Exceptional results.
The Benefits of Cohort Group Reporting
By: David Shepard
This article first appeared in Direct Magazine
As more and more non-direct marketers get involved with database marketing the more important it becomes to remember some of the key lessons painstakingly learned by our direct marketing predecessors. Remembering to measure the performance of cohort groups is one of those lessons. (A cohort group is defined as a group of individuals with one or more common characteristics. )
In the world of direct marketing an enrollment date, or more accurately an enrollment period defines the basic cohort group. For example, all of the new customers that came on the database in the month of August, would be a cohort group. Later we will expand the definition of cohort groups to include attributes other than enrollment period.
Measuring the performance of cohort groups, or let’s call them enrollment groups for a little while longer, is the best way to monitor the performance of any direct marketing business that continually acquires new customers, new members, or new subscribers and is concerned with possible attrition. For all practical purposes that means all direct marketers. Yet not all direct marketers have systems in place that monitor cohort performance.
The Chart below shows monthly attrition rates for individual enrollment groups and the average attrition rate by month for all enrollment groups (the last set of bars). A marketer looking at this graph would immediately notice that enrollment groups 14, 15 and 16 are performing well below the average behavior of prior enrollment groups. Without enrollment group reporting a marketer would have to rely on monitoring trends in overall or average churn rates. (The average churn rate is defined by the number of attriters in a period divided by the number of customers at the start of the period.) Measuring overall churn will frequently miss trends that are due to changes in acquisition strategy or competitive conditions.
Generally, direct marketers do not stop at reporting at the enrollment group level. The more common practice is to subdivide the enrollment group by major media source so that the performance of say all direct mail or all print acquired customers can be tracked. Frequently a change in enrollment group behavior can be quickly traced to a change in the mix of new customers -- customers acquired from direct mail generally perform better than customers acquired from print, and they tend to perform better than customers acquired from broadcast, who tend to perform better than customers acquired from outbound telemarketing and so on. (Remember I said generally, so your experience may differ.)
So, the usual cohort group is an enrollment group broken down by major media. Cohort reporting is of course not limited to attrition reporting. One may track overall sales, sales mix, store visits, average purchases or returns, or complaints, or anything else that’s relevant to one's particular business. For example a cable company may want to track upgrade or downgrade behavior as well as overall disconnect rates, and the cohort group could be traced to a particular sales territory or to a particular sales person. Companies with reward programs may want to track points earned or points redeemed by cohort group to get an early warning reading on changes in customer behavior.
Cohort group reporting can also be carried down to the keycode-enrollment group level. At this level cohort reporting is not used for overall trend analysis but for forecasting the lifetime value of individual customer groups. The weighted average projection of all of the cohort groups acquired from the same source (same keycode) represents the lifetime value of the average customer acquired from that particular source. And, this average value can be compared to the cost per order to measure the profitability of the promotion.
Cohort group reporting has been around since the 1970’s. In those days the reporting was done in batch mode at the end of each cycle update. A set of hard copy reports was produced and distributed to the marketing managers who were responsible for new customer acquisition and customer marketing. Today the same information can be produced in a variety of ways including everything from the original hard copy reports to drill down exercises using star schemas to multi-dimensional presentations that represent cohort groups in three dimensional cubes floating around the front of your PC. (In fact, if you were of a mind to do so, you could probably turn your cohort reporting into a screen saver.) The problem with the newer representations of the same old concepts is that one might not recognize the need for the drill down exercise, or the multi-dimensional presentation, so I’m partial to old fashioned hard copy reporting, updated with modern graphics that make changes in performance obvious to anyone willing to look. And, the need to look is just as important today as it always was.