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What is cohort marketing, and how does it impact small businesses?

A fantastic product, along with an effective marketing and communications strategy, can pave the way for solid customer relationships. However, your customers can have different interests and requirements. 

They could be industry experts who already know a lot about what your product does. Your marketing communications need to be detailed and highlight your product or service’s key specifications and benefits to sell to those consumers. 

On the other hand, your customers could be regular users who want to make their life easier without hurting their wallets. Here, your marketing should highlight your product’s affordability, ease of use, and how it can make their life better. 

Simply put, you can have different customers for the same product, and sending all of them the same marketing campaigns isn’t the best approach. 

If you don’t personalise your marketing based on your customers’ preferences, they won’t feel understood or special. And if they don’t feel understood, they won’t buy from you. 

Cohort-based marketing is one of the most impactful ways to add personalisation to your marketing campaigns. Here is a comprehensive guide to creating cohort-based marketing campaigns for SMBs that will help improve conversion rates and customer retention.

Why is cohort marketing important?

Cohort-based marketing involves segmenting your customers into groups, known as cohorts, based on their interests, propensities, and preferences. Ideally, cohorts contain people who share the same characteristics over a while. 

Instead of taking a one-for-all marketing approach, you create campaigns specific to the affinities and interests of each cohort. 

As a result, your marketing efforts are more targeted, personalised, and user-centric. Cohort-based marketing can enhance your marketing campaigns in the following ways:

1. Compare user groups to find the best customers

Let’s understand this with a quick example. Suppose you sell complete desktop computer setups for people who work from home. Your target customers are:

  1. Freelancers and solopreneurs. 
  2. Regular employees who work from home.

Individuals in the two groups can have different requirements and interests. For example, freelancers might need an affordable computer to work more efficiently. In contrast, remote employees may need a robust setup with a powerful processor, webcam, printer, etc., to deliver maximum performance and productivity. 

By segmenting your customers and sending them targeted marketing messages, you can find which customers are more interested in buying from you.

2. Group the leads into channels and convert them

Are you running different campaigns on multiple platforms? While it is a good thing to reach a larger audience, it can make your marketing unclear and confusing for you. 

You must know leads from which channel or medium are converting the best using various channels and campaigns. Cohort-based marketing involves grouping sales leads based on the campaign or marketing medium.

After grouping the leads, you can approach them using the same marketing method. If leads from a specific channel or campaign stand out, you can scale your marketing and lead generation efforts for that channel or campaign. 

3. Forecast future purchases and trends

Predicting future trends and accordingly adapting can give your brand promise a competitive edge. Cohort-based marketing enables marketers to understand buying behaviours and anticipate future actions. For example, you can figure the frequency of repeat purchases and the average time between purchases.

What Is Cohort Analysis and How to Perform One?

Cohort analysis is the building block or the fundamental step of a cohort-based marketing strategy. It involves creating cohorts based on the acquisition date, medium, campaign, or other characteristics and then comparing the cohorts over time. 

This way, you can identify the highest-performing and least-performing cohorts, along with the key factors driving their performance. A cohort analysis comprises the following steps:

  • Accumulate raw data.
  • Create and set cohort identifiers.
  • Calculate the “lifecycle stage” for each event.
  • Enter data into a pivot table and turn it into a graph.

You can perform these steps in Microsoft Excel, Google Sheets, Zoho Sheet, or any other spreadsheet or data analytics solution. And don’t worry if this feels too technical or complex.

Google Analytics has a “Cohort Analysis report” feature under Audience that allows you to run a cohort analysis and generate a report. The report highlights the impact of your marketing campaigns on specific user groups. 

You can create cohorts based on the following factors:

  • Target audience.
  • Campaigns.
  • Channels.
  • Ad content.
  • New service offerings or product lines.
  • Sales, promotion campaigns, or discounts.

Once you have your cohorts, you can compare them across key metrics like:

  • User retention: Repeat traffic, repeat purchases
  • User action: Transactions, goal completion
  • Customer value: Customer lifetime value (LTV)
  • Marketing channel: Channels, campaigns, keywords, devices, etc.
  • Customer engagement: New website visits, sign-ups

Follow this comprehensive guide to cohort analysis with Google Analytics for a better understanding by Neil Patel.

Types of cohorts

Cohorts are mainly of two types — acquisitional and behavioural — based on the time a customer spends using your product and their actions during their journey.

1. Acquisitional cohorts

Acquisitional cohorts provide insights into the timeline of a customer’s journey, and this includes: 

  • When the customer signed up for the product?
  • When does the customer re-purchase the product?
  • The period for which the customer used the product?
  • When the customer dropped off the product?

Acquisitional cohorts help you measure the churn rate and customer retention rate across periods. 

2. Behavioural cohorts

Behavioural cohorts help you analyse how your customers interact with your brand and product throughout their journey. 

To utilise behavioural cohorts, you’ll need to set specific actions (goals) that you want users to take. You can then evaluate those actions and identify your consumers’ behaviour. The actions can be to:

  • Sign up for a free trial.
  • Subscribe to the email list.
  • Download a white paper.
  • Fill a survey form.

How can businesses leverage cohort analysis to create high-converting campaigns?

The core purpose of cohort-based marketing is to improve your marketing strategy by analysing user behaviour over time and across channels. 

If implemented correctly, cohort marketing can help you create high-converting campaigns and increase customer retention. 

Here is how to utilise cohort analysis to upgrade your marketing strategy, make better product decisions, and reduce churn. 

1. Learn more about your audience and their shopping habits

Cohort analysis helps you get in-depth insights into your consumers’ shopping habits, and it also enables you to find the most lucrative channels. 

For example, suppose you are a contact centre software vendor, and you want to increase the number of subscriptions to your product. You are using two lead magnets: a free trial and a free downloadable white paper. 

You can divide users into two cohorts based on whether they register for a free trial, download the white paper, or do both. By comparing the conversion rate across cohorts, you can learn more about your users’ shopping habits and optimise your marketing strategy accordingly. 

So, if users who downloaded the whitepaper converted more, you can invest in producing more high-quality content to establish thought leadership and build trust.

In the same way, you can leverage cohort insights to identify the most lucrative marketing channels. For example, suppose you use QR codes on your brochures and print ads to direct people to your website. 

By the way, if you don’t use QR codes for marketing, start using them today. They’re highly effective and easy to use, and you can create them for free using a QR code generator. When users scan your code and visit your website, it registers as mobile traffic.

You can segment mobile traffic from overall traffic and compare conversion rates and other metrics between the two sources. You can also compare advertising campaigns or email marketing campaigns to get deeper insights. 

2. Improve your post-purchase campaigns

Follow-up emails have an open rate of 40.5%, a click-through rate of 6.4%, and a conversion rate of 0.7%. Customer retention costs less than customer acquisition, and retaining customers should be your topmost priority. 

Post-purchase campaigns play a vital role in customer retention, and therefore, optimising them is crucial. Cohort insights help you understand which customers are likely to make a repeat purchase. 

You can use this data to optimise your post-purchase campaigns and increase customer retention.

3. Understand and Transform LTV Metrics into Payback Metrics

Often, advertisers treat customer lifetime value (LTV) as the cornerstone of revenue metrics indicating marketing success. 

They often overlook payback period metrics, which are vital for measuring cash flow and return on investment (ROI). It is equally important to analyse how often and how soon your customers are coming back. 

Insights obtained from cohort analysis allow you to determine the revenue your customers are generating over a period. You can transform your LTV metrics into 30-day, 60-day, and 90-day payback periods to draw a relationship between revenue-per-customer and time. 

You can make your payback data more actionable by segmenting it by marketing channels and campaigns, customer segments, and products. 

4. Measure short-term marketing efforts

Customer insights obtained from cohort analysis can help you analyse how your consumers respond to your short-term marketing efforts. 

For example, you can send welcome emails to users in different cohorts and gauge their responses if you have a recently implemented email campaign. 

By using UTM tracking for your email marketing campaigns, you can recreate new segments in your cohort analysis report based on traffic sources, including campaigns, mediums, sources, and keywords. 

Suppose you run an email campaign for 14 days offering a flat 20% discount on all your products. You can track how users in different cohorts are responding to the offer, and this is an effective way of measuring the performance of your short-term marketing efforts. 

5. Measure the right metrics

The average customer acquisition cost across all B2B and B2C industries have increased by 60% over the past five years. 

Since the CAC is continuously increasing, measuring ad performance in return on ad spend (ROAS) can put you at a disadvantage. ROAS is flawed as it doesn’t measure profit and takes only the ad spend into account, and you can’t use it on omnichannel campaigns or measure anything that is not an ad. 

Return on marketing investment (ROMI) is a new, more accurate KPI that focuses on profits and incorporates all omnichannel KPIs. Cohort analysis is the most effective way to measure your ROMI. 

You can use cohort data to identify the most effective channels and campaigns, along with the expected payback and profitability over a period. With this information at hand, you can invest more in high-probability campaigns and increase your ROMI.

6. Identify churn behaviour

Customer insights obtained from acquisition cohorts help you find when your customers tend to stop using your product in the customer lifecycle. This metric is more prominent among SaaS and mobile app companies. 

You can measure the percentage drop-off every day to determine when users tend to opt out the most. For most mobile apps, that timeline is around two weeks, and this number could be higher for older, established companies and lower for new companies. 

By identifying churn behaviour, you can find when your customers drop off at a concerning rate. You can optimise your campaigns accordingly to encourage the users to keep using your product. 

For instance, if you are witnessing a significant drop-off on days 4-5, you can start sending emails on days 3-6, offering a free add-on, sharing helpful information, or offering a free upgrade. 

Wrapping up

With personalisation being the new marketing standard, companies need to understand their customers well and optimise their campaigns and communications accordingly. 

Cohort analysis provides you with in-depth customer insights that you can leverage to create highly targeted and conversion-oriented cohort marketing campaigns. 

 

By contributing writer: Luke Fitzpatrick – freelance business journalist (published in Forbes, Entrepreneur & Tech In Asia) & guest lecturer at the University of Sydney, lecturing in cross-cultural management and the pre-MBA program.

 

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