can use cohort analysis to track how groups of customers behave over time. The two most common types of cohorts are:

Acquisition Cohorts: These cohorts are based on when customers first interacted with your business. They usually share a common signup or purchase date.

Behavioral Cohorts: These are based on customer behavior, such as purchasing a particular product or interacting with a specific feature.

Cohort analysis is especially used for tracking retention, and conversion rates, and understanding how different customer segments respond to various marketing, product, or service efforts.

Why Is Cohort Analysis Important?

The following are some main points that highlight the importance of this analysis.

• It provides a more in-depth view of user behavior than general aggregated metrics.
• It allows you to track how well you’re retaining customers from specific marketing campaigns.
• You can spot patterns in user behavior that can help optimize marketing and engagement strategies.
• It helps you understand how different customer groups interact with your product or service. You can also check if any updates have a positive impact on their retention.
• Cohort analysis enables you to identify high-value customer segments and focus on retaining them, which can increase LTV.

A Stepwise Guide to Perform Cohort Analysis

 Step 1: Define the Purpose

Before you start the analysis, define your goals. You must know whether you are looking to understand customer retention over time or tracking how different groups interact with your product. This step will ensure that your analysis is focused and actionable.

Step 2: Make Cohorts

Once you know your objectives, the next step is to segment customers based on shared characteristics. For example, you can make a group of customers who signed up in January 2024. Similarly, you can make a cohort based on how they interact with your product. You need to be very careful when doing this as the analysis is based on cohorts you make.

Step 3: Data Collection

After defining cohorts, you need to gather the necessary data for the analysis. You can do so by tracking and analyzing different metrics. The key SaaS metrics you should focus on are listed below.

Retention Rate: It involves measuring the percentage of users in a cohort who continue to engage with the product over time. High retention indicates sustained LTV. Meanwhile, declining retention may highlight issues with acquisition or onboarding channels.

Churn Rate: It’s the percentage of users who stop using your product over a specified period. Tracking it will help you identify patterns that cause user dropout.

Customer Lifetime Value: It’s one of the most important SaaS metrics for any business. You can track it to predict revenue generated by a user over their entire relationship with your company. This will allow you to determine the long-term profitability of different segments.

Engagement Metrics: You should pay special attention to engagement metrics like active users, session duration, and frequency of interactions. Understanding these metrics will help you refine product features to maximize engagement.

Step 4: Data Visualization

Tracking the aforementioned metrics will provide you with useful data on customer behavior. Now, you have to visualize it. The best way to do so is to organize data in a table or chart.  A cohort table will show all segments and how they react or behave over time.

Step 5: Data Analysis

Once you managed to visualize the data, now you have to analyze it. When doing so, you should look for trends or patterns. If done appropriately, this analysis will provide you with actionable insights.

Final Words

Now, you are all set to perform cohort analysis. All you have to do is to follow the aforementioned steps. Make sure you refine your acquisition and retention strategies based on insights you get from this analysis. Monitor all crucial metrics continuously to track any changes in customer behavior.