As a SaaS entrepreneur, you have a lot of data coming at you. The volume and complexity of the metrics you collect can make your head spin. How to make sense of it all? One great answer is using cohorts. This means grouping your customers by their characteristics to break your data into manageable, actionable slices.
Once you see the patterns in how different demographics use — or don’t use — your product, you can:
Determine when and how to best communicate
Identify flaws in your messaging or promotions
Find out who is best served by your product
Design incentives to keep customers engaged when they’re most likely to stop using your product
A good place to start is looking at cohorts grouped by time, segment, and size.
How to use time-based cohorts
Time-based cohorts group those who signed up for various products or services during a certain time frame. Looking at time-based cohorts can reveal telling patterns in customer behavior. If 75% of those who signed up after your Q1 promotion remain customers in Q3, but only 50% of those who signed up upon receiving your Q2 email are still with you in Q4, it may be a clue that you over-promised in your Q2 promotions.
Time-based cohorts can be particularly useful in looking at churn. For SaaS businesses, churn will likely peak at the start of a time-cohort’s time frame, but will eventually stabilize. Customers bounce off your product early, but hopefully the ones who stick with it for longer learn to love it and churn at lower rates. Without a cohort frame, you may not see the pattern and then come to mistaken conclusions about customer retention.
How to use segment-based cohorts
Segment-based cohorts break customer groups down by the level of service or type of product they purchased. If you run a SaaS company with multiple levels of service, this can be very helpful in determining which service level works best for your target audience.
For example, if your most basic service level churns at a much lower rate than your most expensive, that may be a sign that users are either getting everything they need from the basic version or feel that the premium version is too expensive.
How to use size-based cohorts
If you’re a typical early-stage SaaS company on the way to serious traction, you likely have a good mix of clients—small businesses, scaled companies, and enterprises. Comparing these groups can show you where your stickiest revenue streams come from, and potentially illuminate issues with your product.
Generally, small businesses and startups churn at a much higher rate than enterprises.
Many SaaS companies “asterisk out” the smallest, most churn-heavy cohort to get a better picture of their average churn. Try combining this with MRR—does the lion’s share of your MRR come from a high-churn cohort? If so, you may need to figure out how to make your product stickier for that group.
It can also be very helpful to look at the CSAT and Net Promoter Score (NPS) of different sized customers. Churning small businesses but maintaining a NPS of 50 in that cohort means something very different than churning small businesses and maintain a NPS of 0.
Combining segments
There is no right way to construct these groupings, and combining the two types can give you insight into what makes your customers tick. For example, learning that the premium members attracted by your October campaign have more staying power than the basic customers, or that three-year enterprises churn at a higher rate than two-year enterprises can lead to revealing questions.
Getting your metrics right is only the first part of your challenge as a savvy SaaS entrepreneur. The next part is figuring out what to make of it all. Cohort analysis can get you the fine-grained analysis you need to get smart about your growth.
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