Retention by cohort

Successfully acquiring new customers is only truly successful if those Customers then return to buy from you again (and again). The metric that reflects this is called retention. It’s one of the key metrics that influences the growth of your business. When your customers’ retention is low, you’ll spend more of the income from your business on marketing rather than keeping it as profit.

At the same time, retention is easy to improve if you can see the performance by cohort and understand where to invest.

The Customer retention by cohort report is essential to any business looking to understand its Customers and will go a long way towards explaining other things like sales figures and the impact of marketing initiatives.

Let's go through the definitions of the columns:

Cohort: The group of Customers that made their first purchase in a given period.
Cohort size: The number of distinct Customers in a Cohort.
Retention: The number of Customers that returned to purchase from your Shop again after their first purchase.
Total sales: The total sales -- that is, gross sales - discounts - returns + taxes + shipping charges.
Orders: The total number of orders placed by the Cohort.
AOV (Average Order Value): The Total Sales (not including returns) divided by the number of orders.
Frequency: This is the average number of orders placed by each customer in the Cohort.
CV (Customer Value): This represents the average monetary value that each Customer brings to your business. It is the average order value multiplied by the frequency.
Average LTV (Lifetime Value): represents the average monetary value that each Customer brings to your business over their lifetime.

A great way to understand the retention rate is by plotting each Cohort's retention by period:

This report shows Customer retention rate up until May 2019. We can interpret this report as follows:

Look at the Cohort size in each Cohort, month over month. This represents the number of First-time Customers acquired in any given period. You should ask yourself: is this number growing healthily each month? Are there peaks and troughs in Cohort sizes? Is this what I had aimed for? For a growing business, the Cohort size should be growing steadily.
Next, we can examine the retention rates. Your business objective should be to improve retention over time, i.e. to have an upward trend as you go down a column (say the first month, MO 1). If you retain a higher percentage of new Customers who joined in period Feb, 2019 (22.1%) than those who joined a while ago Aug, 2018 (14.1%), we are on track. Ideally, the retention rate should be increasing over time as you improve your shopping experience, customer service, etc.
Another metric we will look at is the rate at which we lose people. It is expected that, over time, retention will fall. This is the reason that you must always keep acquiring new Customers! If you can slow customer attrition so that the fall between each period gets smaller, then you will grow revenue and can focus more resources on serving existing customers vs acquiring new Customers (which is more expensive).
By analyzing the Cohort Lifetime Performance we can gain insight into customers' purchasing behaviors, identify trends, and strategize more effectively. For example, increasing the average order value or purchasing frequency can significantly improve revenue and customer lifetime value.

The report provides two alternative views that display the total number of Orders placed and Total sales generated by retained Customers. Those views will help you track not only the success of your Customer acquisition, but also provide insight into the impact to your business.