In the world of SaaS and ecommerce, we find ourselves constantly turning to conversion rates to define our success. There’s a long user journey from first contact with a customer, through to their trial, onboarding and repeated use. We break that journey up into segments and spawn a product team to improve the section they are allocated. As product people, our goal is to get as many users as possible from A to B before the customer is handed over to the next team, our success is measured by this conversion rate. Being able to measure our team’s performance with a single metric is great … to an extent.
Is it measurable? Tick.Is it easy to explain it to stakeholders? Tick.
But as we slowly unpick our product experience, find new ways of guiding users through our product and remove points of friction, we come to a dangerous realisation.
Yes, I can increase my conversion rate, but I know full well that the user is going to drop off further along in the life cycle.
What got us into this mess?
Let’s boil companies down to their essence. Companies exist to sell products to an audience they come into contact with, the product and the audience and the 2 variables a company can play with.
In the ecommerce world, audience can be counted as traffic to your website. For apps, they’re app downloads, in the bricks and mortar world they’re the people that walk past your shop. For simplicity, let’s refer to the audience collectively as traffic.
Looking through the lens of monetising traffic, the perfect metric to measure product success is customer lifetime revenue per unit of traffic.
Obviously, it’s not feasible to measure this. Customers make repeat purchases spread out over many months (like Airbnb), in SaaS it could be years of recurring payments. It’s impossible to run a controlled AB test from the point we first make contact with a customer and their last touchpoint— In that time the product has changed! The type of customers we’re getting from Facebook ads have changed!
We choose to measure a segment of that journey clearly in our control and doesn’t require waiting around for half a year to get meaningful test results. Maybe it’s page landing to sign up, landing to first purchase, or repeat usage in 2 months.
Acquisition hacks cover up product market fit
But here’s the rub. If you’ve got strong product-market fit, users will push through the pain of your crappy acquisition experience. High intent users have a burning need for your product.
Forced to read lots of text to understand the 5 benefits of your product? No problem, they were sold after the seeing the first. Page looks shit on mobile? They’ll open a desktop view.
These users are also the ones who will most likely stick around longest, buying again and again because it’s the best solution to their problem. By improving your product flow, the users now coming through the funnel and pushing up your conversion rate are the marginal users with less intent. They don’t have a strong need for your product, but your onboarding was nice so they’re willing to give it a go.
Naturally, they’re less likely to be repeat users. By increasing acquisition conversion rate, cohort LTV has gone down.
Does that mean you did something wrong? Certainly not. You’ve now won more customers, brought in revenue and created the opportunity to drive repeat usage. The mistake comes in assuming that these users have the same LTV as the users you acquired last month who had a stronger need for your product.
Can you afford the same CPA if the next cohort’s LTV is lower?
Retention or acquisition?
If we look further along the journey, increasing a user’s LTV (more repeat purchases, upsells and cross sells) has double the impact. Obviously, it’s increased revenue from the existing user. What’s often overlooked is that this can be ploughed straight back into acquiring customers at a higher CPA and reach customers that you weren’t able to before. Where you could only access customers through organic traffic, now you can afford to carpet bomb an entire city with snail mail. Given the choice I’d pick higher LTV over increased acquisition conversion rate any time.
If this post struck a chord with you, I strongly recommend reading Andrew Chen’s essay on the Conservation of Intent, it helped me turn some of my amorphous thoughts into this post.