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Customer Segmentation: Cohorts

This is part 2 of a 5 part series on Customer Segmentation.

One of the most common ways to segment customers is to group them by the date they started using your product or service for the first time. All of the customers that started at the same time are considered a cohort, and the longer you are in business the more cohorts you will have.

Why does the customer start date matter? Let us count the ways:

  1. Your product and service changes over time, so the experience a new customer has today is likely different than the experience a new customer will have in 6 months.
  2. A customer who has been with you for a year will likely use the product differently than someone who just started yesterday. Analyzing customer behavior in aggregate will produce confusing results by combining different levels of expertise.
  3. Customer expectations may vary as the profile of your business grows!

The good news is that segmenting customers by cohort is easy to do, and most analytics tools will do it for you automatically. The challenge is choosing the time frame to use in creating your cohorts! Do you cohort by day, week or month? In my experience, you should cohort by…

Days if you have a product that is growing very quickly and changes a few times a week (e.g. mobile games). In these products you want to learn as quickly as possible and you can’t wait a few weeks to figure out if the changes you are making are having a positive impact. Keep in mind that the size of your cohorts can vary significantly when measuring by days if your customer acquisition rate is not relatively constant, so that might influence how you time a cohort.

Weeks if you do not update your product more than once a week and your customer growth is relatively predictable (e.g. retail stores).

Months if your business is stable and you are planning quarters (or years) in advance (e.g. enterprise software). In mature businesses it’s unlikely that the customer experience will change radically week to week so you are looking for longer term trends.

So, in summary you should cohort by the cadence of your business. If you update your customer experience daily you should cohort by days, if you only update it a few times a year consider quarterly.

Quote of the Day: “I get by with a little help from my friends.” – John Lennon

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The Customer Segmentation series