I Do wish the water heater thermostat held a better tolerance between the on & off temps. Thinking attaching it to an aluminum "heat sink" may help but not sure.
A heat sink will shorten the lag between changes in air temp and the temp registered on the back of the thermostat.
In my Cozy Can, the thermostat is external, but slapped firmly against the metal can, which serves as a giant heat sink, and the insulation blanket covers it all. For that, I believe much of the temp swing (+- ~5ºF) is the result of the thermal latency of the Crock Pot crockery.
In my wooden baby kiln (really baby--27"x12"x11"), the thermostat is anchored within a square hole cut through the wall, and is well insulated on the exterior. It also runs about +- 5ºF.
Bob