When you run marketing based cohort analysis you'll frequently be forced to constrain assumptions to the single cohort with which you're working. More specifically, your LTV threshold needs to be applicable to the cohort.
To recap:
- If your business is profitable: the LTV threshold defines how long you're willing to wait for your acquired cohort to pay off.
- If your business is not profitable: same as number 1, but also the LTV threshold must be equal to or less than the amount of cash runway you have, otherwise you run out of money and go bankrupt.
The LTV threshold duration is generally constant against all of your campaigns. This creates a standard set of rules for your marketing efforts to be judged against, and defines the relative performance of multiple campaigns.
Why cohorts layer
When running marketing cohort analysis within a time constraint, you're inadvertently drawing an arbitrary line where your business doesn't consider revenue from future cohorts. As you acquire future cohorts, new cohorts build upon, or "layer," on top of one another.
In the example above where numbers represent absolute conversions, in January you wouldn't recognize cohort conversions from from February or March, but in February you'd layer the newly acquired cohort on top of January's acquired customers. A similar logic would be used for March and all months into the future.
Growing faster = layering faster
The speed at which your cohorts convert and re-convert within your LTV threshold is your cohort layering momentum.
This is similar to sand being shifted from one sand dune to another, where individual grains of sand are potential customers and the wind is the sum of all possible sales re-engagement activities available in the ecosystem. Faster wind blowing in a single direction (your marketing efforts) will yield a faster shift in sand (more customers) to the next dune (acquisition campaign cohort).
The sum of all cash in your business is represented by the curves in graphs A-C. Your cumulative cash position is a function of your cash burn on overheads & fixed costs, cash inflow from sales, and external cash from loans or investors.
Graph A:
In this scenario you will run out of money at the red point, and anything to the right will cease to exist. Your business is either burning too much cash too quickly, not selling enough or selling a too low of prices, or you have too little external buffer cash to sustain your current cohort layering momentum.
Graph B:
You'll breakeven. Here your cohort layering momentum is fast enough to just hit the $0 mark at the yellow point, but you never run out of cash. You should consider increasing your layering momentum or build a safety buffer in the event that one of your future marketing campaigns fails.
Graph C:
Nice work, you're profitable! You never run out of cash in graph C because your acquired customers purchase and re-purchase fast enough to cover your overhead expenses, and you need no cash infusion from investors.
Ways to increase cohort layering momentum
Even if you're profitable, the upside of making cohorts layer faster is that you will generate more money in the future. Here are a few ways in which you can improve your cohort LTV's:
- Increase average order value: generate more revenue each time customers convert
- Increase speed at which first time purchases convert: generate revenue faster
- Increase speed at which subsequent purchases convert: generate future revenue faster
- Reduce customer churn: reducing churn allows you more opportunities to convert and re-convert customers in the future
Achieving the above will alter the shape of your business' cumulative cash curve - typically steepening it upwards, or making it inflect sooner. My recommendation is to attempt improving all of these, reaping the incremental benefits of all elements acting together. If you don't achieve one, you'll still benefit from improvements in the others.