Why Conversion Rate Isn’t That Important For Memberships
November 29, 2018
“Wait… did I hear you right? Did you just say my conversion rate isn’t that important for my membership site?”
We did! We’ve committed internet marketing blasphemy of the highest order. But let’s be clear. We’re not saying that your conversion rate is of no importance. Conversion rate is an important metric for you to track and improve. Rather, we’re challenging the idea that you should view your conversion rate as the most important metric to your business. This is doubly true if you’re trying to earn the holy grail of a membership or subscription business: stable, recurring revenue.
If you view your conversion rate as your “marketing north star,” then stick with us. We’ll show you why your conversion rate – whether it’s for your landing page, a lead generator, or an email marketing funnel – should not be your guiding metric. In fact, if you place too much emphasis on your conversion rate to the exclusion of other vital business metrics, you could be on the dangerous path towards what growth consultant Martin Wilson describes as “The Valley of Death” for businesses.
Once you read this post, you’ll know how to measure the metrics that can help you grow your membership business and build the sort of stable, recurring revenue that gives you peace of mind and helps you sleep at night.
Conversion Rate: Defined
Before we dig in, let’s define conversion rate as it exists within this context.
In marketing terminology, your conversion rate is the percentage of people who take a desired action compared to those who don’t. If that definition sounds a bit vague, here are a few examples that help illustrate the point:
Imagine that the action you want everyone to take when they visit your website is to become a paying customer. If you have 1,000 people visit your website per month and 20 of those people become paying customers, you would end up with a 2% conversion rate.
Or, let’s say that you want everyone who hits your landing page to sign up for your newsletter and join your mailing list. If for every 1,000 people who visit your website, 100 people sign up for your newsletter, you’d have a 10% conversion rate for that action. Not bad!
So, it’s easy to see the allure of using your conversion rate as the benchmark in determining the success of your business. After all, if what you want is to acquire new customers, improving your conversion rate seems like a surefire way to accomplish this. But herein lies the problem.
Why Conversion Rate Is A False Summit
One of the hardest things to do in business is to acquire new customers. How do you get more people to buy your products and take up your cause? What makes things even more difficult is focusing on metrics that don’t actually help you make significant strides in your business.
In your quest to acquire new customers and grow your business, you can wind up spending an inordinate amount of time, energy, and effort trying to “optimize” your landing pages, opt-in forms, or email campaigns to achieve the highest possible conversion rate. You can create hundreds of variations, hoping to double or triple conversion and bring in new customers. Doing this would make sense if your conversion rate was the highest leverage point in your business.
But it’s not.
The fact of the matter is that obsessing over your “conversion rate” is only marginally helpful. Like we said, it’s not that your conversion rate isn’t important at all. In the right context, your conversion rate could be just the thing that makes the different. For example, tracking your conversion rate is incredibly useful when you want to test the price point of your product or membership. But beyond that, you generally can’t optimize much, unless you have a massive amount of traffic.
Let’s break down that premise for a minute…
If you get 1 sale for every 1,000 visitors, you’d have a 0.1% conversion rate. That’s a tenth of one percent, pretty dismal. But what if you made $1,000 per sale, and paid only 10 cents per visitor? That comes out to a profit of $900, before taxes. Now, all of the sudden, who cares about your crappy conversion rate? Of course, this is an exaggerated example. In practice, the numbers are not always so obvious.
Back to the point. Spending all of your time trying to improve your conversion rate is not the best use of your time. Measure the difference in conversion between two price points, and you’ll have some useful data. Then go out there and buy some traffic or promote your offering and see what you’re made of. This is where the rubber meets the road for any marketer. It’s judgement day. It’s scary, and it costs real dollars.
At the end of the day, what’s most important is how much profit you are generating in your business. Shouldn’t we then focus on a metric that represents the total amount of revenue that a new customer is worth to you over the course of their relationship with your business?
A New North Star
Since we’ve tossed conversion rate aside, how are we to make decisions about our business? What is going to be our new data-driven north star? The answer is Lifetime Customer Value.
Lifetime Customer Value is recognized as one of the most important metrics in business and is absolutely something you need to measure to make informed marketing decisions. If you are building a membership or subscription-based business, Lifetime Customer Value takes on an even greater importance since your customers pay for your products or services over the course of weeks, months, or years.
So, what is Lifetime Customer Value? Lifetime Customer Value is defined as the projected net profit of your entire relationship with a customer. In other words, it’s the average amount a customer will spend with you over the course of their relationship with your business. In the case of membership sites and subscription businesses (as opposed to businesses that are built around one-time purchases), your members will pay you on a recurring basis. This means that their Lifetime Customer Value is connected to the amount of time they spend with you as a paying member.
Let’s look at a clear example of what Lifetime Customer Value is and see how it can be used to understand your business:
Say that you operate a membership site that charges members $25 per month for access to your content and community. If on average your members stick with your membership for 6 months, you would have a Lifetime Customer Value of $150. That means that you can realistically forecast that a new member will be worth approximately $150 to your business.
Ok, so what? What can you do with this information?
Well, when you know that a new customer will be worth approximately $150 to your business you will then know exactly how much you can spend to profitably acquire a new customer. Your Lifetime Customer Value calculation can inform marketing decisions such as how much you pay affiliates for new customers or how much you’re willing to spend on a paid advertising campaign. As you can see, Lifetime Customer Value is the key to making intelligent decisions about your marketing budget.
There is a lot of great information out there about how to specifically calculate your businesses Lifetime Customer Value. If you’re building a membership or subscription business, this excellent article by Zuora details the best Lifetime Customer Value formula for subscription businesses. MemberMouse’s Advanced Reporting Suite also includes Lifetime Customer Value reporting. It tracks your members’ Lifetime Customer Value based on important variables such as referral source and membership level. And, you can run the report whenever you like to track your Lifetime Customer Value at intervals that make sense for your business.
But Lifetime Customer Value Is Just The Tip Of The Iceberg
Once you have identified your Lifetime Customer Value, you’re ready to take things to the next level. What do we mean by that? As you can imagine, not all customers are created equal. Some of your members will be worth a lot more to your business than other members. For example, some of your members might stick around for a month or two while others remain paying members for years. When you calculate your Lifetime Customer Value, what you are really coming up with is an average. The average amount a customer who walks in your doors will be worth to your business.
The key is to have an easy way to distinguish between the customers of yours at the lower end of your Lifetime Customer Value spectrum, and those at the higher end. Ideally, you would have a means by which you could sort your members based upon the affiliate that referred them to your business, the source of traffic that brought them to your website, or the products and memberships they’ve purchased from you. Well, there is an easy way for you to get this vital information.
But first, let’s zoom out a bit to look at this concept in the form of a concrete example:
Going back to our previous example, picture that you operate a membership site that charges $25 per month. And on average, your members stick with your membership program for 6 months. This brings us back to your average Lifetime Customer Value of $150. Not bad!
Now imagine that you have 3 primary ways of acquiring customers: Facebook Advertising, Affiliate Partners, and Organic Traffic.
With a tool such as MemberMouse’s Advanced Reporting Suite, you can automatically track your Lifetime Customer Value based upon the means by which you acquired that customer. Meaning, in this example, you could obtain 3 distinct Lifetime Customer Value calculations for these 3 separate traffic sources.
Yep. Let that sink in for a second.
Now, when you run your Lifetime Customer Value report you might discover that one of these traffic sources is bringing you significantly higher quality customers. People who stick with your membership for much longer periods of time. And since your billing your members on a recurring basis, the longer they are with your membership, the higher your Lifetime Customer Value.
Imagine you learn that customers who are referred to your membership site by your primary affiliate partner stick with your membership for 20 months on average. This means that members who come to your business through this channel have a Lifetime Customer Value of $500. That’s $350 more than your average Lifetime Customer Value! What’s more is that you could discover that customers who become members of your site via a Facebook Advertising campaign only stick around for 2 months. These members would then only have a Lifetime Customer Value of only $50.
By now, the critical importance of highly specific Lifetime Customer Value calculations should be clear. When you know how much a future customer will be worth to you based upon the route by which they come to your business, you can run highly focused and effective marketing campaigns. When you know which of your customer acquisition channels are most profitable, you can refocus your efforts and stop wasting time and money in ineffective areas.
How Can You Do This?
If you want to gain this sort of insight, the ability to see which of your members are likely to be most profitable for your business, it all comes down to being able to sort and categorize your members. You can either do this by hand or utilize a tool like MemberMouse’s Advanced Reporting Suite.
Our Advanced Reporting Suite gives you the tools required to measure Lifetime Customer Value by affiliate, products purchased and membership level. Beyond determining which customer acquisition channel is most profitable for your business, Advanced Reporting Suite can help you discover whether members who belong to a certain membership level are more profitable than others. The ability to clearly see this information in real time is exactly what’s required to take your business to the next level.
The Advanced Reporting Suite also goes far beyond Lifetime Customer Value reporting and gives you real-time access to additional guiding metrics such as churn and retention rates, sales by membership level, and sales by channel. One of our customers who recently signed up for the Advanced Plan had this to day about the Reporting Suite:
“The advanced plan is awesome. I’m looking at the stats now for my site. I had no idea it could get this detailed.”
For readers of this post only, we’d like to offer you a 30 day free trial of our Advanced Reporting Suite.
If you’re already using MemberMouse, click here to request that Advanced Reporting be added to your account for 30 days.
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Hopefully we didn’t hate too much on conversion rate. We admit that it is an important metric to track and be aware of. However, when you are making decisions about your business and marketing dollars, there is no metric of greater importance than Lifetime Customer Value. Once you have a clear understanding of your Lifetime Customer Value, it’s time to dig a bit deeper and get true insight into who your most valuable customers are and where they came from.
When you have access to these vital metrics, you’ll be equipped to make intelligent, informed decisions about your business and take things to the next level. If you have any questions or thoughts at all about this, please leave us a comment below.