We know tracking your progress and metrics are important, but how do you measure your business in a way that enables you to make good business decisions?
In this episode Chris and Tony discuss:
- Why a lot of the key metrics people talk about will be no help to you
- How to track your business in a way that will provide a good return on investment
- Why you always have to focus on one element of the ARC approach, and it might not be what you think
- Ways that you can look at your customer data to know if you are really on track
Listen to The Mainframe below ...
The Right Way to Measure Audience Attraction, Retention, and Conversion
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Tony Clark: This is The Mainframe.
Welcome back to our continuing series on the arc reactor approach to digital marketing and digital commerce: the attraction, retention, and conversion. And the reactor is your automation strategy. How are you doing Chris?
Chris Garrett: I’m doing great, but I really think this time next year we should be in San Diego for ComicCon. I can’t believe we sat here had to watch You Tube and Instagram instead of being there.
Tony Clark: I know. I just came back from a road trip. We did a quick getaway. Been on the road visiting family, and I spent a lot of the time there on my phone trying to keep up with what’s going on — watching small versions of the awesome new Walking Dead trailer and the behind-the-scenes for Star Wars. It just looked amazing. Our friend Danny Sullivan is there with his son and he actually went to the Star Wars concert and everything, so I’ve been living vicariously through Danny.
Chris Garrett: It looks so cool. They all get a lightsaber. They went to a fantastic outdoor concert and poor Kevin Smith had an empty room because 6000 people left his hall to go to that concert.
Tony Clark: Exactly. I think the Star Wars scene basically dropped the mic right there. It’s going to be hard to top that next year for anybody.
Chris Garrett: But even the Agents of Shield and the Flash panel — it just looks so cool. I wish I was there.
Tony Clark: Yeah I know. Every year. But then I look at what it takes to get there, standing in lines … and I don’t know.
Chris Garrett: Yeah.
Tony Clark: It’s one of those things. It’s kind of a toss-up for me.
Chris Garrett: Yeah. Maybe just doing it once just so we can say we’ve been and done it.
Tony Clark: Yeah, exactly. Well let’s think about it maybe for next year.
Chris Garrett: It’s a good year for it though. The new Star Wars looks absolutely amazing. All the practical effects, and they all look so passionate about it. I think this was a good year for Danny to go.
Tony Clark: I think it’s awesome too, and the resurgence of practical effects in general. What Abrams has done with Star Wars and what we saw with Mad Max. And we’re starting to see movies and these genere films being made. Like real genere films instead of — I’ll use the terrible Green Lantern as an example, where basically it’s filmed in a giant green screen room and then everything is all done with computers.
Computer effects are great, but there is nothing like real practical effects and puppets and real makeup. The artistry that goes into creating this stuff. I love it. Like the Walking Dead behind-the-scenes documentary of the ingenuity and the engineering that goes into the gore and the zombies. To me that’s awesome. It’s nice to see a resurgence every now and then.
Chris Garrett: Well it ties nicely into the theme of our arc reactor series because you use the tool for the job, and for some things practical and miniatures is best, some things CGI, sometimes a blend of the two is required because of the additional matte paintings and the composition and everything where they bring the various assets together. It’s exactly what we’ve been talking about. Have a system, know the goal you’re trying to work towards and use the correct tool at the right time.
Tony Clark: Exactly, and it’s all about measuring. One of the things I love about MythBusters, they talk about a lot, is doing bench tests and doing small-scale testing to see if you need a practical effect versus whether this is better done on a computer, and that’s about measuring. Again, that ties into today’s episode of metrics and what it is you need to measure to make sure that you’re effectively using your attraction, retention, and conversion strategies to further your overall goals.
Chris Garrett: Yeah. And I think anybody that’s heard me speak before knows my aversion to math. It just gives me all kinds of cold sweats, panic attacks, and anxiety, but Tony you’re the COO, this is the world you live in.
Tony Clark: It is. And it’s all about executing effectively. Part of operations is just measuring. It can be overwhelming. We’ve just gone through a huge exercise, and we won’t go into a lot of detail, but we were pulling out some key metrics for the Rainmaker Platform. And we had to do our own data mining to pull things out and some other measurements and things to see what we want, what we knew intuitively, and what we felt what was happening.
As we always say is the main metric we measure is revenue and profit. We could tell by those metrics that things were going very well, but it’s nice to have data that back that up and it allows us to decide different strategies. Different marketing strategies. Different ways to approach an audience.
Why a Lot of the Key Metrics People Talk about Will Be No Help to You
Tony Clark: Going through that exercise of pulling this data together — it was overwhelming, but now we have solid numbers to work from. The thing is you need to start small. You need to start basic. And you need to know what it is you need to measure to effectively get your goals across. Not just whatever happens to be the latest buzzword or the latest thing that you’re hearing out from the Silicon Valley circle.
Chris Garrett: That’s the thing. There’s a lot of vanity metrics out there and some of the metrics we do track — they’re useful in its place, but we get overexcited about them. One of them is unique visitors and return visitors. It’s not actually possible to track those 100% accurately, but it is the thing we use as a benchmark to compare against everybody else.
The reason we can’t compare it really is because you can think of a visit or a session as page views within a certain time frame, but it could be that the person is just reading and then they view another page. How would you tell if that person was just reading a really long article and then viewing another page when it was two sessions? You have to draw the line somewhere.
Visitors — you can tell if an IP address computer has visited your site, but that person might get frustrated with the mobile experience and then switch to desktop. That’s not two people, that’s two IP addresses — one person. It’s actually one session. We see that in e-commerce a lot. People abandon the cart on the phone and then they do the transaction on the desktop. A lot of these things you can only really measure against your past success. You can’t really measure against the industry benchmarks too well because we know a lot of it is based on assumptions.
Tony Clark: That’s true. And knowing what you need to measure for your particular business is really what is the most important thing. It’s the main subject of this particular episode because we’re not just talking about the general metrics that you need to measure right? We’re talking about those things that your particular business needs to make actionable business decisions. It may be different than what somebody even in your same industry needs because of your particular audience, and your particular setup, and how you’re generating your audience. How you’re marketing to that audience.
Those are the things you need. To really understand what it is you need to measure before you start measuring. Just using some industry average or some industry example is a mistake. There are people that are going to tell you, “You have to measure this or you have to measure that.” That’s wrong. The only thing you have to measure is how much money you’re making because that is what is a measure of a successful business because we’re talking about in a business environment here.
One off from that is how do you measure that? For example, advertising cost per click. If most of your marketing or most of your traffic comes from advertising, then that is something that you’ll want to measure. But if you don’t do a lot of advertising, or you’re starting to get into advertising, then that might not be as important of a metric. But you hear people saying, “oh you gotta measure this, you gotta measure this.” It’s really about knowing what it is you need to measure for you. We’ll give some examples as we go of things you’ll want to look for for your particular business.
Chris Garrett: Yeah, and that’s one of the reasons we’re a content marketing-driven business, because that’s how we chose to develop the business and continue to develop it — that’s our strategy. A lot of the metrics are from that advertising world. As Tony says, the cost per click is very much an advertising-based metric. Other metrics that come into play are coming across all businesses, but it always comes down to how much are you making? How much is it costing you to make that? Because they’re the things that can allow you to make a business decision.
Can I afford to spend more on my marketing so I can make more money in revenue and profit? If you’re only looking at things like hits and page views, then that is not going to allow you to make a product-based or service-based business decision. But for your BuzzFeeds and those kinds of companies that make all of their money from exposure advertising that might be the key thing for you. You have to look at what drives your business. What the constraints and the assets of your business and how you can measure the growth or the effectiveness of those.
Tony Clark: You can look at specific things like your average orders. Your average visitors. But really what you’re trying to get to is a lifetime value of the visitors to your site. Either a customer or starting with a lead all the way through your funnel process. That’s something that almost any business is going to want to measure because you’re looking at …
Some people will measure subscribes versus unsubscribes. Well there’s a lot of time where unsubscribes were not a bad thing because it’s a funnel of sorts. You’re trying to get rid of people who aren’t interested in what it is that you’re providing. An unsubscribe isn’t necessarily a bad thing if those that are staying subscribed are moving further along in the funnel and you’re measuring the lifetime value of that particular person.
That’s one of those where people get hung up on, “well, I’ve had these unsubscribes.” A lot of times we found, especially with lists, that certain promotions will have people unsubscribe. We don’t look at that as a failure, we look at it as culling of the list — a cleaning up of the list, because now we have people that are willing to take a step or take the actions that you want to move further into the funnel or to make a purchase. Which ultimately, that’s the goal.
We’ve talked about that over and over on the series. That you want to go from cold lead, to warm lead, to an interested party with engagement, to customer, to return customer. And that’s one of the things that you can measure by looking at this lifetime value of somebody versus just a subscribe versus an unsubscribe.
Chris Garrett: Yeah, the unsubscribe could be a signal that you’re focusing on your precise target market. It could be that you’re annoying people and that you really need to look at what you did to cause those things. It’s being aware of what the metrics mean as well as what the metrics say.
Tony Clark: That’s absolutely true, because you can get caught up in measuring something but not really understanding what it is that you’re seeing. Having a better idea of what is it –not only what you’re measuring, but what is the meaning of that measurement. And that’s why it’s important to follow that measurement through to a success of some sort, right?
How to Track Your Business in a Way That Will Provide a Good Return on Investment
Chris Garrett: Yeah. And it goes back to what you were saying. We’re driving towards revenue. We’re driving toward profit. What gets us to that goal? What is going to help us understand our incremental improvement towards that goal? They’re the metrics that we need to focus on. The ones that give us meaning, allow us to make decisions, and give us insight into what to do next. Focusing on those things is going to actually free up your mind and your business instead of just bog it down in numbers. And it’s actually a less stressful approach because you’ve got that dashboard to be able to see how well it’s doing.
Tony Clark: Exactly. Let’s go through an example here using a subscriber-type model, a membership-type model, or say a software-as-a-service-type model where there’s a recurring piece to it, because that’s something we always preach about — trying to get on a recurring approach — so let’s talk about that.
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Chris Garrett: Okay Tony, let’s set up the scene for the type of business we’re going to talk about now. This is a recurring revenue membership or subscription type business, right?
Tony Clark: Right, so it could be an education program like a teaching sales-type thing you put together, or it could be a recurring software product. Let’s start with an information product because that’s something we’ve done over and over again, measured, and looked at. Let’s say this is an information-type product, but it really can be any type of subscription with a recurring model.
Chris Garrett: One of the reasons we talk about the subscription is because of that lifetime value. You want to start with what that is about?
Tony Clark: So the lifetime value is how much an individual customer is worth to you over the lifetime that they are with you. You’ll hear a lot of these what I call “BS metrics,” and I think churn is one of them. You hear about this a lot. Churn to me, and some people are not going to like this, but to me churn is what people in Silicon Valley who do nothing but talk about the latest funding round like to talk about. This is sort of porn for them. But for a real business it really means nothing.
You could have a high, wonderful turn rate. However, if you’re not making any money, if the lifetime value of that customer is a dollar, then who cares? If your churn rate is really high, but the lifetime value of that customer is $10,000, then who cares? You’re making lots of money. That’s one of those metrics that I think is a “BS metric.” As opposed to lifetime value, where you can specifically see how much a customer is worth to you over the lifetime that they are with you. That’s something that you can measure specifically.
Chris Garrett: If you know that the lifetime value of your membership is x — for example, say the lifetime value of your customer is worth $200 on average — then you can actually work back and determine what your marketing budget should be. What you should aim for as a customer acquisition cost.
Because if you can, on average, make a certain amount of money from that customer, then to acquire that customer you can actually spend up to that. Now it goes back to your margin and your profit. You can’t spend all your lifetime value on just acquiring customers and then have no money to pay bills and wages, but it does give you something to work from. You can work back and say, “Okay, what should my customer acquisition cost me?”
Tony Clark: Exactly. You’re looking for the average revenue per customer. How much does this person make for you. Or an average aggregate of customers. And then that will determine advertising budget and it will also help you determine margins. Let’s say you have a really effective content marketing strategy. You’re using social and you’re using content to engage. You’re using cornerstone content to draw them in. You have a really solid list and a really solid lead program that nurtures on through the funnel.
Effectively, once you put that in place, your acquisition cost per customer goes way down. Because after you’ve done all the work, you keep it up, and then you can look at the margin between that and what you’re actually getting for a customer.
Now also look at if you’re using advertising mainly to get customers, which is an effective strategy for some people. What is the cost of advertising to that customer to acquire that customer versus what I actually make on that customer? The average revenue per customer over the lifetime. And you can see what your margins are there.
Chris Garrett: One of the things we do as a business is we invest a lot in our customer service and support because that is mostly what we sell — if you look at it that way — but also because retaining customers and keeping happy customers doesn’t only give you those cases and testimonials and referrals.
It also is a lot more cost effective to keep customers happy than it is to be constantly trying to acquire new ones to replace the ones you’ve lost. Some people say it cost like six to seven times more to acquire a new customer than it does to keep one happy. This thinking allows you to justify investments in things that in other business are seen as a cost. I see customer service as being an asset to our business.
Why You Always Have to Focus on One Element of the Arc Approach, and It Might Not Be What You Think
Tony Clark: Customer service is really important to us, and we’ve always talked about — Brian and I say all the time that the customer service is marketing and it’s about retention. So the real number that you would measure versus a fake number like a churn is customer retention rate. How many of your customers are you retaining? First, you have to have a quality product to retain them, so your refund rate goes down. The people aren’t just jumping ship and not returning. Especially on a subscription model, you want to keep that subscription going. Customer service will also help with that to allow you to extend that retention.
Customer retention rate is basically how many customers you’ve acquired in the month. So you have a start number. This is the number of customers we’ve had at the beginning of the month. You look at the customers you’ve added, and you take those out because you’re not adding those in yet. You’re seeing the retention, and then you see how many you’ve lost in that time period. That gives you a customer retention rate — a percentage of how many people are staying on your subscription program over time. That helps to build out to what your lifetime value is.
Chris Garrett: If you have a membership site, that retention will actually turn into a number of days active or number of months active. If you’ve got a monthly membership subscription, you can usually expect to start see people dropping off at the four to six month margin. You can expect a certain amount of revenue, and this is just natural loss of customers because people’s lives and situations change, and because people might get enough out of the early months that they don’t need to keep on, or they might not like it. You’re going to lose a certain number of people.
If you know that you’re, on average, going to have people at 5 months, then you know how much you can afford to spend. You can project your costs. You can project your profits. And you can make decisions about things. And you can also work on saying, “Okay, what awesome things am I going to do at four months, five months, six months? What can I do to keep people anticipating future value so they do stick around?”
Tony Clark: Exactly. And that helps you determine what your average sales per customer are. Then you can also track new versus cancel, because you’re looking at the new customers you’ve added versus how many have dropped off. What you’re trying to get at is a growing monthly revenue or a quarterly or a yearly, but monthly is easier to measure for a lot of people. Especially because you may have a monthly membership program.
What you’re trying to do is grow that revenue over time. Now growing that sometimes is growing the number of customers, but keeping the average amount per customers the same. Also your retention rates — versus somebody who’s new and somebody who’s cancelled — if you can keep that rate steady and grow your customer base, your revenue will grow. Another way to do it is to add new products or upsells. Your customer base may grow but your upsell — the value per customer may grow. Depending on what is it you’re selling — your product and your market — it may be better to do an upsell type of thing, right Chris? You can add customers. As fast as you’re adding customers you can also add the value that customer is worth.
Ways That You Can Look at Your Customer Data to Know if You Are Really on Track
Chris Garrett: Yeah. Following from what Tony’s saying, you can see that dials start appearing in your mind that you can start tweaking up and down. One of the things you can do is acquire more customers. Well how do you acquire more customers? Maybe you have an entry level product that’s low in cost, easiest to say yes to, low risk, and that floats your funnel with new customers rather than new prospects.
What does Copyblogger do? We have products like themes, which are you pay once and you own it. It’s low cost, low risk. You see what you’re getting and that puts a lot of customers into our business. But we’ve also got recurring revenue products like hosting Rainmaker, or the Authority membership where they’re monthly but they don’t stay static. If somebody becomes an Authority customer they may also become a teaching sales customer. A Certification customer.
The average value of a customer increases because they’re gaining more value. And also it means that they become more loyal because they’re deeper into the ecosystem. Not only do you have the opportunity to look at those numbers and say, “Okay what’s the constraint I need to work with here? What can I do about it? I need more customers. I need higher average values.” You can make decisions. And you’re inspired, then, to make those decisions, and you can see what you need to do.
Tony Clark: Exactly. And that’s what measuring is all about, is to see what’s working and what’s not. You can look at things like price points. Like are your prices too high, or in a lot of cases the price is too low. You’re finding that you’re getting customers and retaining them, but the price for the value and the value that you’re providing isn’t high enough. You can raise the price for the next batch and then you can measure to see, “How many more customer are dropping off at this point versus this point now that I’ve raised the price?”
You may find that you’re not losing as many as you thought, and the ones that are sticking around are now worth more. They have a larger value to you per customer. Those are the important things to measure and, like Chris was saying, you can do these dials in your head. You can actually see, “I’m going to measure this versus this.” Just keep in mind that the goal is really to see how much value you’re providing and how much value you’re getting per customer as you grow in customer size and as you grow your product line.
Chris Garrett: And long-term, because all of this stuff needs a long-term view point. Lifetime value. We’re not talking about your sales conversion numbers. Because we’ve seen businesses over and over again that have had massive first-day sales and then a week later they got massive refunds, charge backs. They get a bad reputation. This is not what we’re talking about.
We’re talking about happy customers that come back to you. They’re loyal. They bring friends, they’re saying good things, and they’re giving you great feedback so you can improve. Really, that’s the best kind of business. It’s a long-term business with happy customers that you’d actually like to meet face-to-face and shake their hands instead of those scummy short-term quick wins where the customer retention is days rather than months.
Tony Clark: Because what you’re trying to do is build a business. You’re trying to build an organization, and you’re trying to build a relationship. And when you do that, there’s nothing but success. Because as you grow that relationship, you can offer more value either in the existing product or through a new product to that customer.
And because you’ve demonstrated that you continually provide value, you’re able to develop this long-term relationship — this lifetime value. By doing that you are really growing an organization. Whether you stay one person forever with maybe just some help with support, or you grow to a 100, 200, 300-person organization, you still take the same strategy of continuing to provide value over time and then measuring how that value is being received by the customers and then continue to add on to it as you grow.
Chris Garrett: If you’ll listen to the No Sidebar podcast, I was interested to hear Brian Gardner talk about the reason he wanted to join forces with Copyblogger and form this bigger Copyblogger organization with StudioPress. He could see his customer base growing. His work load was just increasing, increasing, increasing. He was doing 80-100 hour weeks with no end in sight.
He made a huge decision, it was like a scary decision for him to say, “Okay we’re going to fold in with these other people that I barely know.” But it was the best decision for him, because it freed up his time, and it was safer because it wasn’t all on his shoulders. It could be that the numbers tell you radical things of very tiny day-to-day things, but without tracking the number you will not know.
Tony Clark: Exactly. We talked about these arc reactor metrics that you need to be measuring. What are the key takeaways? What are the main things we need to be doing here on our key attraction, retention, and conversion marketing metrics?
Chris Garrett: I think the key takeaway for me is that you need to be tracking what help you make business decisions in your particular business. And yes, attraction metrics like your visitors, your customer click, and the subscriber numbers — all of those are very important. For us, the retention is the key part. Like customer loyalty, the customer value, and growing that customer value. That for me is the biggest takeaway. What would you say is Tony?
Tony Clark: I would say the same thing, because really what we’re getting at is what you’re trying to do is grow a reputation. You’re trying to grow an organization. And you do that by providing value. The metrics that we use to measure that are the lifetime value that we’re providing the customer over time and our retention of that customer over time. And that really is the key metric that you’ll be measuring for using these key strategies.
Chris Garrett: Cool. In the next episode we’re going to take more about segmentation as part of the attraction, retention, and conversion. And please do give us at rating on iTunes, we’d love to see you.