Customer Segments and Customer Cohorts are two terms we often hear when discussing a recurring revenue startup. They are two ways of grouping and analyzing your customer base but they are meant to help analyze different aspects of your business. Both are insightful, but knowing what differentiates them is important.
Let’s start with a Cohort, or a group of customers who were all acquired in the same time period. Most SaaS/Subscription businesses breakdown their cohorts by month, but you can tailor your cohorts to your business if monthly tracking doesn’t make sense. Given the month-to-month nature of most recurring revenue startups, the monthly cohorts make sense because cohort analysis is focuses around helping you understand time based economic metrics for your startup, LTV, Onboarding Issues and Seasonality.
Looking at a cohort of customers you would group all the customers you acquired in say July, you also want to know the total amount of $ they spent buying products/service in that first month as a customer. You then want to track how many of those new July customers are still paying customers in August, September, etc. tracking your customer retention in each month until there are none left. You also can track their $’s spent in each subsequent month so you can track your cohort Net Revenue Retention which is important in finding your LTV. Cohort tracking also allows you to check your business for seasonality if you look at historical cohort performance year-over-year. You might notice that in Q1 cohort retention and total $ spent is always worse performing than your cohorts the rest of the year. You can also use cohort tracking to check and see if you have an onboarding issue, say your onboarding is 3 months long, do you see a high customer cohort drop-off in month 4? Perhaps your customers are struggling to onboard and it is leading them to cancel.
Now that we have discussed how to use Cohort Analysis to understand your customers, so what is a Customer Segment? Segments are groups of customers that share. similar characteristic that IS NOT the first month they became a customer. This characteristic could be anything from customer size, industry, MRR, location, etc. The possibilities for customer segments is endless, through it is best practice to try and identify 3-4 segment characteristics that will differentiate your customer base.
Customer Segmentation is meant to help identify your ICP, or Ideal Customer Profile, by identifying the segments of customers that perform best. We can measure this by comparing segments on metrics such as LTV, MRR/Customer, Cost to Serve and CRRPD. These metrics can help you identify which customer segments are profitable, those who pay you the most, and the customer who call in the most support and success tickets. By comparing these metrics across customer segments you will find the characteristics that define your best performing customer segments. You can take that information and help make operational decisions around customer marketing, acquisition and retention.
Customer Segments and Customer Cohorts are two different methods for grouping and analyzing your customer base. They tell you different but both crucially important things about your customers. Take the time to analyze both and you will be able to use the results to help operationalize your entire team around the best customers to help your business grow and thrive.