Hack84.Understand Frequency and Lifetime Value


Hack 84. Understand Frequency and Lifetime Value

Not all customers are created equal, nor are all customer acquisition strategies. Frequency and lifetime value are powerful metrics to help you differentiate customers and the content they engage in most profitably.

Repeat visit behavior metrics are a good place to start understanding customer retention. The idea is simple, and measurement is very straightforward. But many ideas that are "simple" are not "the best way," and this is true with using the repeat visit metric to determine visitor value. When you are just starting to look at visitor behavior, it's a fine toolcertainly better than not paying any attention to retention or visitor value at all. But once you start learning about the profitability implications of managing visitor retention, you will most certainly ask, "What's next? How can we do this even better?" When you get to that point, you'll need a better tool set that provides a more meaningful picture of visitor behavior.

6.5.1. The Limits of the "Percent Returning Visitors" Metric

So what's wrong with using repeat visits? For one thing, the repeat visit metric is bipolara repeat either happened or did not, and there are certainly more types of visitors than two. For example, the repeat visit metric doesn't take into account the difference in value between a 200-time visitor and a 2-time visitor, and you probably would agree the difference in value here could be significant. So we will need to account for these differences in value in our visitor retention management thinking.

In addition, some web sites, particularly commerce sites, have access to very specific measures of customer valueactual sales. So for these sites, we want a retention model allowing the flexibility to be more specific about visitor value.

6.5.2. Use Frequency and Lifetime Value to Better Understand Your Visitors and Customers

There are two additional measures of visitor value we can use on the Web that address the shortcomings of the repeat visitor metric: frequency and lifetime value.

6.5.2.1 Frequency.

Frequency is a more accurate measure of visitor value than repeat visits, and if the site doesn't sell anything, may be the most accurate visitor value metric you can use. Frequency goes beyond "repeat visitor" status to count how many times a visit has occurred during the tracking period. Most companies would like visitors to come back to a site. Some sites depend on it because visits are tied to revenue. When trying to allocate resources towards various projects on the web site, it might make sense to allocate more resources towards the areas generating visitors who come back to the site more than twice. Low-frequency visitor segments are often "accidental" or can be "noise" and may not be worth spending money on; the example of the 200-time versus 2-time visitors comes to mind here. High-frequency visitor segments can be the most valuable and loyal, especially if the site is ad supported and relies on this activity to generate page views.

When trying to decide how to group number of visits into "low" and "high" frequency, a good rule of thumb is to draw the line based on the average number of visits the "average visitor" makes before he engages in a conversion event. For example, if you're an online retailer and you know that most of your customers visit the site at least three times before they purchase, you can define "low" frequency as less than three visits and "high" frequency as more than six visits (double the minimum number of visits to convert). Keep in mind that you will always have fewer high-frequency visitors than low-frequency visitors and that your definition of these groups should reflect this rule of thumb.

6.5.2.2 Lifetime value.

Lifetime value in this context is the total sales generated since tracking of the visitor or customer began. This metric is self-explanatory; more sales are normally a good thing for a web site. When you are just starting out with retention management, tracking sales to put a monetary value on a segment is technically probably the easiest thing to do. Later on, you may decide to use a different measure of monetary value, such as "gross margin" or "gross margin net of acquisition costs." It really doesn't matter when examining behavior (it does when looking at profits though) as long as you are consistent in the way to determine "value" across all the visitor segments.

6.5.3. Use Frequency and Lifetime Value to Segment Your Customers

Frequency and lifetime value are used in visitor segmentation in the same way as the repeat visit metric. Segment visitors by some characteristic and then compare the value of the segments to determine where the greatest value is generated. How should you divide or segment your customers to analyze repeat rates? How about using these characteristics:

  • Media used to acquire the visitor or customer, including the specific search engine and keyword phrases used to find the site

  • Offer you made on the initial visit

  • Ad copy used to present the offer

  • Content areas visited

  • Products or categories purchased from

When you segment your visitors by these characteristics, you discover significant differences in current value by source or experience with the site, just as you found with repeat visits. There is one slight difference, however, and that is the way the metric is calculated. When you are using repeat visit percentage, you are looking at the percentage of visitors who completed more than one visit. When you are using frequency or lifetime value, you are looking at the average across all the visitors in the segment.

It is very useful to examine frequency in the context of the average lifetime value of visitors. Consider the following data, where we see the frequency and lifetime value metrics by content area of the site visited:

Table 6-2.

Content area visited

Average frequency

Average lifetime value

News

66

$83

Sports

10

$33


In this case, it doesn't matter whether frequency or lifetime value is more important to your web site; visitors viewing news have much higher value than visitors viewing sports. It would make financial sense to reallocate resources away from sports coverage towards news coverage to attract and retain high-value visitors.

With this in mind, different types of sites will use frequency or lifetime value preferentially:

  • If you can directly assign a dollar value to a visitor segment, as with commerce and most lead-generation sites, lifetime value is probably the measure to use, because it relates directly to the bottom line.

  • Content, branding, and self-service sites lacking direct revenue-generating components should use frequency.

  • For some self-service sites, segments with low frequency might be seen as "best," since a visit to the site is evidence of a "problem" that needs to be solved.

6.5.4. Use Lifetime Value per Visit to Drive Action

What if the table above looked like this, with low frequency and high lifetime value for news and the opposite for sports?

Table 6-3.

Content area visited

Average frequency

Average lifetime value

News

10

$83

Sports

66

$33


Well, you just have to decide which is more important to your business model; I'm betting it's probably lifetime value. But think about what else this table is saying to you: on average, news delivers $83/10 visits, or $8.30 in lifetime value per visit; sport delivers $33/66 visits, or $0.50 per visit. This discrepancy strongly suggests that you should compare these two content areas and find out if there is something being done in news that could be ported over to sports. Why is news so much more productive than sports on a per visit basis? Is it the way the content is displayed? Navigation? The use of engagement devices?

Suffice it to say, by understanding the frequency and lifetime value of your customers, you should be able to begin making better decisions about how to interact with them. By examining the lifetime value per visit on a perpage, product, or category basis, you can start to identify differences in how customers bond with you over time. By using this information in tandem with the continuous improvement process [Hack #2], you can take advantage of this extremely valuable data about your "best" customers.

Jim Novo and Eric T. Peterson



    Web Site Measurement Hacks
    Web Site Measurement Hacks: Tips & Tools to Help Optimize Your Online Business
    ISBN: 0596009887
    EAN: 2147483647
    Year: 2005
    Pages: 157

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