ASSIGNMENT-I

COHORT ANALYSIS



VISHAL KUMAR

ROLL NO.-18, 1ST YEAR

LBSIM-PART TIME
What is Cohort Analysis?
In marketing speak; a cohort is a group of customers who all joined at the same time. Joining
in this case can mean either subscribing to your email list or making a first purchase, and at the
same time can mean in the same week, month, or quarter.
egardless of how e!actly you define the cohort, the key is that you are following a single group
of customers and watching how their beha"ior changes o"er time
#ost importantly, in a $ohort %nalysis you are comparing how different cohorts beha"ed at a
comparable point in their lifecycle.
$ohort %nalysis enables you to easily compare how different groups, or cohorts, of customers
beha"e o"er time. &his gi"es you quick and clear insight into customer retention trends and the
health of your business. 'ee how your latest customers compare to those from se"eral years ago,
or compare users who joined o"er the holiday season with another group that joined in the
summer and see if those holiday shoppers really stuck around.
Why cohorts?
'o how would our retailer mo"e from an %() approach to a cohort*based approach+ (erhaps
they could look at the cohort of customers who made a first purchase in #arch ,-., and the
cohort of customers who made a first purchase in #arch ,-./. 0or each group, they could track
a"erage re"enue per customer o"er the first si! months of their being customers. 1ere2s what it
might look like3
Average Revenue Per User
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Total
#arch ,-., $ohort 4..- 4,5 4.6 4.7 4.8 4.9 2!!
#arch ,-./ $ohort 4.., 4.: 4.7 4.9 4., 4.. 1"4
0irst of all, you2ll see that a"erage re"enue per customer drops off pretty steeply between month
. and month ,. &hat2s because e"ery customer in the cohort is making a purchase in month . *
that2s how the cohort is defined; * but only some customers are going on to repeat in the
following month.
<ut we can also see that once we normali=e for the amount of time that a particular group of
customers has been around, the retailer2s customer retention seems to actually be getting worse
o"er time. &he group of customers who made their first purchase in #arch ,-., spent an a"erage
of 4,5>customer in their second month, while the group of customers who made their first
purchase in #arch ,-./ spent only 4.:>customer on a"erage in their second month. &his could
mean that fewer customers are repeating, or that repeat customers are spending less on e"ery
transaction.
&his pro"ides a "ery different picture from the %() snapshots we saw earlier. ?hereas %()
doesn2t control for the age of the customer base * and is therefore "ery sensiti"e to changes in the
mi! of customers * cohort analysis pro"ides an apples*to*apples comparison of different
customer groups at the same point in their lifecycle.
Per#or$ing Cohort Analysis to %isuali&e Custo$er Retention
$ohort analysis has lots of practical applications * and can be a powerful tool in marketing
decision making. ?e2ll get into more specific use cases in a bit, but for the time being let2s
e!plore how cohorts can help you hone in on some of your company2s long*term trends in
customer retention.
1ere are some tips to assist you on your way to become a $ohort '(C for, conducting a
retention diagnostic with cohorts3
'e#ine your cohort grou)ings* 0or looking at long*term trends, it is probably best to group your
cohorts on a quarterly basis @e.g., all customers who made a first purchase in A. of a gi"en yearB.
If you2re more interested in looking at the performance of customers acquired from a particular
campaign or channel, it might make more sense to group your customers by week or month.
(+serve cohort +ehavior* #any analytics platforms ha"e cohort reports built into them, and if
you don2t ha"e one a simple database query can help you group customers by first transaction
date and then follow their spend or repeat rate o"er time.
Co$)are ,i##erent cohorts over ti$e* 0or e!ample, how did your A. ,-., cohort compare to
your A. ,-.. and A. ,-.- cohorts+ 0or e!ample, if you saw a graph like the one below, you
would know that you were doing a good job keeping your customers engaged * the a"erage
re"enue>customer for the A. ,-., cohort is higher in their second quarter of being customers
than that of the A. ,-.. cohort @in their second quarterB or the A. ,-.- cohort @in their second
quarterB.
A,,itional Use Cases #or Cohort Analysis in -.co$$erce Mar/eting
?hat are some additional ways that sa""y marketing teams can harness the power of cohort
reports+
$ohort %nalysis is one of the tools which can be used in e*commerce for understanding
customerCs beha"ior, in particular customer engagement.
&hree key reasons to use this tool are3
@.B Identify users which are ready to become customers
@,B Identify users which are going to be defected and can be retained
@/B Identify users which could be a target group for cross*selling or up*selling initiati"es.
What are so$e use cases #or Cohort Analysis?
.. D!amine where cash flow is coming from and understand the health of your business.
,. Dasily see how much monthly or quarterly re"enue is dri"en from newer and older
cohorts.
/. 'tudy customer retention patterns to see if they are getting better or worse.
9. $ompare cohorts of users from different segments.