The gift that keeps on giving
For a marketer, the ultimate joy of joys is receiving a conversion. When a visit converts you receive praise and are told to "do more of that." Alas, you have a limited amount of time in your day/week/life and so you must channel your resources towards those activities which generate the most value.
how to value a customer
As with a peacock, with a customer you're likely getting more than what meets the eye. Every customer conversion you see is the beginning of a longer conversion process. In very rare cases, a business will receive only a single per-customer conversion. Here's a basic framework for the customer conversion journey:
- Entry into business: lead generation
- Micro conversion: signup to email list, free trial, app download etc.
- Lead warming: your business needs to prove the value your customer will receive after converting
- 1st time conversion: 1st purchase, associated with a 1st purchase AOV
- Customer reengagement: outreach elements of your CRM strategy
- Repeat conversions: subsequent purchases and subsequent AOV's
At times some of these may happen at the same time, for example 2 & 4. For a single acquired customer, the sum of 1-6 can be summarized as a customer lifetime value (LTV).
What business models can use a LTV?
Any business where you'd expect multiple conversions can and should use LTV analysis to judge marketing acquisition efforts.
- SaaS: recurring subscriptions and future upsells
- Digital goods: recurring subscriptions and future upsells
- Traditional eCommerce: upsells, nascent category and repeat purchases
- Apps: It's likely they're trying to sell you something... more than once
Also:
- Your favorite golf course: if golf is your passion, you'll likely be going back
- Your local farmer's market stand: once you find "the perfect carrot," you'll never settle for anything less
- Your family funeral home: while you will only die once (YOLO) - you likely have many family members that might need funeral services. Naturally, lead times for this business model will vary and I have few suggestions for "customer reengagement" CRM activities.
Why is LTV the right metric?
LTV is just a fancy way of saying that your customers are worth more than their initial conversion.
- LTV's give you a better feel for the value of one acquired customer. Based on this you can re-allocate budget and how much you'd be willing to spend on a single visit.
- It incentives your business to provide stellar customer experiences so that customers come back. When they do so, it'll likely be at a lower CPA than that of their first conversion.
- Your competitors do it. Your investors want you to do it. It's not rocket science.
What thresholds should I use for my LTV calculation?
The window of time in which you should consider repeat purchases from a single cohort is highly dependent on how much cash your business holds. More specifically, the maximum LTV threshold should be within a period of time before your business runs out of cash.
It's likely that your business generates cash, but likewise it burns cash on overheads and other fixed costs. If you're a startup, you might also have some cash from your amazing investors. Your aggregate cash position is defined by the sum of these three, and is represented in the following graph.
In order to not run out of cash (go bankrupt), the maximum window in which you'd be willing to look at customer LTV would be the point when your business runs out of cash. You could likewise bake in a buffer threshold, in case you miss your targets, need to raise more cash, or need to pivot your business to not run out of money.
Calculate your LTV
Once you've found the point in time where your business runs out of cash, simply use this as the maximum threshold for customers to convert and repeat. You can back this amount into a per-visit LTV amount, and use this as a maximum visit cost threshold.
Basing your acquisition efforts on an LTV will likely allow you to allocate more spend to acquire more valuable cohorts.
My business will never run out of cash
Congratulations! Sounds like you're profitable. You can still use LTV analysis to define the value of your customers. Choose an industry and business appropriate conversion threshold, be it 3, 12, 36, 60 months, and you'll be on your way to better understanding the value of your customers.
