Conversion, Lead, and Lag Indicators – Weighing in on Hamel-Sukmanowski Discussion

Hamel got things started with “Conversion is King” blog post:

So I was talking with my co-worker Patrick Glinski about my notion of conversions being the only metric that matters and he brought up an interesting problem with it. If you have a business, and your only concern is sales (conversions) then over time you will lose because you are ignoring the other parts of your business. To continue with my Rolex example, if Rolex only focused on the sale, the conversion, and not on the aspiration, eventually everyone who could buy one, would have then Rolex wouldn’t have any new potential customers.

To which, Sukmanowski replied:

Take one of mine and Novo’s favourite metrics for example – recency. The traditional marketing research person would tell you that the way in which they define a “customer” is “anyone who has bought from you at least once AND WHO IS LIKELY TO BUY FROM YOU AGAIN”.

I love this definition because you’re not really a customer of mine if you never ever plan to come into my store again. You were a customer then, but not now.

Recency is actually a “lead” measure for future conversions. If for example an e-commerce website notices that visitors are allowing more time to pass in between visits, then this is a key lead measure that their sales could potentially be off in the next period.

To which Hamel Replied in New customers vs. old customers:

I would like to point out that recency is only important in its relation to conversions. Conversions are the hub of all metrics because it is the most important metric. Mike has definitely given me stuff to think about. Thanks Mike.

And it’s at this point that I’ll throw myself into the line of fire.

There are different flavors of Recency. There’s the flavor of Recency that uses time since conversion as the measure. There are other, more subtler flavors, time since last visit, for instance.

Different products will have a different conversion recency periodicy, and Novo argues this in Drilling Down. A vehicle purchase will have a periodicy measured in years, whereas consuming FREE! content from a website (if that’s considered conversion, refer to a previous post here about defining conversion) will have a recency periodicity measured in days, and in some cases, an irregular hourly type of cycle. (For instance, checking the New York Times or Bloomberg five times a day while at work, then once at 9pm (if your work day ends at 8:59pm) and then not touching it again over the weekend.)

I believe that recency is a great measure of ‘habit’, and a habit is just a simpler way of saying “periodic behavior”. Habits tend to be sticky, and not necessarily because there’s a total ‘addiction’, though, there’s certaily an element of addiction to routine. (How about I just say that I’m conflicted with the semantic difference between something that is habitual and something that is an addiction?)

Recency is powerful like that, and it has to be tempered with frequency to derive a good LifeCycle.

To the question of 10 new customers over 10 retained customers, I think I’d prefer 10 loyal customers. I don’t have to pay to acquire new customers, I just have to pay to keep the loyal ones I have happy. Certainly, those costs increas, but at some point, those costs of retention start to exceed the cost of acquisition…at which point, you let them go.

Ultimately though, there’s some breakeven point, as Hamel has alluded to.

There’s something to LifeCycle management that’s quite important.

I’m glad that Hamel and Sukmanowski have started this up – it’s what blogging should be.