In the last two blogs written by Michelle Houston, she covered the importance of using Contribution Per Order (CPO), instead of ROAS when evaluating the performance of marketing programs. At the end of one of those blogs, she talked about the importance of also assessing and understanding the significance of lifetime value (LTV) as part of the equation. I wanted to continue that thread and take it a step further by incorporating LTV as the last step of the proper analysis into the equation.
As covered in past discussions, LTV is an important metric to track as it will vary widely by acquisition source. When applied to the first order for a new customer, CPO is the equivalent to cost or profit per customer acquired. This will vary by acquisition source as well. When CPO is combined with LTV, those metrics are a powerful tool in driving your company in the right direction (or wrong direction if you’re not careful).
In the analysis below, we can evaluate the total effect that CPO and LTV have on the current and future business. That effect allows you to make educated decisions on where to place marketing budgets to set the business up for success. If evaluating acquisition cost/contribution in a vacuum, the data would indicate cutting all postal since it lost -$12 on the initial order and redistribute to SEM non-brand, email, and social, which are marketing channels that can leverage the additional marketing spend.
However, brands are encouraged to evaluate customer behavior beyond that initial purchase and analyze the net result of revenue that incorporates data 12 months down the road (which is LTV). When performing further analysis, those initial postal customers went from -$12 loss to an LTV value of +$29 (in the chart below), meaning those prospects provided more revenue in 12 months than most of the other true prospecting sources (social, SEM non-brand).
If investing only in the aforementioned digital acquisition sources, short-term profitability would increase, but long-term viability would take a significant hit as the customer file’s makeup fundamentally shifts to a lower value over time. Therefore, your critical 0-12M buyer file will get weaker, bringing in significantly less revenue than the prior season or year.
This analysis from the chart above is a real-world example of how the right or wrong decision can have on your customer value. This company did not heed the analytics, made decisions in a vacuum, and they shifted their marketing budget to less valuable acquisition sources. Within three years, they had damaged the value of their customer file to the point that they had to close their doors as the business could no longer support itself with a healthy buyer file. For most brands, nearly 80% of their revenue is derived from the 0-12-month buyer file. When the customer characteristics significantly alter, it can substantially impact demand expected from this critical source of your customer file.
Finally, this doesn’t mean brands should stop profitable acquisition from their initial order, but rather, how do you treat those customers post-purchase and why postal acquisition may require an investment strategy. Both can be done successfully, but strategies and tactics are needed to be financially successful.
Proper analytics and further evaluation of customer behavior will set your brand up for success. If you evaluate the incorrect metric(s) and make uninformed decisions, you may struggle to comp year-over-year demand, further jeopardizing your long-term sustainability.
I’m here to help answer any of your LTV questions. Please email me at tseaton@cohereone.com