As a business owner, you have to ensure the success of your website. And a big part of that process is considering the lifetime value of your members and the churn rate of your site.
In this article we'll look these two important factors — customer lifetime value (CLV) and churn rate — to help you gain a better understanding of them and their importance to the success of your site.
Let’s get started!
What are Customer Lifetime Value and Churn Rate?
We'll start by quickly defining what CLV and churn rate mean in relation to subscription and membership sites.
Customer Lifetime Value Explained
Customer lifetime value (CLV) is a term used to describe how much each customer (or member in our case) is worth to your business.
Why You Need to Know Your CLV
Understanding how much profit, on average, each member of your site generates allows you to make more informed decisions about investing in your business.
If you know that the average CLV of your site is $100, and you have 100 members, your business should be generating $10,000 in revenue on average.
Armed with this information, you can create a more realistic budget for your membership site. This information helps you outline how much you can spend on improving and marketing your business, as well as give you insight on how to manage other costs involved in running your site.
Knowing how much each new member you sign up is worth also helps you avoid spending more on acquiring those new members than you’ll get back in subscription fees and other transactions.
How to Calculate Your CLV
How you calculate your customer lifetime value depends on the type of membership site you’re running and what its payment and subscription model looks like.
Using a basic membership site as an example, we can calculate the CLV by multiplying the monthly subscription fee by the average length of a typical subscription on the site.
Imagine your membership costs $20 per month, and the typical length of a membership is six months. Based on these figures, the CLV of a member of your site would be six months times $20 per month, or $120.
If your membership site also has a sign-up fee of $10, the CLV would increase to $130.
Things get more complicated if your membership site has optional extras. These extras might include things like access to premium content at a higher cost, multiple pricing plans, or separate products for sale.
In any case, a look back at your records and some general averaging will allow you to calculate your unique CLV regardless of your pricing structure.
As you can see, your CLV is very important to the health of your membership site, but is it more important than the churn rate?
Churn Rate Explained
Knowing the churn rate of your site is just as important as knowing the CLV. And, as you'll see, the two are closely related.
However, whereas you'll want to increase the CLV of your membership site so that it generates more revenue, you’ll want to reduce the churn rate as much you can.
Churn rate refers to the number of members who leave your site over a period of time — usually a year. The higher the churn rate, the greater the number of members ending their subscriptions, thereby reducing your site's CLV.
There are many reasons why members leave your site.
In some cases, subscriptions can end involuntarily, such as when a member's method of payment expires. Fortunately, this problem has an easy fix. We suggest you take a look at a few useful tools you can use to end involuntary membership site churn.
However, in some cases, a member will leave because they no longer feel they're getting value from their subscription. This is a more difficult problem to address, but there are still many things you can do to reduce this type of membership site churn.
Which Is More Important: Customer Lifetime Value or Churn Rate?
There’s no easy answer to this question, because the CLV and churn rate metrics are tightly intertwined.
As mentioned, if your site has a high churn rate because members are canceling their subscriptions shortly after joining, that will have a huge impact on your site's CLV.
A low churn rate, on the other hand, means that you're retaining your members and they're paying their monthly fees for a longer time — this will result in a higher CLV.
With that in mind, both the CLV and churn rate are vitally important to the success of your membership site. However, once you’ve achieved a low churn rate, you can still do more to increase your site's CLV.
How to Increase Customer Lifetime Value
One simple way to increase the customer lifetime value of your site is to raise your membership fees.
Raising your prices does have the potential to increase your site's churn rate. However, if the price increases are supported with enough value to justify them, you’ll see your CLV increase.
You can also generate revenue from your users in other ways to increase your CLV. For example, you can offer extras in exchange for a one-time fee, such as access to an online event or a product like an eBook. If your members pay for these extras on top of their membership fees, it will improve your site's CLV.
Achieving a low churn rate and high CLV are two very important aspects of managing a healthy membership site.
If your site has recurring subscription fees, then reducing the churn rate will increase the customer lifetime value. It's simple: the longer a user remains a member of your site, the more revenue they will generate.
If you're struggling to get your churn rate down, you can still increase CLV through subscription fee increases or by selling other products and services to your members.
In most cases, the things you do to reduce your membership site churn rate, such as adding more content, will also allow you to raise your rates. Those efforts should also increase your CLV by making your membership site more appealing to your target audience.
When it comes down to it, it’s not possible to say whether the CLV or the churn rate of your membership site is more important. The two metrics will always work in tandem.
Do you have any tried-and-true methods for increasing the customer lifetime value and reducing the churn rate of your membership site? Let us know in the comments section!