Data Analytics

Cohort Analysis 101 - An Introduction

 Data is king. Understanding customer behavior is the key to a successful ecommerce business.

But how you convert data into useful information is everything — which is why cohort analysis is a must-have tool for your Shopify store.

So what is a cohort?

This refers to a group of people who share a similar trait over a specific time frame.

A cohort analysis involves studying the behavior of a specific group of people. It may also incorporate one cohort or many different cohorts.

There are two main types of cohorts.

One is time-based cohorts. This component considers customer data focused on a specific time. For example, when a customer first buys a product.

The other type is segment-based cohorts. This element focuses on specific characteristics like customers that have annual contracts.

Why Cohort Analysis important?

Cohorts allow you to dig deeper into which factors are really driving revenue for your business a given date range.

For example, let’s say you are a marketer for a growing ecommerce brand. You ran an Adwords campaign a month ago, so your metrics went up. At first glance, you might think to yourself, “Great, we’re seeing growth in our numbers, so Adwords is a great investment and marketing channel for our company.”

But reviewing metrics through cohort analysis, lets you dig much deeper, and may provide a different conclusion for this marketing campaign. A cohort will answer the question, “Of all the customers who purchased your product last month, how many people are still engaged after 1 month, 2 months, 3 months, and so on?”

This data set can inform further actions to try and improve repurchase rate (more on this below) and other key metrics. You can use cohort analysis to understand the related groups of customers and their behaviors, which is invaluable for your business's growth.

Curious about some of Peel’s Cohort analysis options?

Let’s dive in.

1. Customer Retention By Cohorts

This metric applies mainly to subscription businesses. Every subscription based business model wants to cut down churn and increase the lifecycle of better user retention.

On the Peel dashboard, it’s not always the first thing you see—don’t be alarmed.

It’s more expensive to acquire new customers than to retain old ones. This is why customer retention is essential.

Different customer cohorts may have different retention rates.

For example, you may observe a higher retention rate on some products and not others. This can influence business decisions like what products to market or even drop. Those decisions are the driving factors that can help drive down your customer churn from month to month.

2. Repurchase Rate by Cohort

The repurchase rate helps you figure out how many customers bought your product more than once. This is another of our behavioral cohorts that gives you a window into your customers' common characteristics.

This metric is crucial if you don’t have a subscription business (where you'd be more interested in preventing churn rate specifically). How often are customers coming back to your brand and making another purchase?

Repurchase rate by cohorts helps you pinpoint the specific groups of customers that like your product.

Knowing which cohorts buy your products frequently can positively influence your marketing plan while detecting weak elements. Thinking about what you can do to increase that repurchase rate - send SMS or more email campaigns, maybe even offer special pricing promotions for a limited time - might increase the repurchase rate for future cohorts.

It's an invaluable practice for you to understand the period of time that transpires between first time a customer buys your product and the next time they return and convert for a subsequent sale.

Like all of Peel’s metrics, you can segment the repurchase rate by cohort metric by-products, vendors, SKU’s, discount codes, locations. Doing this can help you determine the success of using a specific discount on a campaign, or whether a specific product in your offering initiates better loyalty and repurchase.

Thinking about the segment values of your business and looking at the analysis can help you better plan for growth opportunities.

3. Cohort Customers per Order Count.

This metric shows you how many customers made more than one order.

Essentially, how many customers came back for a particular order. Do 500 of your customers from that cohort purchase 4 times?

This metric is relevant for businesses that may sell subscriptions in an irregular frequency, such as every two weeks, seven weeks, or three months. This helps those businesses focus in on the offerings that have the best conversion rate based on the cohort size.

4. LTV Per Customer

LTV is total profit divided by the number of customers.

The lifetime value measures how much profit you make per customer over time. This indicator is usually an ever-increasing number, especially if you’re retaining customers.

This is how much revenue you can expect per customer from a cohort.  It is very insightful to measure customer LTV in relation to the cost of customer acquisition (CAC). Peel’s LTV: CAC ratio tells you how long it takes to make back the investment of acquiring that customer - hence profitability.

5. Segmentation and Cohort Analysis

Segmentation can help you understand the lifetime value of your customer better.

You can look at the LTV while segmenting by different products or attribution channels.

This metric can also help you understand the critical drivers of LTV, such as higher-priced products or specific attribution channels - Is Facebook more valuable than Google, etc?.

*Check out our latest product update that adds new avenues for custom segmentation to Peel's automated analytics.

6. Cohort LTV

You can also analyze the Lifetime Value of a customer by cohort. It tells you how much, in particular, is that cohort bringing in - was there a specific campaign that you ran that made that month’s cohort more valuable than others?

Knowing these numbers and pinpointing your marketing activities will help you define what works and what doesn’t work for your business.

This element helps you determine how much money a particular cohort brought you in profits. The goal of LTV is to tell you how much money you’re making over time.

The more costs you have and the more input you have, the more accurate the LTV is.

But wait! There’s more to Cohort Analysis!

Want to be fully equipped to grow your ecommerce store with cohort analytics?

Be sure to watch the video above to learn how to navigate these elements. If you want to get started with our automated analytics tool that brings your cohort analysis reports to life with data visualization, visit the Shopify App Store. You're 1 click away from a free 15 day trial that will open the door to better understanding your user behavior through detailed cohort analysis.