March 07, 2018

Conversion Rate Impacts LTV

Let's look at two different customer segments.

  • Segment 1 = 2% conversion rate, $100 AOV, 40% Profit Flow-Through, $0.90 Ad Cost. Profit = 0.02*100*0.40 - $0.90 = ($0.10).
  • Segment 2 = 1% conversion rate, $200 AOV, 40% Profit Flow-Through, $0.90 Ad Cost. Profit = 0.01*200*0.40-$0.90 = ($0.10).
Profit in either segment is identical.

Profit per New Customer is far from identical.
  • Segment 1 = ($0.10) / 0.02 = ($5.00).
  • Segment 2 = ($0.10) / 0.01 = ($10.00).
You lost an additional five dollars acquiring the customer in Segment 2.

At this point, LTV becomes really important. The larger AOV needs to drive enough LTV to offset the additional five dollars you spent acquiring customers.

Perform a little math today, and see if your low conversion rate / low response rate customers are causing you LTV problems, ok?

16 Business Principles: Hillstrom's Marketing Management

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