September 21, 2016

Which Lifetime Value Scenario Should You Pursue?

Here's the lifetime value information from yesterday:
  • Google / Paid Search: On average, you make $5.00 profit acquiring a customer via paid search, and you generate $12.00 of profit in year one and you generate $27.00 of lifetime value.
  • Facebook:  On average, you lose $10.00 acquiring a customer via Facebook, and you generate $8.00 of profit in year one and you generate $20.00 of lifetime value.
  • Offline Advertising: On average, you lose $15.00 acquiring the customer via Offline Advertising, but you generate $20.00 of profit in year one and you generate $50.00 of lifetime value.
Remember, our issue isn't having too few / too many metrics. Our issue is knowing what to do with the information available to us.

The Google / Paid Search scenario is easy. You make money acquiring the customer, you make money in year one, and you generate a healthy amount of lifetime value. In this case, you test your way into spending more on paid search - and you find out just how deep you can go down the paid search rabbit hole, right? (testing, of course, in tandem with natural search, so that you know how much paid cannibalizes natural search ... right?)

The Facebook scenario is deliciously entertaining. You lose money acquiring the customer, you generate profit in year one but not enough profit to offset what you lose acquiring the customer. In other words, after one year, Facebook customers are still unprofitable. Do you continue to pursue this source of acquisition? How did you answer?

I know how I would answer. I'd pull out my five year business investment simulation, and I'd tally corporate profit over five years with and without Facebook names. You run five year business investment simulations, right? Right? If your company has an annual retention rate of between 30% and 45%, then you need to be paid back within 12-18 months in order for the company to optimize long-term profit. That's what I see in the simulations I run. This is where you have to present scenarios to your CFO. You show your CFO what the business looks like five years from now with Facebook names and without Facebook names, and you let your CFO pick the path that aligns with Finance goals. If the business must grow top-line sales and profit isn't all that important, then you'll invest in names from Facebook. If profit is important, you'll avoid these names. But your five year business investment simulation will give you the answer you are looking for.

Look at your Offline Advertising names. You take a bath acquiring the customer, but the customers you acquire become the best customers you'll acquire. Again, this is where you have to have a five year business investment simulation. Why? Because you need to show the CFO that in the short-term, your business results will look bad, but in the long-term, you'll have a very healthy business.

Does this make sense to you?

The issue isn't whether lifetime value (LTV) is a key performance indicator you must track or not. The issue is what you do with the metric. You need a five year business investment simulation to make sense of LTV, and you need to have a good working relationship with your CFO so that you can make decisions that align with corporate goals.

What questions do you have?