How Cohort Analysis Can Help Small Business

How Cohort Analysis Can Help Small Business

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Every business consistently strives to sharpen their edge, to improve their chances of besting their competition and walking away with the lion’s share of their own particular market. In this quest for supremacy, businesses will take advantage of every tactic they find that proves itself even remotely effective. And while it’s important for every business to thoroughly explore and exploit their strategic options, small businesses need to fight even harder, and utilize even more sophisticated tools, if they wish to rise through the ranks and dominate their field. One powerful tool every small business needs to use is cohort analysis.

Cohort Analysis Defined

To perform a cohort analysis, you must analyse the behaviours a segment of your customers for a specific period of time. Each segment of customers you analyse is known as a “cohort,” and once you group together a cohort of your customers those members are fixed in place- you can’t add or subtract new members to each group after you begin tracking them, and likewise you can’t exchange members between cohorts after beginning your testing. Most businesses choose to form cohorts around a shared set of characteristics. For example, you may create a cohort whose members are all females between the ages of 18-25, or you may form a cohort of members who all became your customers within the same 3-month period of time.

The more specific your customer base the more specific, and as such the more actionable, the data you receive. For example, if you track a group of customers who are all 18-25 year old women, you can be rest assured the data you receive from this cohort analysis produces a predictable picture of what you can expect from future customers who happen to be 18-25 year old women.

Once you have this data, you can take advantage of tools such as Microsoft’s Power BI, which utilises powerful visualisations of your data to provide actionable insights that can improve productivity and efficiency and help you make business-critical decisions.

The Power of Highly Focused Analytics

The greatest strength of a cohort analysis lies in its ability to spot previously invisible strengths and weaknesses within your company’s more general customer base. Here’s a good example of how cohort analysis can spot lucrative trends where previously you saw nothing but failure. Let’s say a company is trying to get their first-time customers to make a second purchase. That company’s general data tells them only 2% of their customers are actually going forward and making another purchase after the first. This data is both disheartening and not particularly actionable. With this general data, all a company can do is perform more scatter-shot initiatives to try and bump up their conversion rate. But let’s say that company separated their customer base out into cohorts dependent on age and gender. This company then performs a cohort analysis and sees that even though their customer base as a whole only converts at 2%, males between the ages of 25-34 convert at a 20% rate. With this data our business now has a number of clear options at their disposal, all of which will likely result in a higher number of second sales. Some of these options include:

– They can focus on drawing in a larger number of 25-34 year old males.

– They can focus on increasing the conversion rate for 25-34 year old males even further, which will be easier than increasing the conversion rate for disinterested demographics.

– They can perform a second analysis, one that pinpoints why exactly this demographic converts higher than others, and then attempt to tweak their offer to broaden its appeal.

– They can create separate sales pitches and initiatives that target other groups as effectively as their default pitch targets 25-34 year old males.

Aren’t all of these options superior to the sort of over-generalized approach to improving conversion derived from an over-generalized approach to tracking customer data? Cohort analysis brings to light realities flat, general data never will- realities that will provide avenues for your business’ advancement you never even imagined.

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