For example, if you make tilapia and put it on a warming pan for guests to eat, you want to know how many of your guests actually eat the tilapia fillet. If no one eats the tilapia fillet, you're spending money on fish that will end up in the trash.
Every time someone serves a tilapia fillet, that's a conversion. Your customer saw and accepted the offer. Therefore, you made money on that fillet. Ideally, you want to know what ratio of customers will take a tilapia fillet so you know how many to make each night without spending money.
It's the same with websites. You need to know how many people will accept your offer compared to the number of people who visit your website.
You can use the equation we described above to calculate your conversion rate, but that's not all. If you base all your decisions solely on conversion rate, you're missing out on potential profits.
When running a restaurant business, for example, it's not enough to know how many people convert on the dishes you offer. You also engineer database need to know how much each customer spends at your restaurant, how many drinks they consume, and other metrics.
The same goes for online businesses. If you want to maximize your profits, you need to know the bigger picture.
Customer Lifetime Value
How much money does the average customer spend on your business over the duration of their relationship with you? That's basically what customer lifetime value is about.
If a customer buys one item worth $99 and never returns, his or her lifetime value is $99.
If the same person buys a product for $99 every year for ten years, his or her customer lifetime value becomes $990.
Ideally, you want to convert high-value customers who will stick around for the long term.
You also need to track the value per visitor.
Let's say 1,000 people visit your website in a week. Thirty of those people buy $99 worth of products. But you can't just take those 30 people into account.
Your value per visitor is the total transaction value for the period ($2,970) divided by the total number of visitors to your site ($1,000). This means your total value per visitor is $2.97.