The final installment on Critical Business Metricsw from the
Bear Creek Web Blog:
Today, we wrap up our look at critical website metrics by discussing
the bottom of the funnel. The best conversion optimization strategies
don't stop at the moment a purchase is made or when your team closes a
deal. Total optimization must include both your ability to acquire
customers, and your ability to retain them.
When it comes to retention, the two key metrics for the bottom of
the funnel that we are going to discuss are churn rates and customer
lifetime value (LTV). We tie these metrics back to what we learned in
our first post – specifically, cost per customer acquisition (CPCA) and
cost per lead (CPL). (If you missed our earlier business metrics
posts, you can catch up here with part one and part two.)
While churn rates and customer LTV are not numbers you will find
directly in Google Analytics, they are essential to understanding the
sustainability of your business model and whether or not your inbound
marketing is delivering a solid ROI.
Churn Rates
If you've ever swapped cellphone service or changed internet
service providers, you have been a part of what is known in the
subscription business model as the churn rate or attrition rate. Simply
put, the churn rate is the percentage of users who leave or cancel a
service within a set amount of time.
Example: For the
month of March, you have 100 current subscribers. By the end of the
month 20 of those subscribers have cancelled their service. In this
example, your gross churn rate is 20%.
Churn Rate (%): # of subscribers lost ÷ # subscribers at the start of the month.
In the scenario, you would need to have acquired at least 21 new
subscribers in March in order offset your losses. Factor in the CPCA for
those subscribers versus the cost of the subscription and you have a
clearer picture as to whether or not your subscription model is
sustainable.
In the long term, if your churn rates are increasing over the
course of several months, this can be an indication of growing
competition in your niche or customer dissatisfaction – both key areas
to address in order to keep your business profitable.
Customer LTV
The lifetime value of a customer is trickier to calculate, and
requires some historical data to estimate accurately. Let's go back and
take a look at the example in our first blog post in this series.
Assume that the CPCA is $5.00 and the average cost of a product sold is
only $4.00. On the surface, this would seem to be a losing
proposition, as we are losing $1.00 for every sale we get.
But let's take it a step further and also assume that on average, a
customer makes 10 purchases from our store over the course of one
year, and that our business does not see many repeat buyers after a
year's time. In this instance, the customer LTV is $40.00 – well above
the $5.00 spent on user acquisition. If we can find a way to encourage
larger purchases or more frequent purchases, then the ROI improves even
further.
We can use a similar method when discussing the cost per lead. If
we assume that the average project billed to a new client has the cost
of $1000 and that clients hire us for at least 4 projects, we have a
customer LTV of $4000. Again, the profit is much higher than the cost
per lead of $5.00 or the CPCA of $6.25 that we calculated in our first
post.
Addressing Problems with Customer Retention
There are often many underlying causes of poor customer retention. Areas you will want to investigate include:
Cost
While pricing is often not the sole factor influencing a purchase, it
can be a deciding factor for some customers. If you are competing
solely on cost, customer churn can be expected any time a competitor has
lower prices than those you advertise.
Value
Value can be tangible, such as providing additional products or service
offerings. It can also be intangible – superior customer support,
better expertise, more experience, etc. How your customers perceive the
value of your offerings when compared to the competition can contribute
to churn.
Customer Nurturing
What you do after the sale is just as important as leading up to the
sale. Many companies like Sears and ThinkGeek offer incentives for
customers to continue shopping at their website. Points, membership
perks, suggested products and services – all of these allow you to
maintain contact with your current customers and encourage new sales.
Customers who are not invested in your brand are more likely to shop
elsewhere, leading to retention issues.
Understanding the best ways to optimize your online business
requires a holistic view that incorporates metrics from every area of
the funnel. By focusing on those areas that directly impact your bottom
line, you can improve customer experience and profitability. If you
need help understanding essential website metrics for your business, talk to us.
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Great post from the Bear Creek Web Blog on Adaptive vs Responsive Mobile Web Design. Very thorough: