Since joining Evergage and working with several dozen customer success professionals (from individual contributor through executive), I’ve come to realize that cohort reporting isn’t common knowledge or a common practice. This blog article will explain what it is and why you should use it.
In case you don’t know what a cohort is, it’s a grouping of people or entities with a common element. When looking at customers, the common element is usually the date they became customers. For example, everyone who purchased your product in January would be part of the January cohort, and so on.
Once you start to define cohorts, you can start building reports by cohort. Here’s an example of a report showing retention by cohort over time:
The way to read the above chart is along the left-hand side we have the different cohorts, grouped by the month they purchased. Along the top we have months since purchase (or age of the cohort in months). In the chart itself we list the retention rate. Month 0 is defined as the month they purchased. The chart assumes that your customers pay upfront for the month, so it’s impossible to churn that month. Therefore, the retention rate in month 0 is always listed at 100%.
Starting in month 1, you’ll notice the retention rate dropping. For example, of all the customers who purchased in January 2012, 81% of them were still customers at the end of month 1, while 75% of the original cohort are still customers at the end of month 2, and so on. Therefore, if the January cohort contains 100 customers, 81 are still active at the end of month 1, and 75 are still active at the end of month 2.
Now that you know what a cohort report is, let’s see explore they’re so valuable. The first reason is that cohorts provide a clean way of looking at the data. This is because once a cohort is defined, it is static and won’t change. So when looking at retention rates by cohort, you can really understand how well you’re retaining customers. If instead you looked at retention rates across your entire customer base, you’ll have a mix of older customers (who historically have high retention rates) and newer customers (who generally have lower retention rates). So as you try to decipher why your retention rate may be too low or fluctuating a lot, you won’t really know if it’s being impacted by newer customers, older customers, or some other segment.
The second main reason that cohort reporting is valuable is it makes it very easy to identify patterns. For example, in the above chart, it is very clear that customers who purchased in May or later have significantly higher retention rates compared to customers who bought before then. So in this example, you may have made a change in May. For example, you may have improved your onboarding process, better managed expectations during the sales process, announced a new product feature, etc. The cohort data above would help show that your changes had a very positive impact on the retention rate of your customers.
In the above cohort report you can also clearly see that February and April cohorts outperform other cohorts. While this chart doesn’t tell you why that is happening, you can now dig into those customer cohorts to find out. Once you find out why those cohorts are doing so well, you can try to reproduce it. Then you can use the cohort report to can determine if it made an impact on retention (as per the example above).
I hope this article has helped explain what cohort reporting is and why you would want to use it. If you’d like to learn more about cohort reporting, see examples of other patterns you might find, and learn about other kinds of reports for customer success, then please read our simple guide to churn analysis.