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Only three metrics matter for your online business

There are number of metrics that startups and websites obsess on. Some of the most overanalyzed yet non-useful metrics are number of visitors or pageviews on a website. The reason startups get obsessive about them is that these metrics are easy to use and are no brainer. Just slap some code on the website and you are ready to get insights on your startup’s progress, supposedly.

In fact, there are three metrics that a startup (or for that matter, any website or online business) should single mindedly obsess on accurately measuring and hence optimizing for:

  1. Monthly growth in number of paid users – what is the number of paid users you have this month v/s you had last month? Is the difference positive month after month? Focusing on growing number of paid users month after month should be top priority because it is what ultimately brings more revenue and gives you confidence to achieve even more success. Any growth less than 50% should be a cause of worry for startups because during a startup’s early days you are looking for hyper-growth. Eventually the number would stabilize as the business stabilizes but during the first year or so target for more than 50% growth for sure. And if by chance, growth starts going towards the negative territory, you should get alarmed and act accordingly.
  2. Retention rate of existing paid users – how many of your existing paid users canceled your product/service this month? Is that figure decreasing month after month? This metric is complementary to the metric above (growth in paid users) because while the above metric helps you focus on acquiring new customers, this one helps you focus on retaining existing customers. If customer growth rate is high but retention rate is low, then no matter how many new customers you get this month, next month you are back to square one. If, on the other hand, you have good retention rate, you will build great momentum month after month. You should definitely go out of your way to retain existing customers. If they leave, do (polite) exit interviews. Ask them why they leave and fix it in your offering. A good retention rate that you should be targeting at would be 75-100%. This means no more than one fourth of your existing customers should cancel your product or service in a month.
  3. Monthly Revenue – the amount of revenue you are bringing in month after month. This is a n obviously important metric but a lot of startups just don’t focus on it as much as they would like to. Instead they start focusing on number of visitors or other such proxies. Monthly revenue ties together the above two metrics plus one more important ingredient: cross-selling or up-selling. If you are acquiring new customers and your existing customers are getting retained, are they purchasing more stuff from you than they currently do?  As your startup evolves, you and your customers should move up the value chain and you should continually find new avenues to provide value to your existing retained customers.  And in the process, make more revenue per customer.

The three strategies of: a) getting new customers, b) retaining existing ones and c) up-selling and cross selling new offerings are not new. Management gurus have been discussing them for ages. Even then startups and websites get drowned in a flood of metrics and forget that they are there to make money.  They should better be optimizing how to make more money. And only way to optimize that is to focus on the right metrics. Do you agree?

3 Comments »

  1. I like how you call it Retention Rate vs. Churn Rate. I’ve been thinking of it as churn until now; same thing really, but churn feels like looking at from the wrong end of things.

    Comment by Adam — December 2, 2009 @ 10:32 am

  2. [...] the original post: Only three metrics matter for your online business « Wingify … No [...]

    Pingback by Only three metrics matter for your online business « Wingify … | My Business Blog — December 2, 2009 @ 1:50 pm

  3. I used to spend all my marketing budget and efforts on bringing traffic to my sites. But the mistake i was making was not following on from that point. In order to increase conversions you must employ a web analytics tool to tell you where your website is succeeding and where it is failing. Im using Clicktale at the moment which is serving me well, it has great functions such as real time videos of your customers journey through your site and heatmaps showing every click and scroll etc, not to mention the wide range of aggregate behaviour analysis it retrieves.

    Comment by Max — December 2, 2009 @ 9:54 pm

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