Cohort Retention Analysis Explained

The free application Automated Cohort Retention Analysis for Excel serves as an analytic tool for sellers who sell to clearly identified customers, like web shops, catalog sellers or B2B sellers.

Every new customer is automatically assigned to a group of customers (cohort) according the month of their first purchase. For example all customers who made their first purchase in January 2017 are in the cohort “C jan 17” and others belong to other respective cohorts.

When a customer stops buying he is considered inactive. The application each month evaluates how many customers of each cohort became inactive. A percentage of remaining (=active) customers is called retention. Consider a cohort “C jan 17” with 100 customers (in the January 2017 100 new customers made their first purchase). If 30 of these customers did not made any purchase after 31st January until now they are considered inactive from February on. We say that there were 70 active customers in February. Since there were originally 100 customers in the cohort we say, that after the first month the cohort had 70% retention.

If after the February other 15 customers became inactive, 55 customers remains active (70 Р15) so the cohort retention after 2 months is 55%.

In the following picture there are 3 cohorts. The first one has 90 original customers. The retention after the 1st month is 56% for the April cohort, 50% for the May cohort and 28% for the Jun cohort.

cohort churn

It means that retention rate is decreasing. The same is valid for the second month.

This scenario is very dangerous for the seller since, in order to keep the business running, he needs to acquire more and more customers every month. If the retention rate continues to decrease, eventually the cost of customer acquisition becomes prohibitively high and the shop will have to close.

There are several ways to increase the retention, we will write about it in the next post.

However you cannot manage the retention if you cannot measure it.

This type of visualization (combination of table and chart) has an advantage that you can very easily determine the retention tendency. It is illustrated on the following scheme. Just observe the shape of the bars in individual columns and you will immediately know how is your business evolving.

Retention tendency visualization

The table and chart is created in the free application Automated Cohort Retention Analysis for Excel that can be downloaded here.