January 11, 2018

How Does Lifetime Value Fit Into The Picture?

There are four ways you are going to impact Lifetime Value.

First = Average Order Value. Companies with 35% rebuy rates and $150 AOVs tend to yield better LTV than companies with 35% rebuy rates and $80 AOVs. If your AOV is < $100, life is hard.

Second = Rebuy Rate. This one is pretty much fixed in concrete. If you have a 35% rebuy rate, it's going to change by +/- 5 points, tops. Your business model determines your LTV, not the other way around. If your rebuy rates are > 50%, LTV begins to accelerate.

Third = Operational Excellence. I know, I know, you HATE thinking about this. But when you stop the leaks and improve gross margin and reduce return rates and STOP DISCOUNTING you find that previously unprofitable customer acquisition activities become profitable. Hint - if you are in the SELL quadrant, private equity folks will pay more for companies that have operational excellence. Discounting, FYI, is fatal to LTV. If a customer is expected to spend $200 next year at 40% off and a 60% gross margin, you make $40 gross margin. If your customer is expected to spend $200 next year at 20% off and a 60% gross margin, you make $80 gross margin. Discounting destroys customer acquisition activities because you cannot afford to acquire as many customers because of your cost-per-new-customer metrics.

Fourth = Multiples. Buying from multiple channels increases LTV by +/- 10%. Buying from multiple product categories increases LTV by more. Buying from multiple seasons ... multiple tender types ... once you control for customer spend, all of these factors increase LTV. The best companies maximize all of these "variables" and squeeze more LTV out of customers, which allows them to spend more to acquire more new customers (who also have increased LTV). 

If you end up in the SELL column, LTV becomes critically important. Your potential buyer wants to know several things.
  1. They want to know that you know LTV down to the penny.
  2. They want to know that you know whether a 0, 1, 2, 3, 4, or 5 year payback period is right for your business.
  3. They want leaky holes plugged in your p&l, and if they aren't, they'll pay you less and they'll make you plug the holes THEIR WAY and you won't enjoy that experience a whole lot. So "Fix It" before they force you to fix it THEIR WAY.
  4. They want to know that you can acquire HALF OR MORE of your new customers without any assistance from Google, from Facebook, from Amazon, from Catalog Co-Ops. Why? Because this leads to future growth and it leads to healthy LTV because you don't have to spend money to acquire the customer.
Lifetime Value (LTV) is critical to the success of your business. Measure it ... or hire me and I'll measure it for you! Half of my Q4-2017 and Q1-2018 projects focused on LTV.

Business Principle #2