Almost every company we work with is interested in running cohort analysis on their data. This comes as no surprise to us because cohort analysis is an extremely powerful tool with many potential applications.

Many companies understand that cohort analysis can be a valuable tool, but they ask an important, fundamental question:

How can I use cohort analysis to improve my business today?

Here, we step through an example of how a fictional company uses cohort analysis to make smarter business decisions. This example was compiled based on observations of how real companies are using the cohort analysis functionality in our online dashboards.

A Cohort Analysis Example

Let’s use our Vandelay Industries demo data set. There are a few important things to know about this business.

• Ecommerce site
• Actively spending on acquiring new users
• Some users buy immediately upon signing up, others only after a while, and others not at all
• Cost per acquisition for paid search is $80
• All-in acquisition cost (including discounts and revenue splits) is $60 for a group buying site

Based on this information alone, it makes sense to double down on group buying, because it has a significantly lower cost. The missing information is what these users do after they are acquired. That’s where the cohort analysis comes in.

Below, we have two weekly cohort analysis charts. One is for customers acquired through paid search, and the other is for a group buying site. The average incremental revenue from customers acquired through group buying sites is significantly smaller than other customers. Once the data is presented in this way, it’s easy to see that our strategy of focusing on group buying rather than paid search is shortsighted.

Three months in, users acquired from paid search generate $140 and group buying generate $75, almost 50% less.

• Paid search 3 month net revenue per user is $140 – $80 = $60
• Group buying 3 month net revenue per user is $75 – $60 = $15

We could look at the data for different cohort time periods, or in different segments, but the underlying message is the same. Without the benefit of cohort analysis, the folks at Vandelay would be acquiring drastically less profitable customers.

For a real life example of how one of our customers uses this analysis to make smarter customer acquisition decisions, see the Jackthreads case study.

You can also test drive the Vandelay Industries demo to run this analysis yourself, or start your free trial of RJMetrics to run cohort anlayses on your business’s data.