Data-Driven E-Commerce Case Study: Cohorts and Segmentation
Data-Driven E-Commerce Case Study: Cohorts and Segmentation
Data-driven analyses of your audience may reveal surprising findings about what your e-commerce retention strategy should be.
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Disclaimer: As you all know, the e-commerce field is highly-competitive, so we are not able to disclose the real company name, product, and numbers.
At Metrilo we analyze tens of thousands of e-commerce platforms, from Shopify to Magento. I would like to share some insights of Merry Hiking Boots E-commerce Store (totally made-up name, I hope I am not crossing on a real company; if so, I apologize). This company decided that they needed data analysis. They were wondering about three main topics:
- Which group of consumers to target most strongly?
- What exact kind of product to offer, to whom, and when?
- If they find answers to the above two questions, then comes the final one – in what way can they reach the highest revenue and how to improve their Visitor-to-Loyal Customer ratio in the long run?
The first and foremost thing to notice was the fluctuation of sales performance over the course of a calendar year. This occurrence may be caused by a number of reasons, but first, we decided to investigate the sole nature of their product. And before we dive into the study, let me ask you:
What is your opinion on customer retention?
Just a question. Think about it for a second.
To back up what we initially suspected, we analyzed a Revenue Chart on a monthly breakdown (2015 vs. 2016). We can distinguish a similar trend in both years (small growth, at best). The previous two annual charts show the same result.
As one would expect, user interviews and usability tests followed. We crossed out some hypotheses, using obvious analysis on different metrics. Most of those were unexciting, and we didn’t get much from them. However, there was one segmentation that looked extremely interesting.
Revenue Segmentation for Better Customer Retention
We decided to analyze a certain chart based on Payment types. The segmentation showed a constant change in 2016. First payments (the 1st purchase of every customer) and the repeat purchases (when an existing customer buys an item again) exchanged positions in terms of bigger revenue bringers.
Afterward, we concluded that new customer revenue drops rapidly in autumn, but repeated purchasers cover the huge gap.
With this information in mind, we launched a cohort analysis for all customers who made their first purchase in 2016. After some calculations, we reached an interesting chart, included both First purchases and Repeat purchases.
All customers from 2016 contributed to the best Revenue via a repeat purchase at the end of summer/beginning of autumn. In addition, we found that customers from February-May are the strongest spending customer cohort. All of them are high revenue bringers 4-5 months after their first purchase.
What Does This Tell Us About the Company’s Customer Retention Levels?
Firstly, we decided to go through the same metrics, but many years down the line. This report showed similar results. February-to-May customers spent increasing amounts on repeat purchases. Now let’s connect some dots.
Merry Hiking Boots is an e-commerce hiking business. It comes directly to mind that their loyal customers are dedicated hikers. They plan their trips, along with their hiking equipment. The rest of the customer base purchased on an ad-hoc principle during the summer or bought hiking boots as a gift for Christmas.
The other report was aimed at defining which products were best for a repeat purchase, and this went way simpler than the previous one. To put it simply, the Merry Hiking Boots E-commerce Store managed to find a well-developed customer core. What is more, they knew what and when to sell it to them.
With this new information in hands, the autumn campaign of 2017 was attacked with a totally different customer retention strategy.
The brand swapped their attention from acquiring a new customer to full-on customer retention. Their marketing teams targeted loyal customers in a set time period of 3 months. The results, as you can guess, were outstanding. The three “weak” months during autumn showed outstanding profits (almost a triple-up in revenue in October and November).
This is a brief e-commerce study, but it shows the power of properly executed customer retention. Every e-commerce business should take the time to understand their clients, and carry out sensible customer retention strategies.
Customer Retention as the Way to Increase Profits
Now, let’s discuss the topic in general. Every salesperson aims at one single thing – to increase revenue. And this is normal. This is the way it is intended to be. When we speak of increasing sales, more often than not, we encounter the “I need more customers” opinion. Nobody thinks of customer retention. At first.
And this is the wrong approach to having a profitable e-commerce business. While it is beneficial to attract new clients, customer retention leads the list of revenue bringers. If you aim all of your resources at gaining new spenders on your store, you will ultimately lose your existing ones.
In terms of poker play, it is always better to save your chips in a tournament than to risk them for eventual double-up. Unless you have the “nuts” (strongest hand on a particular deal), it is way more sensible to save your stack.
A saved chip is worth more than a won chip. And in e-commerce, a retained customer is worth more than a newly acquired one. It is cheaper (5-10 times) to hold on to a customer than to attract a new one.
After a year or two, your e-commerce business will have a core of loyal customers. It is estimated that almost 80% of your future revenue will come from them. And now customer retention doesn’t sound so bad, does it?
Why Focus on Customer Retention?
Many business owners rely on the idea of a great product. And your e-commerce business may very well sell the best product in the niche. Congratulations. However, the expectations of customer retention solely because of a product are extremely wrong.
Every customer likes to have a connection with a brand for repeated purchases. Yes, they may be attracted to the quality of your items, but don’t forget the quality of service. Customer retention is executed through a personalized shopping experience.
And this includes more than just a great product. Responsive customer support, personalized promotions and messages, and customer feedback are just a part of every good customer retention campaign.
When you think about it, it is easier to make a new friend but how many of them will stick by your side? And how many of your existing friends will leave you because they found a better friend? It is a childish comparison but it works in proving the point.
Your customers can be your friends, albeit it virtual ones. So be sure to make them feel that way.
Opinions expressed by DZone contributors are their own.