Marketing Is Math (Part 2): Live or Die By Your LTV
LTV or Lifetime Value of a customer.
This is the metric that successful companies know and live by.
Now, LTV doesn’t ACTUALLY cover the entire life of the customer. You calculate LTV in segments.
I like to know 30-day, 90-day, and 12-months at least when possible. New companies won’t have these numbers off the bat but they should start tracking them right away.
There are also two types of valuable LTVs to track. Your leads, and your buyers.
For example, if I have an email list of 100,000 people and email marketing is a large part of my business – I need to know how much each list subscriber is worth to me over time. Great email marketers shoot for a subscriber being worth at least $1/month. So in this case of 100,000 subscribers, my 30-day LTV for leads should be $100,000. 90-day LTV goals would shoot for $300,000, and 12-month goals for $1.2 million.
That’s for the whole list. So if with my advertising I can acquire a qualified lead for less than $1.00 each in advertising, I’ll be in positive ROI within the first 30 days.
In the real world, however, that isn’t always the case.
It’s more reasonable to bet on a qualified lead costing more like $2.50 or even $5.00 in many cases. If the only number I knew was my 30-day LTV per subscriber, I would probably start freaking out.
“I’m losing so much money! Stop the advertising! $5.00 per lead! No way!”
That’s very small-minded, and it comes from not knowing your LTV numbers. Supposing that it really did cost $5.00 in advertising to get a lead and my average LTV numbers were solid at $1/month – it would take 5 months to recover the cost of acquiring that lead.
But what’s 5 months in the life of your business? Everything after that is profit!
As long as the company can afford to buy more leads and wait for the LTV to work its magic for a positive return, the company should buy as many qualified leads as it possible can!
This is just an example with leads. What about customers?
It varies wildly from business to business, but let’s suppose you know you can acquire a buying customer for every $30.00 spent on advertising, on average. What if your widget only costs $10.00?
Once again, the small-minded entrepreneur that doesn’t know his numbers starts to freak out.
“I’m losing $20.00 on every new customer!” is heard coming from the board room meeting.
Buyers are definitely more valuable each than just leads, but a monthly LTV may be difficult to calculate. So in this example, the 30-day LTV would probably only be $10.00, not including costs of good sold, taxes, fees, operational costs etc.
That’s where small business owners really go bonkers. They feel like their flushing money down the toilet. If they don’t know their numbers, that’s possibly true.
In this situation though, where the company maintains a good relationship with that customer, and makes monthly promotional offers where a healthy percentage of the buyers choose to buy once again, the LTV over time goes up. For the sake of simplicity, let’s say buyers choose to buy again for about the same amount once every 60 days.
So in our example, the 90-day LTV would climb to $20.00 because the buyer chose to buy again.
The boss looks at the reports and says, “Well, this looks better, but we’re still losing money! We’re bleeding to death! The sky is falling!”
And that’s why knowing the 12-month LTV is important.
As long the buyers come back and make purchases consistently, the company can keep waiting it out. In our example, on average we’re looking at $10.00 every 60 days. So, in the first 12 months the customer will have spent $10 during the first 30, $10 more by the end of the first 90, and approximately $60-$70 total by year end, let’s just say $65.
Now the boss is smiling. “Hey, this is great! We spent $30 to acquire the customer and they spent $65 with us this year! We’re profitable!”
And that number could repeat itself over the next 12 months, and the next, and the next.
You get the drift.
So the formula is LTV > CPA (Cost per acquisition) and you can win. You may have to be patient, and go a little slower than you want in order for the LTV to work out – but that’s the best metric you can work for.
Really aggressive companies would be like “Hey if we make $65 from them in 12 months, let’s be willing to spend up to $65 to acquire a customer. We’ll be able to outbid our competitors on our advertising and acquire more and better customers!” The companies that do this have to be tracking LTV over time and have a solid base – but that’s why the market narrows over time.
The business that knows its LTV and increases its ability to buy customers gradually conquers larger and larger shares of the market, and their competitors never even know how it happened.