As a huge fan of all things subscription commerce (having been in subscription commerce now for 21 years!) I frequently joke that when it comes to analysis, LTV is everything and sort of the only thing. People tend to chuckle at that one, but I’ll stare right back because it's the cornerstone metric for pretty much any company, especially subscription commerce. When you can master the art of working your LTV and dissecting it, you will be able to harness that power to grow your business. Once you understand this metric, you will have the deepest understanding of your business and how it works.
It's important to make this as complex as it needs to be in order to be simultaneously useful and informative.
So why is LTV so darn important? Well in the minimum it helps you with the following:
Strategic Decision-Making: LTV helps in making informed decisions about how much money to invest in acquiring new customers and retaining existing ones. When you’re wondering if a promo is acceptable, what the allowable cost to reacquire customers is, or pretty much anything that ties to P&L - you can backstop this to how it affects your LTV.
Customer Acquisition Cost (CAC) Balance: By knowing the LTV, businesses can balance it against the CAC. A favorable LTV to CAC ratio means that the company is spending a reasonable amount on acquiring customers relative to the value those customers bring. When you know your LTV in and out, you can bend the costs to your will and make critical decisions without worry.
Targeted Marketing: LTV allows brands to segment customers based on their value, leading to more targeted and efficient marketing strategies. High-LTV customers might receive different attention or rewards compared to lower-LTV ones. Guess what, high-value customers are significantly more likely to know other possible high-value customers, and will also get the most out of rewards. Think about giving your best customers the best referral awards - you’ll like the outcome.
Product Development and Innovation: Understanding which customers bring in the most revenue over time can guide product development. It helps in prioritizing features or services that cater to high-LTV customers. One of the best ways to grow your brand is to consider what types of offerings or features will increase your LTV. When you have a dedicated customer base, you also have a product launch platform and an audience that will likely at least try something new. Free quality marketing is hard to find, so cultivate it.
Customer Retention: Since acquiring new customers is often more expensive than retaining existing ones, knowing the LTV helps in strategizing customer retention efforts effectively. When you know all about them, you can curate strategies that are effective in the stage that the customer is in.
Measuring LTV in mass is easy, there is a fine art between the macro picture and the micro one. Macro focuses on your business health, but keep a watchful eye out on the micro, there are nuggets there that can deliver fantastic outcomes if you take the time to research. Not every one of these measurements will yield something marvelous, but most will teach you something that I bet you didn't know.
Ways to Measure LTV
Cohort Analysis: This involves grouping customers into cohorts based on their subscription start date and tracking their behavior over time. It helps in understanding how LTV evolves for different cohorts. Usually, this is monthly, but you can slice this any way that you like, as long as the data is significant. So you can define a cohort as: Monthly, promotion, channel acquired, or any other active qualifications that might suit your business. Get creative here, you may come to find that certain customer activities lead to unlocks. A great one would be to understand LTV by the products in their first order (if those aren't the same for everyone). You may find that people that buy “product X” in their first order are significantly more valuable than ones that don't. Product quality and membership introduction means a lot, first impressions ya know!
Predictive Analytics: Using machine learning (ML) algorithms to predict LTV based on early customer behaviors can provide more accurate and actionable insights. These can be fun but frequently not cheap. When given all the possible inputs, ML systems will usually find things more quickly, but without a lens of reality, sometimes they can be pretty tone-deaf to your needs. If you can try one, do it!
Customer Engagement Scoring: Scoring customers based on their engagement levels (like product usage, feedback, and social media interaction) can help in estimating a more nuanced LTV. These types of “cohorts” can be really interesting triggers for churn mitigation. For example, historically when you see a customer login action change (perhaps they used to log in weekly, but now they have not logged in for a month) can be a call to action to do everything you can to retain.
Now that you are an expert in all the ways to obsess about LTV, what can you do with that information? Great question, let's see how you can apply Insights from LTV.
Customized Customer Experiences: Use LTV insights to tailor experiences. High-LTV customers might receive premium support or exclusive offers, enhancing their loyalty and further increasing their LTV. When you know LTV inside and out, you can more easily cater your offering to get the customer to make one desired step forward in the effort to increase their LTV.
Optimizing Marketing Spend: Allocate marketing budgets more effectively by focusing on channels and strategies that bring in high-LTV customers. Find the high-value customers, you can pay more for them and make more in the process. Allowable CACs by channel are not something to ignore.
Customer Feedback Integration: High-LTV customers are often the most loyal and engaged. Their feedback can be invaluable for improving products or services. They will keep it real with you all the time, actually cultivating an ambassador group of these customers is THE MOST valuable market research you can obtain.
Churn Prevention Strategies: Identify at-risk high-LTV customers using predictive analytics and deploy targeted retention strategies to prevent churn. As I mentioned above, get them before they cancel, always cheaper in the long haul.
Cross-Selling and Upselling: High-LTV customers are more likely to be receptive to additional products or upgraded subscriptions. Tailored recommendations can boost revenue while enhancing customer satisfaction.
Resource Allocation: Focus resources (like customer support, and product development) on areas that impact high-LTV customers the most. Quality breeds quality, you can foster improvements for all around the actions and information that high-LTV customers contribute.
In conclusion, understanding and utilizing LTV is fundamental for subscription brands. It's not just a metric of revenue; it's a comprehensive insight into customer behavior, preferences, and the overall health of the business. By employing unique methods to measure LTV and applying its insights strategically, subscription brands can ensure sustainable growth and a strong, loyal customer base.
Evan Padgett, a seasoned professional in the E-commerce industry, boasts an impressive career spanning over 20 years. With a rich and diverse background, Evan has confronted and overcome a myriad of challenges, marking his journey with significant achievements and growth.
Starting his career in the industry in 2002, Evan has witnessed and adapted to numerous changes in the digital marketing landscape. He has held C-suite executive roles at renowned organizations such as Techstyle Fashion Group, managing a $300M P&L responsibility across brands like JustFab, Shoedazzle, Fabletics, and Savage X by Rihanna. He also contributed significantly to Thrive Market during its major growth phases.
In the last five years, Evan transitioned to the client service side, where he played a pivotal role in building up an agency. His expertise helped the brands serviced within, simultaneously growing the agency from a 10-member team to 40 in five years and quintupling its annual revenue. As the business development lead within Stealth, Evan generated significant agency revenue and led a team to aggressively grow revenue for their clients. Notable clients include Hello Fresh, Factor 75, Crocs, Lashify, Spot and Tango, among others.
Evan is well-recognized for his methodical problem-solving approach, aligned with collective company goals, resource allocation, and level of importance. As a devoted follower of the Entrepreneurial Operating System (EOS), Evan excels in integrating business strategies.
His specialties encompass a wide range of skills including, but not limited to: Modeling/Forecasting, Data Analysis, Data Mining, Report Generation, Technical Implementation, Landing Page Optimization, Consumer Experience Expertise, Lifetime Value analysis, MS-SQL, Subscription Commerce, Market Research, User/Customer Acquisition, Marketing Strategy, Team Building, Executive Leadership, Brand Development, FP&A, Product Management, Project Ownership, EOS Practitioner, and Business Development.
Today, with a well-rounded set of experiences under his belt, Evan Padgett is evaluating new opportunities, all the while helping other brands solve their problems.