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Mastering Ecommerce Cohort Analysis: A Guide to Understanding and Predicting Ecommerce Customer Lifetime Value

Title: Mastering Ecommerce Cohort Analysis: A Guide to Understanding and Predicting Customer Lifetime Value

When you’re starting an ecommerce business, projecting the ultimate lifetime value of a customer can be challenging. In this article, we’ll discuss how to perform ecommerce cohort analysis to better understand and predict your customer’s behavior and value over time.

Let’s take a hypothetical example of a new ecommerce business that began its operations in January 2018. In that month, 1,000 unique customers purchased. Those 1,000 customers placed 1,100 orders totaling $110,000 in revenue.

By calculating the average order value (AOV) and average revenue per customer, we can get a better understanding of how much each customer is worth.

  • Month 1 Customers: 1,000
  • Month 1 Orders: 1,100
  • Month 1 Revenue: $110,000
  • Average Order Value: ($110,000 / 1,100) = $100
  • Average Revenue Per Customer: ($110,000 / 1,000) = $110

To perform a cohort analysis, you’ll need to follow this distinct group of customers who placed their first orders in January 2018 over time. This group of 1,000 customers is called a cohort, specifically the Month 1 Cohort, or January 2018 Cohort.

As we track this cohort’s purchases over time, we can see how their behavior changes and start predicting their future actions. Let’s say that in February 2018, 180 of the initial 1,000 customers ordered again, placing 200 total new orders and generating $20,000 in new revenue. In March 2018, 80 of those initial customers ordered again, placing another 100 orders and generating $10,000 in new revenue.

After three months, the revenue for the January cohort would look like this:

  • Month 1 revenue: $110,000
  • Month 2 revenue: $20,000
  • Month 3 revenue: $10,000

Total revenue for Month 1 cohort to date: $140,000 Average revenue per customer in Month 1 cohort: $140

By analyzing this data, we can begin to predict how the cohort will perform in the upcoming months. For example, let’s assume these initial 1,000 customers continue to place 100 new orders totaling $10,000 every month for the next five years. Based on this projection, the revenue generated by the January 2018 cohort would be:

  • Year 1 Revenue for January 2018 Cohort: $230,000
  • Year 2 Revenue for January 2018 Cohort: $120,000
  • Year 3 Revenue for January 2018 Cohort: $120,000
  • Year 4 Revenue for January 2018 Cohort: $120,000
  • Year 5 Revenue for January 2018 Cohort: $120,000

5-year total revenue for January 2018 Cohort: $830,000 Average 5-year revenue per customer: $830

Cohort analysis is a powerful tool for ecommerce businesses looking to understand and predict customer behavior. By tracking specific cohorts over time, you can gain insights into the lifetime value of your customers and make better-informed decisions about marketing, customer acquisition, and retention strategies.

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