Know Your Market and Audience: Cohort Dynamics
Launching and growing a project or startup requires not only a great idea, product and team. Knowing the dynamics of market and audience are more important than ever in this fast and exponentially changing world. In this blog series we are touching a few points about market and audience dynamics.
There is certainly no shortage of really interesting project opportunities both in the corporate and public sector as well as in the realm of startups. The question is often if, how and when a project can succeed?
- What is the net growth rate of the market and audience?
- What portion of the market is really addressable?
- How does the composition of the cohorts change over time?
- Is there enough time to accelerate and compete?
This blog series will explore these question. In this blog post we will look at the question:
How does the composition of the customer base impact performance?
In other words: we are looking into dynamics of cohorts in the customer base. This is an area which only few businesses explore. The customer base is growing and at the same time the composition is changing. For example simply by people becoming older. And with increasing age the preferences, purchasing power and purchasing behaviour is changing, too.
Take a out of home food delivery business for example: A single student might spend less than a couple living together. But she could be a regularly returning customer. And likewise a multi person household may spend much more on a food delivery but is ordering less frequently.
A change in the composition of the customer base can have a dramatic effect and even influence your business’ metrics in a misleading way.
Let’s take a look at an example with three different cohorts of customer types.
Let’s say these cohorts are building up over time through a simple flow. “Juniors” are coming in, after a year they mature to the “Middle” cohort and after another year they become “Advanced”. This is a simplified model but it illustrates what is happening in the customer base. Also note that the individuals are either progressing along the aging chain or they leave the business (“churn”).
Each group has its own characteristics. We are simulating this by introducing a random noise which let’s their purchase amount vary around their mean. We are not even considering that each group may change the behaviour in itself over time. Here you can see for example how the Junior cohort has a relatively low spending level but it is fairly steady. And the Advanced cohort are heavy spenders but their spending behaviour varies significantly over time.
With continued growth of the customer base there is also a co-flowing change of the behaviour. In this case the average spending (here measured as “ARPU” – average revenue per user) is increasing, but also the variability is increasing).
But what happens when the “Junior” suddenly move away? This could happen for several reasons: a new competitor, the ageing customer base is not “cool” any more, or the business refocuses and reallocates resources towards the more attractive buyers.
Let’s simulate this case by increase the churn of the Junior cohort by 50% starting in month 24. Note that the Juniors are still joining the customer base at the same rate. But a higher portion is churning away.
Surprisingly the ARPU is going up. This could be mistaken as good news. But it is masking what is really going on in the customer base. As the Juniors are churning away, the ARPU is increasing because it is driven by the existing and increasing number of customers with higher purchase purchases.
The real tragedy unfolds slowly in the customer base as the inflow of Juniors is breaking away and therefore the conversion funnel is breaking down which leads to a continuous decline in overall revenue.
This is an important dynamic which needs to be monitored in order to develop the customer base for sustained growth. The project leader needs to implement the right controls and measures on the metrics dashboard.
Investors should not just enjoy the growing customer base but interrogate the cohort analysis and ask for the insights from the lost customer survey.
A short checklist:
More about this and other concepts in the “Shape Growth” Series and the Service and Software-as-a-Service depth briefing in WITTIGONIA Online Academy (http://academy.wittigonia.com).