“Everyone ought to be improving their customer lifetime value, but that’s about as vague as your New Year’s resolution to lose 10 pounds,” says product manager Cindy Alvarez. “And about as likely to succeed, unless you break it down.”
Cindy, who works with startups and Fortune 500 companies to turn customer development into a competitive advantage, says to forget worrying about average revenue per user or customer lifetime value until you’ve answered two simple questions:
- What percentage of Activated Customers (people who’ve expressed interest) have given you money?
- Which types of customers are most likely to give you money?
Answering those two questions will immediately narrow down what you should improve, she says.
Let’s take a look at how the first question can help you focus on the most profitable improvements.
What percentage of Activated Customers have given you money?
To illustrate how this works, Cindy uses some made-up metrics for Amazon.com as an example.
If 15,007 Activated Customers view a page for a specific product, 1,099 add it to their cart, and of those, 332 complete the purchase, then 2.2% of Activated Customers give Amazon their money.
So, how should they get more Activated Customers to give them money?
- Get more Activated Customers
- Get more Activated Customers to add the item to their cart
- Get more users who put the item in their cart to complete the purchase
Let’s look at each answer. Amazon has 15,007 Activated Customers and only 2.2% are paying customers, so answer A, getting more Activated Customers, isn’t where they should focus.
What about getting more Activated Customers to add the item to their cart? “I’d expect that it’s quite common for someone to view a product and not proceed with purchase — you could be just browsing, or perhaps you were just curious about that electronic toenail polisher,” says Cindy. That eliminates B.
So that leaves us with the answer, C, get more users who put the item in their cart to complete the purchase. “I’d hone in on the big dropoff between ‘Added to Cart’ and ‘Completed Purchase’, and try to figure out why via customer interviews, user testing, or a KISSinsights survey,” says Cindy.
Why? If they could get just 10% of the people who added it to their cart but didn’t purchase to complete the order, that’s 77 additional purchases. If one purchase averages $20, that’s more than $1,500 of additional revenue per day, and “the solution is probably just fixing something that [they] should’ve fixed anyway,” says Cindy.
Which types of customers are most likely to give you money?
Now let’s look at how the second question works, using Cindy’s example of a website service.
If you have 82,857 Activated Customers, 7,002 start a free trial, and 2,327 buy the paid plan, then 2.8% of Activated Customers are giving you money. That answers the first of our two questions.
But let’s look at the types of customers and how many from each segment buy your paid plan:
- E-commerce site owners, 2.4%
- Professional service site owners, 0.3%
- Community sites, <0.1%
- Bloggers, <0.1%
Where would you focus your efforts to increase revenue?
Answer: “The overall percentage of upgraders — 2.8% — is interesting, but a lot less interesting than the fact that people running e-commerce sites are dramatically more likely to pay you than other types of customers,” says Cindy.
She strongly suggests that you segment your customers, either using the registration form or a post-signup configuration, to know where your revenue is coming from. Then, focus your marketing messages and homepage on the customers most likely to buy.
“Once you’ve experimented and improved some of the more obvious areas, you’ll feel a lot more comfortable tackling the more complex ‘lifecycle’ metrics,” she says.
More on Lifetime Value (LTV)
If you’re interested in learning more on how to calculate lifetime value, please refer to our infographic below:
About the Author:
April Dykman is a guest blogger for KISSmetrics, you can find her on Twitter here.