As a SaaS business, you need to develop effective strategies to stay ahead of your competitors. However, you cannot refine your strategies without knowing customer behavior and the health of your business. This is where cohort analysis can help you. It involves segmenting customers based on shared characteristics.
For instance, you can make a cohort of all customers acquired through the same channel. Then you can track metrics for each cohort and analyze them to understand how they engage with your product or services. Based on this analysis, you can make informed decisions.
Segmenting customers and then tracking SaaS metrics for each cohort requires a lot of time and effort. It makes you think about why you should incorporate cohort analysis into your strategies. Don’t worry! We will clear up this confusion.
6 Reasons Cohort Analysis Should Incorporated into Your Business Strategies
1. Accurate Retention Tracking
Cohort retention analysis plays a crucial role in retention tracking. Acquiring new customers is crucial for any SaaS business. However, you cannot grow it without retaining existing ones. The longer customers stay with you, the more revenue you generate. However, monitoring retention to get actionable insights can be challenging.
Cohort analysis solves this problem by grouping them based on when they signed up and tracking their behavior over time. This will make it easier to see which groups of users are staying the longest. For example, if you notice that users who signed up in January are leaving after two months, you can find the reasons behind it.
2. Improved Customer Segmentation
Not all customers are the same. Some may use your product daily, while others log in once a month. Cohort analysis allows you to segment them based on their behavior. It can help you understand their requirements. This is important to grow your business as it enables you to develop product features and provide support tailored to the specific needs of each group.
For instance, you can make cohorts based on how often customers engage with certain features. If you notice the segment using specific features tends to last longer, you may focus on promoting that feature more.
3. Identify Patterns in User Behavior
To make informed decisions, you should understand how customers interact with your product over time. Cohort analysis makes it easier for you to spot patterns in user behavior. You can check when they are most engaged or how they interact with certain features. These insights can help you make proactive changes to your product and marketing strategies.
4. Measure the Effectiveness of Product Updates
When you update your product, it’s important to understand how it impacts user behavior. Cohort analysis helps you measure the success of these changes by tracking how different cohorts respond to them. You can look at specific segments to check if the update is having the desired effect.
Let’s say you released a new feature in March. After that, you can create a cohort of users who started using it that month and compare their behavior to previous cohorts. If the March cohort shows higher engagement or retention rates, it indicates that the update is successful.
5. Optimize Marketing and Sales Strategies
Cohort analysis isn’t just useful for product development. It can also help you refine your marketing and sales efforts. By segmenting users based on how they were acquired, you can determine which channels bring in high-value customers. This insight allows you to focus your marketing budget on the channels that generate the highest return on investment.
Let’s say you find that users acquired through organic search have a higher LTV than those acquired through paid ads. With this knowledge, you can shift more of your marketing budget to organic SEO efforts to acquire more high-value customers.
6. Accurate Forecasting of LTV
Customer lifetime value is one of the most important yet tricky metrics for any SaaS business. You need to monitor it to predict the revenue you can generate from each customer throughout the lifetime. Accuracy in predicting LTV will help you develop effective strategies to boost revenue. Cohort analysis allows you to forecast it more accurately by tracking user behavior and retention over time.
You can leverage it to analyze the retention rates of different cohorts. It enables you to estimate how long customers stay with your service and how much they will spend. This information helps you make more informed decisions about customer acquisition costs and pricing strategies. With accurate LTV predictions, you can allocate resources more effectively and grow your business sustainably.
Bottom Line
The aforementioned points highlight the importance of cohort analysis to develop effective growth and retention strategies. You can leverage Baremetrics to segment customers and monitor more than 26 SaaS metrics for each cohort. It also helps you analyze data to get actionable insights and make informed decisions.
