Why LTV is Important
Find Your True Marginal Breakeven
Al Bessin, Partner, LENSER
Agenda
Defining LTV How to Measure LTV Breakeven Analysis Adding Observed Values “Average” Order Value Marketing Contribution and Acquisition Cost LTV and Sources of Buyers Putting It All Together Discussion
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Lifetime Value Defined
Financial “Lifetimes” are typically one to two years Buyer behavior typically falls off rapidly after a few years
“Lifetime Value” is the variable contribution of a buyer in the first- and second- years after the initial purchase
Assumption: a 100% ROI in 12-months is typically doable
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Purpose of LTV Analysis
Define the return on investment of customer acquisition programs Establish metrics to plan acquisition
How much I can spend to acquire a customer is dependent on what contribution I can expect customers from that source of prospects to make
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How to Measure LTV
The Order Contribution of a Buyer in the first 12and 24-months after initial purchase
$ Demand times: Product Gross Margin % less: Variable Transaction Expense Order Contribution
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How to Measure LTV
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Example of LTV
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Example of LTV
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Breakeven Analysis - Defined
“Incremental” Breakeven
The response rate at which the Order Contribution equals the Variable Marketing Expense
Variable Marketing Expense includes only those costs which are truly variable (unlike a financial breakeven analysis)
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Breakeven Analysis
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Adding Observed Values
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Marketing Contribution
Marketing Contribution is the Order Contribution less Variable Marketing Expense When Marketing Contribution on a first order is negative, it is the Acquisition Cost This establishes thresholds for selecting prospecting sources
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Marketing Contribution Example
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LTV and Sources of Buyers
Take the Order Contribution for different sources of buyers, apply marketing expense, and calculate the marketing contribution for initial, 12- and 24-month orders
The Goal is to identify which segments are profitable and which are not
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Putting It All Together
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Marketing Mix
For web orders downstream, marketing mix should be estimated.
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“Average” Order Value
Caveat: “Average” doesn’t always tell the story…
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Wrap-Up
LTV and contribution are key elements for developing a customer acquisition strategy
Discussion
al.bessin@lenser.com 512-351-8197
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