Customer Lifetime Value Vs. Churn Rate: Which Is More Important?

CLV vs Churn Rate FT

There is a lot to focus on if you want your membership site to become — and remain — a success.

As well as ensuring your website is running smoothly and doing all you can do to promote your site to your target audience, not to mention creating new content, you also have to think about the lifetime value of your members and the churn rate of your site.

To simplify this aspect of running a successful membership, this article looks at customer lifetime value (CLV) and churn rate to help you get a better understanding of these two metrics and find out whether or not one is more important than the other.

Let’s begin…

What is Customer Lifetime Value and Churn Rate?

To ensure we’re all on the same page, let’s start by quickly defining what these two terms 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

Once you know how much profit, on average, a member of your site will generate, you can start to make more informed decisions when investing in your business.

If you know that the average customer lifetime value of your site is $100, and you have 100 members, your business should be generating $10,000 of revenue on average.

Armed with this information, you can then create a more realistic budget for your membership website, outlining how much you can spend on improving and marketing your business as well as the other costs involved in running your site.

If you don’t know how much each new member you sign up is worth, then you could end up 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 very much on the type of membership site you’re running and what the payment and subscription model looks like.

For a basic membership site, though, you could calculate the CLV of your members by multiplying the monthly subscription fee, for example, $20, by the average length of a typical subscription on your site, such as 6 months. Based on these figures, the CLV of a member of your site would be (6 months x $20 a month) $120.

However, if your membership site has a joining fee, of say, $10, this would increase the customer lifetime value in this example to $130.

Things get more complicated if your membership site has optional extras, such as the ability to pay more for access to premium content or you have multiple pricing plans. Maybe your site sells products that your members can purchase, giving you another opportunity to generate revenue from your customers.

Unfortunately, with membership sites, there are no hard and fast rules related to working out the average subscription length for a member.

However, if your membership site has been running for a while, it shouldn’t be difficult for you to find out what the average subscription length on your website is. Once you’ve found this out, you can work out your CLV.

As you can see, the CLV of a membership site is very important, 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 customer lifetime value.

However, while 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 as possible.

This is because churn rate refers to the number of members who are leaving your site over a period of time, which is usually a year. The higher the churn rate, the greater the number of members that are ending their subscriptions, and probably reducing the customer lifetime value of your site.

There can be lots of reasons why members are leaving your site.

Sometimes it can happen involuntarily, such as when their method of payment expires while they’re still members, however, there are some useful tools that you can use to end involuntary membership site churn.

Other times though, members simply leave a site because they no longer feel they are getting value from their subscription. This can be a more difficult cause to address, but there’s still lots you can do to reduce membership site churn.

Which Is More Important: Customer Lifetime Value vs. Churn Rate?

Unfortunately, there’s no easy answer to this question as both the customer lifetime value and churn rate metrics are tightly intertwined.

If your site has a high churn rate because members are canceling their subscriptions shortly after joining, then that will have a huge impact on the CLV of your site. As a low churn rate means your members are remaining signed up and paying their monthly fees for longer, this will result in a higher CLV.

With this in mind, both the CLV and churn rate are vitally important if you want your membership site to become, and remain, a success.

However, even once you’ve achieved a low churn rate, you can still do more to increase the CLV of your membership site.

How to Increase Customer Lifetime Value

One 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 the churn rate. However, if the price raises are implemented properly by providing your members with enough value to justify the higher subscription fees, you’ll be able to increase the CLV.

As well as, or instead of, increasing the membership fees, you can also try and generate revenue from your users in other ways. One option could be offering extras in exchange for a one-time fee, such as access to an online event or a product like an eBook. If your members are happy to pay for these extras on top of their membership fees, it could improve the CLV of your site.

Final Thoughts

Achieving low churn rates and high customer lifetime values are two very important aspects of managing a membership site.

If your site has recurring subscription fees, then reducing the churn rate will increase the customer lifetime value as the longer a user remains a member of your site, the more revenue they will generate.

Even if you can’t get your churn rate down, you can still increase the customer lifetime value. This is because it might be possible to raise subscription fees or sell other products and services to your members.

In most cases, the things you can do to reduce your membership site churn rate, such as adding more content, will also help you raise your rates, and in turn, increase the customer lifetime value as your membership site will be more appealing to your target audience.

Unfortunately, it’s not possible to say whether customer lifetime value or the churn rate of your membership site is more important. In most cases, they are two metrics you should pay very close attention to and be working to improve in tandem.

How will you increase the customer lifetime value and reduce the churn rate of your membership site?

Categories: Advice
About Joe Fylan

Joe uses WordPress to create websites of all types and loves sharing his experiences of using this software with other users. If you need a steady stream of great content for your website, or you want the latest WordPress news and reviews check out his writing services and WordPress blog.