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.
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.
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:
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 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.
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.